Schedule 2 - Prudential regulation of FCA investment firms

Financial Services Bill – in a Public Bill Committee at 2:00 pm on 24 November 2020.

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Photo of Pat McFadden Pat McFadden Shadow Economic Secretary (Treasury) 2:00, 24 November 2020

I beg to move amendment 21, page 63, line 5, in schedule 2, at end insert—

“( ) high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility, and”

This amendment would require that, when making Part 9C rules, the FCA must have regard to high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility.

Photo of Rupa Huq Rupa Huq Labour, Ealing Central and Acton

With this it will be convenient to discuss amendment 25, page 79, line 29, in schedule 3, at end insert—

“( ) high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility.”

This amendment would require that, when making CRR rules, the FCA must have regard to high standards in social practice and corporate governance including pay, adherence to equalities legislation, transparency and corporate responsibility.

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

Thank you for your chairmanship, Dr Huq. Your initial instructions threaten to make the proceedings a lot more interesting than this morning’s. We will not take them too literally when it comes to how much clothing we remove.

Like amendment 20, on which we concluded debate this morning, amendment 21 relates to schedule 2 on page 63 of the printed Bill. It is designed to ensure that the regulators have regard not only to environmental regulations, which we tried to press this morning, but to social and governance considerations.

Committee members who have anything to do with the sector or industry will know that the letters ESG—environmental, social and governance—come up a lot. I am sure that, like me, the Minister does lots of roundtables, meetings and so on, and he will be struck by the enthusiasm with which City voices are speaking about ESG. We dealt with “E” this morning when discussing amendment 20; amendment 21 is about the “S” and the “G”.

The agenda of prioritising those things goes with the grain of what investors and fund managers say, at least, they are doing of their own accord. However, we believe that adding it to the Bill and the regulatory framework would put regulatory force behind these trends, which already exist with varying degrees of enthusiasm in the investor world.

Photo of Rupa Huq Rupa Huq Labour, Ealing Central and Acton

Order. I think you were told this morning that if you crank the volume up a bit, it is better for the recording.

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

I apologise, Dr Huq; I shall try to speak up.

There are many fine-sounding statements about ESG principles on corporate websites. Some of the toughest money management companies in the world are now telling us that it is no longer just about quarterly or annual returns, but about long-term sustainability. We are told that investors do not want to be making money on the back of poor governance or shoddy or illegal working practices; they want their investments to be in companies and projects that are sustainable for the long term and are run in the right way.

With your indulgence, Dr Huq, I will illustrate that with an example that has been in the news recently. I want to consider what these corporate statements were worth in the case of the clothing firm boohoo. When The Sunday Times exposed the shocking conditions in boohoo’s supply chain back in July, including paying workers in the supply chain well below the minimum wage and serious fire risks in the factories in which the clothes were made, the company commissioned an independent review of the supply chain. That was chaired by Alison Levitt QC; she reported in September. She found that the allegations about the supply chain were

“not merely well-founded but substantially true”.

On the corporate governance side of things, her findings were damning. Her report says:

“No member of the Board I interviewed mentioned that the responsibility for what is happening in the supply chain derived from the duty of the company’s officers to act in the best interests of all the shareholders.”

In other words, the board did not understand that it was not in the interest of their own shareholders to allow a supply chain in which these illegal practices were taking place. Ms Levitt was effectively concluding that the board did not know it was their duty—or that if they did know, they did nothing about it.

Photo of Angela Eagle Angela Eagle Labour, Wallasey

Does my right hon. Friend agree that the lack of effective enforcement is also an important factor in boards’ thinking that the risk may be worth taking? Lack of effective enforcement has been a feature of the last 10 years, as enforcement authorities have been starved of funding and retreated further and further from the frontline, where these practices are going on.

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

My hon. Friend is absolutely right. The point I am making in moving the amendment is that, although there are arguments to be made about enforcement and minimum wage inspectorates and so on, there is another side to the issue: the considerations for investors in these companies and the role of regulators. That is what the amendment is about.

Following Ms Levitt’s report, my hon. Friend Liz Kendall wrote to all of boohoo’s main shareholders—the list reads like a “Who’s Who” of blue-chip City firms: it includes Jupiter, Fidelity, Invesco, BlackRock and Standard Life Aberdeen. None of those firms—with one notable exception, which I will come to—has taken meaningful action. They talk about engaging and following the situation closely, but only one has actually followed through. All the firms have on their websites very fine-sounding statements about ESG, corporate governance, social considerations, sustainability and so on—indeed, some have set themselves up as champions of those causes.

Let me come to the exception to the rule on that list: Standard Life Aberdeen. It has sold all its shares in boohoo and is clear about why. In a letter to my hon. Friend the Member for Leicester West, the Standard Life Aberdeen chairman Sir Douglas Flint says that the firm had been concerned about the supply chain for some time and that

“Our patience with the company’s responses on the issue had been diminishing during the last year. That patience evaporated this summer with the company’s response to the media allegations and that is why we took the decision to sell our remaining shareholding.”

Standard Life Aberdeen is run by serious people. It is a very reputable, important financial management firm and it has decided to act in accordance with its ESG principles and wants to uphold them. What the story shows is that too many companies do not and that often it is just words.

Our amendment seeks to put some regulatory force behind the upholding of these principles. Firms say that they want to uphold them, but, as the story shows, too often that is not the case—action is wished away with talk of engagement and monitoring the situation and all the rest of it. The amendment would make the regulator have to have regard to the exploitation of workers and make upholding high social and governance standards a hallmark of the UK financial services industry. In that way, we would not just depend on good people such as Sir Douglas Flint and on companies that are the exception to the rule; we would send a clear signal to the whole investment industry about the kind of response that we want to see. Otherwise, the fear must be that, although there will be plenty more warm words and mission statements, they will be of little comfort to someone working in an overheated factory and earning £3 or £4 an hour—about half the minimum wage—and that, when the story is exposed and the exploitation is no longer hidden, the investors in the company that is ultimately responsible will not do anything about it.

I ask the Minister to imagine the signal that such a regulatory duty could send. Not only would there be a minimum wage law, as there is now, but the UK’s supercharged, empowered regulators would have social and governance considerations at the heart of what they do.

We have had many debates about standards and what would happen in the UK after Brexit on this issue. Time and again, the Prime Minister has said that he does not want a race to the bottom: he wants the UK to uphold high international standards and there is absolutely no reason to think that our departure from the EU should be any threat to rights of work or any considerations like that. This amendment is a chance to prove that and put it at the heart of financial regulation.

The truth is that companies are much more likely to take such considerations seriously if their investors are tapping them on the shoulder and saying, “Why aren’t you doing that?” It is clear that Standard Life Aberdeen tried to do the right thing for a time with boohoo and eventually got so exasperated that it divested itself of its shares in the company. That is what we want to see more of from major investors and shareholders. It is not happening enough at the moment. The fine words on corporate websites are not matched enough by that kind of action.

Adding what is in the amendment to the regulators’ “have regard to” list and the accountability framework in the Bill would send a powerful signal about the character of post-Brexit financial services. That is why we have tabled it today.

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

It is a pleasure to see you in the Chair, Dr Huq. I rise to support the amendments tabled by the Labour Front Bench. It is really important to hold financial services firms to account; the example of boohoo given by the right hon. Member for Wolverhampton South East is a perfect example. Standard Life Aberdeen really should not be the exception rather than the rule. All financial firms should take their duty seriously, look all the way through their supply chains and act responsibly. It is clear that if the carrot of “doing the right thing” is not working, we need further means to hold companies to account.

The amendment is one of those that make me ask myself, “Why wouldn’t the Government want to do this? Why wouldn’t the Government want to support these things? Whose interests do they serve if they do not want to put this in the Bill?” The Scottish National party feels strongly that, although ESG is not the end of the movement towards a fairer, more sustainable future, it is certainly a vital part. We support the growing trend in the private sector towards greater corporate responsibility. By taking a greater stake in the communities where they operate, firms can become partners for social progress.

I was struck by the evidence given by Fran Boait in the session last week. She said:

“The Bill sets the direction, and it needs to integrate the needs of the wider economy, social responsibility, the environment and thinking about how we set a direction that is different from the one that led to the global financial crash”.––[Official Report, Financial Services Public Bill Committee, 19 November 2020; c. 112.]

The amendments set a good example of that change in direction and responsibility, and of the strong message that the Government need to send out.

To an extent, we have been able to do that in Scotland. We have promoted social responsibility in corporate culture, not least through actions such as the Scottish business pledge. We welcome a wider framework, which would encompass the financial sector and encourage them to do their bit. The partnership between the Scottish Government and business is based on boosting productivity and competitiveness through fairness, equality, environmental action and sustainable employment. It is a commitment to fairness, with businesses signing up to mandatory elements of the Scottish business pledge such as paying the real living wage—not the pretend-y living wage that the Government like to promote: the real living wage, as set by the Living Wage Foundation—and closing the gender pay gap, which has slipped during covid and may well fall back.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow 2:15, 24 November 2020

We should put on the record that the gender pay gap has not slipped but has been abandoned as a commitment by the Government. I hope the Government will rethink that quickly, given the importance of the case that the hon. Lady makes. It has not slipped—it has gone.

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

I meant more that the actions of businesses had slipped, but the hon. Lady is correct to point out that the Government have abandoned that commitment as well. I was going to go there with that point. If companies are not held to account, that slippage will become irreversible. Companies have worked so hard to try to bridge that gap, and going backwards really is unacceptable.

By bringing those elements together, companies across Scotland have shown that they can improve productivity and competitiveness and build sustainable growth in a way that achieves fairness, equality, opportunity and innovation. We have the UK’s highest proportion of living wage employers in Scotland because the Scottish Government made that commitment. That is what we can do with the limited powers that we have. If we were to put into legislation here far more responsibility and accountability, it would certainly move that agenda forward.

In addition, we believe that moves such as increasing worker representation on company boards, which is commonplace among our more productive, investment-rich European competitors, would promote much greater social responsibility among companies that had that representation, as would increasing the representation of women and minority communities on public and private sector boards.

Scotland is on track to ensure that all public sector boards have a 50/50 gender balance due to the statutory targets that we put in place. We would support similar UK legislation for the private sector, because if these things are not in place, it will take a very long time before we see any meaningful change. The evidence shows that it is good for companies and organisations to do that, because they do better when they better represent society.

It is important that we make sure that companies are held to account in this way. The amendments tabled by the official Opposition are good and sound. I am interested to hear why the Minister thinks that they are not good ideas worthy of pursuit.

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

It is great to be under your chairmanship again, Dr Huq. I thank the right hon. Member for Wolverhampton South East and the hon. Member for Glasgow Central for their comments.

The right hon. Gentleman opened with a depiction of the appalling situation with Boohoo, the Levitt review and the challenge of securing widespread adherence to higher standards of corporate governance. He mentioned the actions of Sir Douglas Flint from Standard Life Aberdeen, with whom I have worked closely during the last three years.

Many of the particular aspects of that case are beyond the scope of the Bill, but the right hon. Gentleman uses it to illustrate the reasons why he tabled the amendments, which would introduce a new “have regard” in the accountability regime to which the Prudential Regulation Authority and Financial Conduct Authority would be subject when implementing the Basel standards and the investment firms prudential regime respectively. The amendments would require the PRA and FCA to consider higher standards in social practice and corporate governance when making new rules under the Bill.

It is unclear from the wording of the amendments whether regulators would need to look at their own best practices or those of the firms they regulate. Regardless, I fully support the intention behind the amendments. Indeed, I have chaired the asset management taskforce over the past three years: we have had 10 meetings with industry representatives, including Catherine Howarth, whose responsible investment charity ShareAction has done some significant work on stewardship and how we can get better transparency across the whole of the ESG agenda. Indeed, I believe that our report on that will be produced imminently.

There is no doubt that the regulators are committed to the highest levels of equality, transparency and corporate responsibility. For example, the UK has some of the toughest requirements on bonus clawback and deference in the whole world. The Government, working with the regulators, were also world-leading in the design of an accountability regime for senior managers in the industry; sequentially, over the past three years, that has extended to more and more parts of the financial services industry.

FCA solo-regulated firms are expected to have undertaken a first assessment of the fitness and propriety of their certified persons by 31 March 2021. The senior manager and conduct regime, implemented for all banks, building societies, credit unions and Prudential Regulation Authority-designated investment firms in 2016, was extended to cover insurance firms in December 2018 and most other FCA-regulated firms by December last year.

However, the track record of our regulators should not make us shy away from making them legally accountable for upholding the highest standards going forward. The fact is that the regulators, as public authorities, are already subject to the requirements under the Equalities Act 2010, as are businesses across the UK, including firms within the scope of the PRA and FCA remits. They already have existing powers and duties under the Financial Services and Markets Act 2000, which is being amended by this Bill, in respect of pay, transparency and principles of good governance. In fact, they are already responsible for making rules on remuneration under these two prudential regimes.

I recognise that when I think about the City, there are significant elements that need more work. For the past while, I have been responsible for the women in finance charter. I am currently conducting a series of challenges to the CEOs of banks, looking at what they are doing to address, beyond the targets, a pipeline of talent, so that there are better opportunities for more women to reach the executive level. I will speak more about that later this year.

Sound governance is necessary to support the regulator’s primary objectives of safety and soundness, market integrity and prevention of harm; a new legal obligation in this space would only be duplicative and redundant. It would likely conflict with existing obligations on the regulators in exercising their duties to ensure the sound governance of regulated bodies, creating confusion over whether these vaguer concepts conflict with the regulator’s general objectives.

I do not believe that this Bill is the right place for such changes, but there might be other routes to reassert how important we think these matters are. The Government are currently considering the policy framework in which the regulators operate through the future regulatory framework review, which I mentioned this morning and on Second Reading. I would welcome right hon. and hon. Members’ engagement on this important question—I really would. The matters that the regulators need to have regard to as part of this Bill reflect considerations immediately pertinent to these specific prudential regimes and, I believe, provide the right balance.

Photo of Abena Oppong-Asare Abena Oppong-Asare Shadow Exchequer Secretary (Treasury)

I am really happy to put forward amendment 25, because it will require that, when making capital requirements regulation rules, the FCA must have a high regard to standards in social practice and corporate governance, including pay, adherence to equalities legislation, transparency and corporate responsibility.

We know that best practice corporate governance results in social and economic gains, and that is something the Government are particularly passionate about. Companies that persist in treating climate change solely as a corporate responsibility issue, rather than a business problem, are running a risky business and stand to lose out.

We have seen businesses turn the need to tackle climate change into successful business opportunities. For example, BrewDog, the world’s largest craft brewer, will remove twice as much carbon from the air as it emits every year, becoming the first carbon-neutral brewery. If companies can already shoulder this social responsibility and incorporate it into a successful business model, there is no reason not to hold all businesses to the high standards our country needs to tackle imminent social and political issues.

Climate change affects every facet of everyone’s lives. The effects of climate on companies’ operations are now so tangible and certain that the issue demands a strategy and leadership from the Government. Government intervention has worked before, and it will work again, particularly through amendment 25. Take the Equal Pay Act 1970, for example, which was mentioned previously. Business and civil society converged, and companies with over 250 employees were made to publish data on pay gender discrepancies, resulting in a win-win scenario. Excellent work is now being done to tackle this further and understand racial, gender and environmental concerns, which are intricately linked. We have to follow civil society’s work on equal pay and extend the reporting to data collections on the grounds of racial equality and environmental equity, because our actions will be futile if our evidence is not fertile.

There is no one-size-fits-all approach to climate change: each company’s approach will depend on the particular business and strategy. What we are calling for in this amendment is for the Government to support and enable employers to publish an action plan to tackle climate change and social inequalities, including initiatives to mitigate climate-related costs and risks in client value chains. Jesse Griffiths, the CEO of the Finance Lab, had some important advice for the Committee last week. He said:

“I think that the absolutely fundamental issue with regards to the Bill is that it is an opportunity to put social and environmental purpose at the heart of both the regulation and the duties of the regulators.”—[Official Report, Financial Services Public Bill Committee, 19 November 2020; c. 113.]

Environmental engagement is economic effectiveness, and this amendment will improve the economic health of our businesses and the environmental health of our country.

The amendment would also ensure that regulators can act in accordance with social needs, and ensure that businesses maintain corporate responsibility while still thriving in a competitive marketplace. When the Government asked Ruby McGregor-Smith to review the diversity pay gap, I welcomed that initiative. Campaigners have moved mountains in terms of identifying the profitability, both social and economic, of deepening our commitment to diversity and opportunity of wealth and health creation for all. In McGregor-Smith’s review, “The Time for Talking is Over, Now is the Time to Act”, she highlights how for decades, successive Governments and employers have professed their commitment to racial equality, yet we see that vast inequalities still exist. We must ensure this does not happen with our commitment to environmental stability, and the amendment will help ensure that.

Racial equality, gender equality and environmental stability can never be achieved unless we understand the ways in which they are intricately linked. As Ruby says, the time for talking is over, and I am sure that all the young people participating in the mock COP as we speak agree. I know that I mentioned this earlier about young people, but they are important: they are our future, and we really need to take them into consideration. With 14% of the working-age population coming from a black or minority ethnic background, we know that employers have to take control and start making the most of our talent, whatever their background.

The point stands out when looking at the pay gap for disabled people in the UK. In 2018, the median pay for non-disabled employees was £12.21 an hour, while for disabled employees, it was £10.63. The Minister mentioned earlier that he sat on the asset management taskforce—

Photo of Abena Oppong-Asare Abena Oppong-Asare Shadow Exchequer Secretary (Treasury)

Chaired—apologies; I have bad hearing. He gave examples of shared actions and how to get better transparency, and mentioned that regulators are already committed to higher transparency. I am sure he agrees with me that businesses need to be held to account. The amendment will also help to create an environment that nourishes talent equality and protects our natural habitable environment.

The amendment basically brings huge financial, environmental and social rewards. Companies must realise they cannot ignore those issues anymore. However, we know that most companies will act only when they see a reason to do so. What we need is less talk and more action.

Ruby McGregor-Smith highlights how BME representation in some organisations is clustered in the lowest-paid positions. She calls for employers with more than 50 people to set aspirational targets to increase diversity and inclusion throughout the organisation, not just at the bottom. Such reporting and data knowledge must be applied in other aspects of social and environmental regulations—I repeat, daylight is the best disinfectant.

The amendment will allow employers to push their aspirational targets, be transparent about their progress and be accountable for delivering them. The Government must legislate to make larger businesses publish their ethnicity data by salary to show progress. This is not about naming and shaming; no large business has a truly diverse and inclusive workforce from top to bottom at the moment, but with thorough publishing of data, the best employers will be able to show their successes and encourage others.

The same must be said for environmental targets. We must understand that our people’s health and our wealth is our environment, particularly in this climate where we are dealing with the impact of the coronavirus. Let us not reinvent the wheel and double up on best practice, research and proposals that are already being provided by the Government; we have the opportunity today to vote to give regulators the power to ensure that businesses are held to account in areas of corporate social responsibility. It is important that the amendment sets a precedent that UK businesses adhere to the changing needs of our societies.

As I mentioned earlier, businesses such as Boohoo—I would also like to include Barclays in this—have shown how, without appropriate regulation, lives have been put at risk. As mentioned by my right hon. Friend the shadow Economic Secretary to the Treasury, Boohoo has been in the news for hiring supply chain workers for less than the minimum wage. That is unacceptable and shows that we need to regulate to ensure transparency in the supply chain.

Barclays was also under fire this year after increasing its support for fossil fuel companies. Despite announcing in March that it would target net-zero carbon emissions by 2050, the UK lender provided £24.58 billion of underwriting and lending to large fossil fuel companies in the first nine months of the year—a £200 million increase over the same period in 2019, according to the Rainforest Action Network.

It has been recommended that the capital requirements for investment firms introduce weightings for environmental, social and governance issues. The amendment would enable that to happen and position the UK as a leader in corporate social governance. I am sure we all agree that that is what we want the UK to be.

Photo of John Glen John Glen Minister of State (Treasury) (City), The Economic Secretary to the Treasury 2:30, 24 November 2020

I have listened carefully to the points made by the hon. Lady, who touches on a wide range of subjects, some of which I responded to in my response to the shadow Minister. I would just say that a number of initiatives are under way and intensifying. Just a few hours ago, I launched a piece of work with the Corporation of London on social diversity, a taskforce to bring people together to look at what we can do to improve access to financial services. That follows the work that we have been doing and that former Minister Mark Hoban is doing with the Financial Services Skills Commission. I mentioned the work of Women in Finance, but there are a lot of other pieces of work that my colleague the Exchequer Secretary is also looking at in her dual role as Equalities Minister.

I made clear in my response a few moments ago that I believe the provisions we have already give the regulators significant licence to operate in this area and, although I do not rule out any changes subsequently, I believe at this time that the amendments should be resisted.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

The challenge that the Minister has with these instruments is exactly the issue around the gender pay gap. We were told that that did not need to be written into the legislation, because there would be a commitment. As we have seen this year, that commitment has not been absolute. It has been abandoned by the Government.

The Minister has said that he agrees with those commitments and the issues that the shadow Minister has raised, and that they might be put into legislation. Does he recognise that, for those of us who are committed to those high standards, the point of such amendments is to put it beyond doubt that they will actually happen? As we have seen, if we do not put them beyond doubt, it is tempting for future Administrations and future regulators to remove or weaken the protections.

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

I thank the hon. Lady for those points. As public bodies, it is clear that the regulators are answerable and accountable to Parliament, and I have explained how that will be enhanced, but they are also subject to legal duties to publicly consult on the new rules and to how Parliament wishes to scrutinise them. I recognise the point that she is making, but I believe that putting that obligation into legislation in that way would not immediately lead to the outcome that she supports. Across those areas of completely legitimate aspiration, many of which I share in an identical form, this is something that we would need to look at in the round following the regulatory framework review.

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

I appreciate the work that the Minister and other Ministers are doing in this area, but does he accept that he if puts it into the legislation, he might actually have less work to do, because everybody will then be obligated to do it, rather than him having to ask nicely?

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

Unfortunately, I do not share that view. Given the arguments that I have made about the complications that it would bring, because of the overlap with existing provisions, I do not think that would be the right way to go. I am very sympathetic, however, to many elements of the speeches made concerning the aspirations that we should have to improve the overall quality of corporate governance and behaviour across the City.

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

I am sure that the Minister is completely genuine when he says that he supports this agenda and the aims behind the amendment, but anyone who has followed the issue over the years will realise that we have had taskforces galore on it in the City. We have had taskforces on women on boards and on diversity; now we have a new one on social mobility. I wish that well but, after all those taskforces, do those in the top jobs in this sector—the real pool of decision makers—reflect the country as it is today?

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

Of course they don’t. We cannot conclude that, for all the taskforces and all the well-meaning, great people who have been involved in them, they have made enough progress.

This is not just a British agenda by the way. I read in the news the other day that the upper echelons of German industry are having exactly the same debate about whether to mandate quotas on boards for so many women and about the broader equalities agenda that my hon. Friend the Member for Erith and Thamesmead referred to.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow

If we are recognising that, it is worth noting that other nations that we compete with have already put gender quotas into legislation and beyond doubt, so we are behind our economic competitors. Ultimately, as we all know, the point about such regulation is that it would also make us more competitive. Blasting through the discrimination that has stopped us doing it would help our economy as well as our society.

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

My hon. Friend is absolutely right. For those reasons, we made specific mention of equalities legislation in the amendment.

It comes down to one’s view of the difference between encouragement, taskforces and all that, and legislation. This amendment is not particularly prescriptive. It calls for high standards of social and corporate governance. Hon. Members might say, “How do you define ‘high’?” and so on, but it is no less defined that talking about the relative standing of the United Kingdom as a place for internationally active investment firms to do business.

Once we have been through two or three of these debates, we begin to see a pattern in the way that the Committee works. I find myself a bit unconvinced that voluntary action will do this. There is not just an opportunity but a duty on us to start to define the post-Brexit financial services sector and what its characteristics will be. I want to put a few teeth behind all the fine words we have heard about the commitment to high standards, having no race to the bottom and all the rest of it. I always remember the plea of the former Chancellor, George Osborne: anybody in politics should be able to count. I look around the room and I can count, but I still want to press the amendment to a vote.

Photo of Rupa Huq Rupa Huq Labour, Ealing Central and Acton

We move to a vote—how exciting.

Question put, That the amendment be made.

Division number 3 Financial Services Bill — Schedule 2 - Prudential regulation of FCA investment firms

Aye: 5 MPs

No: 10 MPs

Aye: A-Z by last name

No: A-Z by last name

The Committee divided: Ayes 5, Noes 10.

Question accordingly negatived.

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

I beg to move amendment 38, page 63, line 5, in schedule 2, at end insert—

“(ba) the likely effect of the rules on trade frictions between the UK and EU, and”.

This amendment would ensure the likely effect of the rules on trade frictions between the UK and EU are considered before Part 9C rules are taken.

Photo of Rupa Huq Rupa Huq Labour, Ealing Central and Acton

With this it will be convenient to discuss amendment 41, page 79, line 29, in schedule 3, at end insert—

“(ca) the likely effect of the rules on trade frictions between the UK and EU, and”.

This amendment would ensure the likely effect of the rules on trade frictions between the UK and EU are considered before CRR rules are taken.

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

One of the things that concerns us most about where we are going with Brexit is the risk of trade disputes. We need only look at how one dispute can overspill into another, such as the overspill from Airbus/Boeing into Scotch whisky and cashmere—it is not very wise to spill Scotch whisky on cashmere. Our amendments are therefore sensible. They strengthen what is already in the Bill.

Proposed new section 143G(2) to the 2000 Act states that

“the FCA must consider the United Kingdom’s standing in relation to the other countries and territories in which, in its opinion, internationally active investment firms are most likely to choose to be based or carry on activities.”

Proposed new section 143G(3) states that

“the FCA must consider, and consult the Treasury about, the likely effect of the rules on relevant equivalence decisions.”

That adds further consideration to the impact on trade frictions.

There is still not clarity about what things will look like at the end of the year. Given that financial services are such a huge part of not just the UK economy but the Scottish economy, we feel that it is important that trade and the impact of overspill is looked at within the amendments. It is of significant concern that we do not know what the deals will look like in many ways. Despite the Chancellor’s statement on his equivalence declarations, the EU has not sent yet out someone to respond. I appreciate that the Minister will say that that is up to the EU and the EU needs to move on this. It is true that there are two parties to this, but in order to prevent things from getting out of hand, it is important that that becomes part of the consideration and that in passing rules we look at the wider implications of what it means for financial services.

John Berrigan, the European Commissioner’s top financial services official, is quoted in the Financial Times describing the end of the transition period as an “unavoidably fragmenting event”. That type of fragmenting event could go in many different directions. There could be overspills from one thing to another, where the disputes from one area come into another. That is why it is important for financial services, which has been a seriously overlooked part of the Government’s Brexit negotiations, that we take the small amendments that we have before us into a wider consideration and that we are very careful about the decisions that are made and the impact they could have.

I feel that that fits neatly within the change that we propose to schedule 2. I just want to add this bit in to make sure we do absolutely everything we can to prevent any trade disputes or frictions and anything that makes it more difficult for the financial services sector to trade, to make deals and to keep people employed in this country, rather than taking the easy option of shipping it over to mainland Europe. We need to take all of these things into account to make sure that we protect the jobs and economy that we have here and prevent anything spiralling out of control. We see from other trade disputes just how easily that can happen. The regulators should be mindful. If they are being mindful of other things, they should be mindful of this as well.

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

I will speak briefly in support of the amendment. I think it adds an interesting new angle to our considerations on the schedule. There is quite a lot in the schedule about the UK’s standing as a place to do business. Proposed new section 143G(1)(b) to the 2000 Act talks about the

“relative standing of the United Kingdom as a place for internationally active investment firms”.

Proposed new section 143G(2) says that

“the FCA must consider the United Kingdom’s standing in relation to the other countries and territories in which, in its opinion, internationally active investment firms are most likely to choose to be based or carry on activities.”

None of us has argued that those are not completely legitimate considerations. Of course we want to consider our standing in relation to other countries, but that is different from the trading aspect.

The amendment points out that decisions can be taken that are facilitated by the Bill, for example on divergence, which we have discussed and will discuss further, and those decisions can have one impact on competitiveness but a very different one on the ability to trade. That is particularly important when this equivalence decision is still on the table. I think these amendments on considering our trading position usefully add to the job description of the regulators, which should be about not just competitiveness, but market barriers, market access and our ability to trade into other countries. Considering both of these proposals would be a good addition to the “have regard to” list set out in schedule 2.

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

It is a pleasure to respond to the hon. Member for Glasgow Central and the right hon. Member for Wolverhampton South East. The hon. Members for Glasgow Central and for Aberdeen South propose to introduce a new “have regard” for the FCA and PRA when making rules for the new investment firms prudential regime and implementing the Basel standards respectively. That would require the regulators to consider the likely effect of their rules on trade frictions between the UK and the EU, as the hon. Lady set out.

Again, I understand and share the ambitions for frictionless trade between the UK and one of our biggest trading partners, the EU, but, as I am sure the Committee will understand, I am not able to discuss the details of our ongoing negotiations. We want a free trade agreement outcome with the EU that supports our global ambitions for financial services, and we have engaged with the EU on the basis that the future relationship should recognise and be tailored to the deep interconnectedness of those relationships across financial markets. The EU has made it clear that it does not support such an approach. We remain open to future co-operation with the EU that reflects our wide, long-standing, positive financial services relationship, and we will continue to engage in a constructive manner.

The regulators do not have oversight beyond their financial services remit. It would therefore be highly disproportionate to require them to assess the impact of their rules on all trade matters, covering goods and services. Furthermore, trading partnerships with overseas jurisdictions are the Government’s responsibility, not the regulators’. We consider that regulators should not be asked to go beyond the scope of their capabilities and duties. We have already discussed the capacity of the regulators; the amendment would really go beyond that.

We agree that financial services firms care about the UK’s relationship with overseas jurisdictions, which has a real impact on them. That is why the accountability framework that the Bill will introduce already requires regulators to consider the likely effect of their rules on financial services equivalence granted by and for the UK. Financial services equivalence will be the main mechanism underpinning financial services relationships between the UK and overseas jurisdictions. I believe therefore that the accountability framework, as proposed, meets the aim of the hon. Member for Glasgow Central.

In addition, the amendments focus solely on the relationship between the UK and the EU. That is obviously a matter of enormous concern, but we need to make legislation that accounts for the future. Equivalence or trade in financial services considerations must relate to all jurisdictions. It is crucial that we recognise that in the context of financial services firms, which often have a global footprint and global operations. That also reflects the UK’s present and future ambitions.

The accountability framework recognises the importance to UK firms of our relationship with overseas jurisdictions in financial services matters, while upholding broader international obligations. The Bill already supports the intentions behind the amendment, and for that reason I ask the hon. Lady to withdraw it.

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

I would prefer to press the amendment to a vote because it fits well with the other parts of the Bill. Asking the FCA to consider the UK’s international standing with other countries aligns with other areas in which it is taking on wider roles, and the amendment reflects that. Regulators should have regard to the wider impact of their decisions and to problems that their rules might cause to trade between the UK and the EU, which could be quite significant. It seems wise to put that in the Bill so that the regulators are mindful of it in the decisions that they make.

Question put, That the amendment be made.

Division number 4 Financial Services Bill — Schedule 2 - Prudential regulation of FCA investment firms

Aye: 5 MPs

No: 10 MPs

Aye: A-Z by last name

No: A-Z by last name

The Committee divided: Ayes 5, Noes 10.

Question accordingly negatived.

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

I beg to move amendment 22, in schedule 2, page 63, line 10, at end insert—

‘(2A) The FCA must not make Part 9C rules unless—

(a) a draft of those rules has been submitted for scrutiny by a select committee of either House of Parliament which has a remit which includes responsibility for scrutiny of such rules, and

(b) any such committee has expressed a view on the draft of those rules.’.

This amendment is designed to enhance the accountability framework for the FCA by requiring it, prior to making Part 9C rules, to submit a draft of those rules for scrutiny by a relevant Parliamentary select committee before making any regulatory changes.

Photo of Rupa Huq Rupa Huq Labour, Ealing Central and Acton

With this it will be convenient to discuss amendment 26, in schedule 3, page 79, line 35, at end insert—

‘(2A) The PRA must not make CRR rules unless—

(a) a draft of those rules has been submitted for scrutiny by a select committee of either House of Parliament which has a remit which includes responsibility for scrutiny of such rules; and

(b) any such committee has expressed a view on the draft of those rules.’.

This amendment would enhance the accountability framework for the FCA by requiring it, prior to making CRR rules, to submit a draft of those rules for scrutiny by a relevant Parliamentary select committee before making any regulatory changes.

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

We slightly change tack with this amendment. We have had some discussion of the “have regard to” list in the schedule, but the amendment covers a different aspect, dealing with the relationship between the enhanced role that regulators are to be given under the Bill and the role of Parliament. There are two important aspects to the role. First, in which way should Parliament be involved? Secondly, when should Parliament be involved? By that I mean, at what point in the regulatory process is it appropriate to have parliamentary involvement?

On Second Reading and several times today, the Minister has encouraged us not to look at the Bill in isolation but to see it as part of a process of reform, possibly involving other such Bills in the future. This may be only the starter and, if hon. Members are really lucky, they could be invited back here next year for the main course—who knows? In particular, he has asked us to look at the Bill alongside the consultation document on the future regulatory framework review, which was published a month ago. That document, which is I think 30 to 40 pages long, has a whole chapter devoted to accountability, including parliamentary accountability.

To anticipate the Minister’s response to the amendments, of course the document does not yet reach conclusions because it is a consultation inviting responses. In the part about parliamentary accountability, the document sings the praises of the Select Committee system and the Treasury Committee in particular. My hon. Friend the Member for Wallasey had to pop out, but we have at least another three members of the Treasury Committee in the room, and I am a former member of it. There is no doubt that it is an esteemed Select Committee, which we all accept does a great job in this House, but the work of that Committee is very stretched. It has to cover a huge amount of business: not only banking and financial services more generally, but taxation, fiscal policy and everything else that the Treasury does.

I do not want to be unfair, but when I read that part on parliamentary accountability, I found it hard to escape the conclusion that it was written to give the impression that not a lot should change—the system we have at the moment is just tickety-boo; it is just fine. The underlying assumption seems to be that we can take this huge exercise in onshoring—this large-scale set of regulations, directives and all the rest of it—expand in a very significant way the role and remit of our regulators, and just tack that on to the present framework. I hope the Minister does not think I am being unfair, but that is the impression that I got when I read the future regulatory framework review.

Just to help the Minister out, I will quote a bit from the review. Paragraph 3.18 says:

“The government thinks that the long-established scrutiny mechanisms referred to above will continue to be effective in holding Ministers to account for the work of HM Treasury and the financial services regulators.”

There we are. We have a great system that is anchored around the Treasury Committee, and the Government are saying they think that will be adequate. The review encourages us by saying:

“There are two key reasons why Parliament may wish to focus on the select committee system when considering its future approach to Parliamentary scrutiny of financial services policy.”

It lays those reasons out in paragraphs 3.20 and 3.21, but I am not sure that simply saying that we have a great system at the moment, and that it can continue, is really appropriate to the task.

The idea has been floated outside the Committee—I think it was either on Second Reading or perhaps during the Chancellor’s statement on financial services a couple of weeks ago—that there be a specific Select Committee on financial services. There is precedent for that in Parliament, in the European Scrutiny Committee. Its members have spent many happy hours scrutinising the detail of various EU directives—in fact, some of them have spent many happy years doing so. Here, however, we run into the issue of the scope of the Bill, because it is my understanding that a Government Bill such as this, even it were to be amended by the Opposition on its way through the House, cannot tell Parliament which Select Committees to have.

The idea of a specific Select Committee on financial services may well have merits, and it might even be something that the Government come to favour, but my understanding is that the establishment of such a Committee would be a decision for Parliament—it would not be something that we can mandate by legislation. I am not entirely sure about that, but that is my understanding of the boundaries between a Government Bill and what Parliament will decide. Amendment 26, which I tabled, deliberately does not specify which Select Committees should be involved. That is a debate that will continue. It might be something that the Government eventually recommend or say they favour, but it would be for Parliament to decide which Select Committees to establish.

I want to make it clear to the Committee that although we might think there is merit in the idea of a Select Committee on financial services, the amendment before us does not mandate the creation of a new Select Committee. It is deliberately silent on the issue of which Committee should be involved in such work. Instead, it is focused on what should be considered by a relevant Select Committee, and on when in the process that consideration should take place.

The “what” is the part 9C rules, which are made under schedule 2 of the Bill—the rules governing investment firms that are regulated in this way by the FCA. Those are the rules to which the new accountability framework that we have been debating applies. That is made clear in proposed new clause 143G of the Bill, which states:

“When making Part 9C rules, the FCA must, among other things, have regard to—

(a) any relevant standards set by an international standard-setting body,

(b) the likely effect of the rules on the relative standing of the United Kingdom as a place for internationally active investment firms to be based or to carry on activities, and

(c) any other matter specified by the Treasury by regulations.”

Proposed new clause 143F makes it clear that:

“The FCA must publish a list of all Part 9C rules in force”.

That is the “what” that we are talking about here. It is set out on page 62 of the Bill, in the early part of schedule 2.

I come now to the “when”. When should a Select Committee be involved? When should a parliamentary role kick in? This is actually at the heart of the amendment. It is true, of course, that the chief executives of the PRA and the FCA, plus the Governor of the Bank of England, appear periodically before the Treasury Committee. However, the regulators probably do so at most once or twice a year, and there is no onus on them to appear before a particular regulatory decision is taken or a particular set of regulatory rules come into force.

The amendment seeks—without being prescriptive about the Select Committee involved—to give the Select Committee system a role before final decisions are taken. I tread carefully here, given the debates that we have had in this House in the past few years, but there is an example of this: the ECON Committee, the European Parliament’s Committee on Economic and Monetary Affairs, has played this role for a number of years, and it is regulations approved through that process that we are onshoring through the Bill. Its role is therefore somewhat different from that of the Treasury Committee, or any other Select Committee, in that it considers regulations in draft before they are finalised. That is important, because it allows public interests to be represented and considered before a decision is taken. The important part of the amendment is not so much what Select Committee, but when in the process Parliament should be involved.

If we do not have a process that pushes for parliamentary involvement before a decision is made, we will end up in the paradoxical situation that, after onshoring all this regulation in the name of taking back control, we end up with less scrutiny of these kinds of regulations than we have had up until now, or at least up until January this year, when we at least had British MEPs on the ECON Committee, as well as MEPs from many other countries. There was a role for elected representatives in that powerful parliamentary Committee as it considered and commented on these regulations in draft. Replacing that with a system in which successor regulations can be produced by UK regulators without any prior parliamentary involvement would mean that the onshoring process lost an important part of the parliamentary process. That would be a paradoxical outcome in an exercise that is supposed to be driven by taking back control.

Wherever we stood on that issue, taking back control was understood to mean taking control back to the UK Parliament, not replacing European parliamentary input with UK regulator control, with their perhaps making one or two appearances before Parliament after the decisions had been taken. That is why we believe that it is important to empower Parliament in this new system, rather than onshoring these regulations in a way that results in the public, consumer organisations and, indeed, elected parliamentarians actually having less of a voice over these things while they are in the development stage than was the case in the past. It is to avoid that paradoxical outcome that we tabled these amendments, to try to ensure a strong Select Committee role while regulations are being developed, allowing representations to be made during that development rather than simply after the fact.

Photo of Stella Creasy Stella Creasy Labour/Co-operative, Walthamstow 3:00, 24 November 2020

As this is my first speech, let me say how fantastic it is to serve under your chairmanship, Dr Huq—none of us ever says anything other.

I rise partly to presage what I am sure the Minister knows is coming, given our previous correspondence on my concerns about existing financial regulation in this country and where the voice of the consumer is heard in that. I am sure he has looked avidly at some of the new clauses that I have tabled, which seek to get at that and which I note will come much later, in the shape of new clauses 15, 18, 21 and 23.

The shadow Minister has set out clearly how amendment 22 reflects those concerns. Again, where in the new financial regulatory regime being brought in by the Bill will the voices of our constituents be heard? The shadow Minister has focused on the consequences of leaving the European Union and the lacuna that will be created in terms of financial regulation by the Bill if we do not have that clear commitment with the Treasury or any other financial body to look at Select Committees and the role they might play. I want to focus on the other end of that telescope and what it has been like to seek to give consumers voices within the existing regulatory framework, what lessons that might offer us in the future regulatory framework and why involving Select Committees might be a way forward.

I am sure the Minister would say that working out how we make sure our constituents are heard is a work in progress. We talked this morning very strongly about the impact of financial regulation on people’s everyday lives, the financial crisis and what could be learned from that. Many of us will have seen among our constituents people whose lives were decimated when financial institutions were found wanting and how that has driven the concerns about consumer protection in the wider work of the FCA. My concern as a Member of Parliament who has long had an interest in personal debt in this country has been about how that conversation is part of those bigger questions.

As I mentioned this morning, often we look for specific issues when it comes to consumer voice and financial regulation. On the wider impact, it is almost a given that somehow regulators will think about consumers. The reality is that over the past six or seven years of having the Financial Conduct Authority that has not always been the case. The Bill gives those regulatory bodies more powers. As the shadow Minister has pointed out, it removes one of the mechanisms for consumer voice through the democratic process within the European Union. Therefore, it is right that we ask how we replace that and whether there are gaps in what has happened to date that mean it is even more important, when asking whether the financial regulators are living up to the issues we might want them to have regard to, that that consumer voice is being heard in that process.

Amendment 22 is an eminently sensible idea to say, “Hang on a minute, where there had been previous scrutiny and challenge from democratic institutions, we need to replicate that within the UK Parliament.” It comes from that perspective of saying that it is in everyone’s interest to have that check and balance because it has been of benefit under the previous regime and, under that regime, there has been too narrow a consumer voice. I am not going to prosecute that argument in full today, because I am going to save it for the Minister for the new clauses that I have put down and how I think he can do that. I can see his disappointment already. However, I argue that it is worth looking at where the Select Committee process can add value to financial regulation in this country because, so clearly, it is our constituents who have paid the price when financial regulation has not looked at consumer risk and has not been able to ask questions before a crisis happened.

Many of the issues that our Treasury Committee, for example, as one body that may be involved in this, has looked at have come from our constituents raising concerns and a recognition that something might be on its way. Many of us would argue, and I suspect the Minister would agree, that sometimes regulators have been slow to react because they have been trying to balance the needs of the industry with questions about whether interference might cause more harm. The amendment is a way of getting that right, of having a place where those conversations could take place around financial regulation with a regulator that now has much more extensive powers than previously. It is a way of making sure that, as a democracy, we have a space where we can raise those concerns before problems happen.

When we get to the new clauses I have tabled, one of the concerns I will raise is where we see other regulators—in particular, I think of the financial ombudsman having to intervene where our financial regulators have not been able to do their job around supporting and protecting consumers, and so the ombudsman has picked up the pieces. Under the model we have coming forward in this Bill, it is not clear to me, without the involvement of Select Committees, where those conversations could take place, apart from with the financial ombudsman. Again, we are waiting until institutions potentially fail and organisations can pick up the pieces for that consumer voice to be heard.

I would argue that the amendment is a very regulator and industry-friendly way of doing things, because having those conversations is good for doing good business. One of the principles I am sure the Minister will agree with is that good regulation is in everybody’s interests. Active regulation that makes sure we have a fair, competitive and protected environment—the higher standards we are all talking about—does require explicit scrutiny. It requires not presuming that everybody knows what each other is doing.

It also requires asking whether there is information that can be gained from our constituents. We can all think of the banking crisis, and the kind of information we were getting in our surgeries could be brought to Select Committees and form part of understanding whether the Financial Conduct Authority is applying its role in due course.

I think of the debates we had when I was first elected over a decade ago about the then Office of Fair Trading—[Interruption.] Indeed, it has been that long; I am almost edging into grandee territory, but not quite. At the time we looked at the Office of Fair Trading, there was a recognition that information was coming through in Select Committee debates that was not being picked up by the Office of Fair Trading. That was a function of the fact that the Office of Fair Trading was not the appropriate regulatory body for some of these financial procedures.

If the Minister will not accept this amendment, how will he address the point raised by my right hon. Friend the Member for Wolverhampton South East on the Front Bench about the lacuna created by leaving the European Union and the democratic scrutiny that came from the Committees there? There are also the lessons that we have to learn from the last six or seven years about whether those early-warning systems that involve consumers, and those early-warning debates that can happen in this place, can be part of that new regulatory regime?

Otherwise, the Minister is almost setting up the FCA to fail, because he is asking it to be judge and jury of its own ability to deliver on competing objectives. They are sometimes competing objectives, and that is right—there can be a concern for competition and a concern for consumer protection that overlap, and there can be a concern for competition and a concern for consumer protection that stand against each other. However, without some sort of forum where the consequences can be teased out, information can be brought and democratic scrutiny can be part of the conversation, that gap is not filled. It will fall to the Minister or his successors or to the FCA to be judge and jury of their own homework. As we have seen in the past—I have no doubt we will see this again—that can be a very dangerous position to be in. We can have the groupthink that people talk about, where everyone agrees that everyone is probably doing the right thing, without really recognising that the wrong thing is coming up very quickly.

The financial scandals that our constituents have had to pay the price of tell us that we have to get this right. I look forward to hearing from the Minister that he has ideas about how that democratic scrutiny and engagement can be part of a competitive, high-standard environment in the UK and about the role that Select Committees could play in that.

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

I very much agree with the proposals brought forward by the official Opposition. I congratulate them on their drafting and having found a way to put these amendments forward. Our attempt at this comes in new clause 32, and I will discuss that a bit further when we eventually get to it.

I agree that it is vital that there is scrutiny of these institutions and these powers. It is surely unacceptable that the Government have made so much play of taking back control from the EU only to hive it off to regulators because it is far too terribly complicated for us parliamentarians to worry our sweet heads about. That is not acceptable. That is not the way that it works in the European Union, and it certainly should not be the way Westminster operates. We should trust ourselves and our colleagues slightly more to do that scrutiny. If European parliamentarians, some of whom are now in this place, can do it, we can certainly look at a way that this can be done and that accountability can be taken for these powers.

I agree with those who have said that the Treasury Committee is stretched in its business. Having had a brief discussion yesterday in our pre-meeting about the sessions to come in the weeks and months ahead, I can tell the Committee that those sessions are already very full, running at two sessions in most weeks. We are certainly being kept very busy with all the important things our constituents bring to us, the responsibility the Committee has to scrutinise the Government and all the other things the Committee wants to do. The logic of setting up a new Select Committee to examine these things is certainly very compelling to me, because it will need that specialist knowledge in addition to the heavy burden of work it might have.

I noted that Bim Afolami made a very good plug for this on Second Reading. I think his feeling is that it helps out the Government to have this additional scrutiny. It helps everybody see what is coming, prepares the ground and tries to make decision making better, which should be in the Government’s interest—trying to get to the right thing for all our constituents and for the financial services sector as a whole.

So that is important, and we should have no less of a role in all this than MPs currently have. I draw the Minister’s attention to the evidence given to the House of Lords EU Financial Affairs Sub-Committee, whose reports I am sure he is an avid reader of, for International Regulatory Strategy Group, which also recommends enhanced parliamentary accountability and scrutiny. Its suggestion is a new system of Committee oversight in not just the Commons but the Lords, as we suggest in new clause 32.

The group has a series of principles it thinks such oversight should stand to, such as it being cross-party and apolitical—those are the principles of Select Committees, but it is important that we look at this. It mentions the ethos of the Public Accounts Committee in the way it goes about its business in scrutinising regulatory authorities. It also believes that oversight needs to be authoritative and expert, building up expertise within Committees, that it needs to be risk-based and mainly ex-post, and that it should be open to stakeholder input, which is incredibly important. We all know Select Committees do that; they take evidence and they have good records of bringing in expertise and evidence from people, but they need to be able to use that evidence in a practical way to inform the best strategy and best way forward as we take these powers back.

I very much recommend to the Minister the evidence given by the IRSG. What is he doing to meet this challenge of the “accountability deficit”, as the Finance Innovation Lab put it? We cannot have a situation where more powers are coming back, yet we give them away. That is certainly not what was promised on the side of any Brexit bus, and it should not be the way we go forward. As the honourable grandee, the hon. Member for Walthamstow, said, it stores up a risk that we do not see something coming, that we have not identified a problem on the horizon and that we all end up in a bit of a crisis because we did not have the opportunity to scrutinise properly, to look at the regulations as they come forward and to ensure we do what is best for our constituents and the wider economy. There is logic in having some form of Committee to look at this, in whichever format the House wants to bring that forward. It is essential that that scrutiny exists and that it is at least as good as what was done in the European Parliament.

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

I am very pleased to address the points raised by the right hon. Member for Wolverhampton South East, the hon. Member for Walthamstow and the hon. Member for Glasgow Central. I have listened carefully to what they had to say, and their remarks go to the heart of the distinction between the provisions of the Bill that we are scrutinising in Committee and the broader questions around the future scrutiny mechanism, and the necessity to ensure that we do not undermine the legitimate and appropriate scrutiny by Parliament of our regulators.

It is critical that we ensure sufficient accountability around the new rules of the UK’s financial sector. Capital requirements for firms are extremely detailed and technical. It is right that we seek to utilise the expertise of the regulators to update them in line with international standards.

In return for delegating responsibility to the Financial Conduct Authority, this Bill requires it, under proposed new clause 143G of the Financial Services and Markets Act 2000, to publish an explanation of the purpose of its draft rules and of how the matters to which it is obliged to have regard have influenced the drafting of the rules. The Bill introduces a similar requirement for the Prudential Regulation Authority, under proposed new clause 144D of the Financial Services and Markets Act.

These matters concern public policy priorities that we consider to be of particular interest to Parliament. I have looked carefully at the amendments proposed by the right hon. Gentleman, and the amendments envisage Select Committees reviewing all investment firms prudential regime and capital requirements regulation regulator rules before they can be made. Under that model, Parliament would need to routinely scrutinise a whole swathe of detailed new rules on an ongoing basis. That is very different from the model that this Parliament previously put in place for the regulators under the Financial Services and Markets Act, where it judged it appropriate for the regulators to take these detailed technical decisions—where they hold expertise—within a broader framework set by Parliament.

It should not go unnoticed that, if Parliament were to scrutinise each proposed rule, the amendment does not specify a definite time period in which any Committee must express its view on them. That could bring a great deal of uncertainty to firms on what the rules would look like and when they would be introduced. That makes it more difficult for these firms to prepare appropriately for these changes. Ultimately, there is currently nothing preventing a Select Committee, from either House, from reviewing the FCA’s rules at consultation, taking evidence on them and reporting with recommendations. That is a decision for the Committee.

My officials have discussed this amendment with the regulators, and they have agreed that they will send their consultation draft rules to the relevant Committee as soon as they are published. The FCA and the PRA both have statutory minimum time periods for consultation and will take time to factor in responses to consultation—so this is not a meaningless process—providing a more than reasonable window within which the Committee can engage the regulators on the substance of the rules, should it desire to.

The Government agree that Parliament should play an important strategic role in interrogating, debating and testing the overall direction of policy for financial services, while allowing the regulators to set the detailed rules for which they hold expertise.

Before I conclude, I would like to address the point the right hon. Gentleman made concerning the document that was published a month ago on the future regulatory framework, and to address the supposition he very courteously made that, somehow, the Government believed that everything was fine and little needed to change.

The purpose of this extensive consultation is to do what it says: to consult broadly to ensure that, through that process, the views of industry, regulators and all interested parties and consumer groups are fully involved, such that, when we then move to the next stage of that process—I would envisage making some more definitive proposals—it would meet expectations on a broader and enduring basis. This Bill is about some specific measures that, as I explained earlier this morning, we need to take with an accountability framework in place, but I do not rule out any outcome.

The right hon. Gentleman made some observations about the prerogative of Government over mandating Parliament and Select Committee creation. I think we are some way away from that. We want to do these things collaboratively and end up with something that is fit for purpose, and I recognise the comments he made about the resourcing of such Committees with respect to the role they would play.

I do believe that this scrutiny process, as set out in the Bill, is extensive, and, for the reasons I have given, I again regret that I must ask the right hon. Gentleman to withdraw this amendment.

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

I cannot resist the irony of pointing out that the Government are resisting what could be termed the “take back control” amendment and do not want to add it to the Bill. There are many illustrious Members of this House we could name this amendment after; they have been arguing to take back control for many years.

The Minister said that the amendment would cause a lot of uncertainty; that it might be too much work; that it might require a Committee—whichever Committee it was—to look in too much detail at rules, when it would probably be more concerned with the broad direction. He also pleaded with us to allow the consultation to play out.

There is a serious point at the heart of this about the sovereignty agenda. There will be some kind of consequence at some point, possibly a backlash, that will draw attention to how this is done and the new powers that the regulators have. At that point, people will ask, “What was Parliament doing? What role was Parliament playing?”

On this occasion, I am not sure that the amendment is perfectly drafted or that it does things in the best way, so I will not press it and I will allow the consultation that the Minister has referred to to play out. The issue of Parliament’s role in this new world will come back at some stage, perhaps on Report or when the Bill goes to the other place, but, for today, I beg to ask leave to withdraw the amendment.

Amendment, by leave, withdrawn.

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

I beg to move amendment 1, in schedule 2, page 76, line 31, leave out “143O(4), (6) or (8)” and insert “143O(3), (6) or (8)(b)”

This amendment corrects a cross-reference to new provisions inserted by Part 1 of Schedule 2.

This is a technical amendment that corrects a cross-reference from section 395 of the Financial Services and Markets Act 2000 to new section 143O, as proposed in schedule 2.

Amendment 1 agreed to.

Question proposed, That the schedule, as amended, be the Second schedule to the Bill.

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

Investment firms have a significant role to play in enabling investors to access financial markets, but the current prudential framework that applies to FCA investment firms was made for banks, which is why we need a new bespoke investment firms prudential regime. Schedule 2 contains relevant provisions that enable the FCA to implement a tailor-made prudential regime for non-systemic investment firms.

The new regime will set out new capital and liquidity requirements that will ensure that firms can wind down in an orderly way without causing harm. The right hon. Member for Wolverhampton South East and the hon. Member for Walthamstow are rightly concerned about consumer harm, so I draw their attention to the fact that the FCA will have to set those requirements in relation to the risks that firms pose to consumers, as well as the integrity of the financial system.

The FCA will also be required to make rules for parent undertakings of investment firm groups, because appropriate regulation and supervision are as important at the group level as at the individual firm level. Parents, as heads of the group, should be held responsible for the prudent management of the group.

It is right that specific rule-making responsibilities should be delegated to the FCA as an independent expert regulator, but those responsibilities must come with enhanced accountability. Schedule 2 requires the FCA to have regard to a list of important public policy considerations when making its rules in relation to the new investment firms regime, including any relevant international standards and the relative standing of the UK as a place for internationally active investment firms to carry on activities. To support scrutiny, the FCA will need to report publicly on how its consideration of those matters has affected its decisions on the rules in relation to the IFPR.

The FCA will also have to consider the impact on financial services equivalence, both by and for the UK, and consult the Treasury on that. Consulting the Treasury ensures that the FCA has appropriate accountability for technical choices that might have an impact on firms, while recognising that the Government retain responsibility for international relations and therefore equivalence. These three considerations are those that we have deemed to be immediately pertinent to the new investment firms prudential regime today.

However, as I have mentioned previously, the accountability framework is meant to reflect the changing context. That is why the Treasury will have power to add additional considerations, which would be done following discussions with the regulators and industry, and following parliamentary scrutiny. That is the overall framework that will allow greater scrutiny and transparency, and provide the direction the FCA will take in implementing the new regime in the UK, while rightfully leaving the detail to the experts.

In the longer term, any wider deregulation will need greater debate and the proper scrutiny of Parliament. The Government intend to address that part through the future regulatory framework, as I have discussed, which is now out for consultation. I therefore recommend that that this schedule stand part of the Bill.

Question put and agreed to.

Schedule 2, as amended, accordingly agreed to.