“(1) The Secretary of State must, no later than six months from the date on which this Act comes into force, carry out and publish the results of a review of the capacity of the Financial Conduct Authority to regulate the activities of cryptoasset businesses as required by the relevant legislation.
(2) For the purposes of subsection (1) above, ‘relevant legislation’ includes—
(a) the Money Laundering Regulations 2017, as amended;
(b) the provisions of Part 4 and Schedules 6 and 7 of this Act.
(3) For the purposes of subsection (1) above, matters relevant to the assessment of the capacity of the Financial Conduct Authority to regulate the activities of cryptoasset businesses include—
(a) the projected budget during the current spending review period;
(b) the total number of full-time equivalent staff;
(c) the level of relevant expertise within its workforce; and
(d) challenges related to the recruitment and retention of staff.
(4) The review must also include an assessment of whether the current legal powers of the Financial Conduct Authority provide an adequate basis for consumer protection in relation to cryptoassets.”—
New clause 61—Reporting requirement (overseas territories)—
“‘(1) The Secretary of State must, no later than six months from the date on which this Act comes into force, carry out and publish the results of a review of the level of regulation of cryptoasset businesses for the purposes of tackling economic crime in—
(a) each of the Crown Dependencies; and
(b) each of the UK Overseas Territories.
(2) Following the publication of such a review, the Secretary of State must prepare and publish a strategy for enhancing the level of regulation of cryptoasset businesses in any of the jurisdictions mentioned in subsection (1) above which may have serious deficiencies in their regulatory frameworks in relation to such businesses.
(3) For the purposes of subsection (2) above, criteria for identifying serious deficiencies shall include—
(a) the level of compliance by each jurisdiction with international standards set out by the Financial Action Task Force and affiliated regional bodies;
(b) the level of compliance by each jurisdiction with its legal obligations under any relevant international agreements to which it is a party; and
(c) the level of enforcement in each jurisdiction of relevant laws applicable in that jurisdiction.
(4) The strategy required by subsection (2) above must include specific plans to ensure parity between—
(a) legal frameworks; and
(b) law enforcement efforts
between the UK and each Crown Dependency and Overseas Territory
New clause 60 takes us back to some of the issues we touched on during Tuesday’s debate on part 4 of the Bill in relation to cryptoassets. Considering how many new regulations there are in this area, it is worth taking stock of how well the regulations already in place have been implemented to date and what more needs to be done to ensure that those responsible for enforcing the measures in the Bill have the powers, the expertise and the capacity they need.
As the primary regulator of cryptoasset businesses, the FCA is a case in point. Following changes to the anti-money laundering regulations, cryptoassets were brought under the FCA’s supervision at the beginning of 2020, but, as I mentioned in Tuesday’s debate, the FCA has reported that the overwhelming majority of crypto firms required to register have either failed to do so or withdrew their applications once it was clear that they would not meet the requirements. As a result, there appear to be well over 200 firms doing business in the UK without permission, outside any supervision under anti-money laundering regulations.
Therefore, it should be apparent to every member of the Committee that there is an urgent need to address the growing shortfall between expectations and resources in the context of cryptoasset regulation. However, rather than implementing the strategy required to match the Minister’s ambition, with the requisite staffing, funding and expertise, the Government risk making a bad situation worse.
Under the Bill, Ministers are bringing in new regulations at the very same time as civil service budgets and staff are struggling to deal with unprecedented strain. It is by no means clear that the Bill, particularly in its provisions on cryptoassets, will achieve anything more than to ask more of regulators and law enforcement agencies while providing them with less resource to do it. New clause 60 represents an attempt on the Opposition’s part to require a comprehensive and strategic approach to tackling risks of economic crime in the crypto sector. It is tabled very much in the spirit of seeking to ensure that legislation is properly implemented.
The FCA’s approach to assessing firms in the initial stages through registration removes poor-quality firms and bad actors from the UK system, reducing the risk of domestic firms being used to launder the proceeds of illicit activity. That robust gateway has already prevented over 200 firms that were unable to manage anti-money laundering and counter-terrorist financing risks from being registered.
Cryptoasset firms approved to operate in the UK are subject to ongoing supervision by the FCA to make sure they continue to meet those standards. The regime also provides the FCA with a number of powers in relation to those who do not meet the UK’s standards. For example, the FCA can direct a firm to make disclosures, implement additional controls and oversights, and issue injunctions to prevent potentially illicit cryptoasset activity. Furthermore, the FCA is already subject to oversight by His Majesty’s Treasury, the lead Department for anti-money laundering regulations, and, as a statutory regulator, it is also directly accountable to Parliament.
I turn to new clause 61. Again, I am sympathetic but do not support it. As we have discussed, FATF sets international standards on anti-money laundering and counter-terrorist financing, including in relation to the regulation of cryptoasset businesses, or “virtual asset service providers”, as the taskforce calls them.
FATF and its regional bodies are responsible for assessing their members against international standards. That includes assessments of the Crown dependencies and overseas territories on their regulation of cryptoasset businesses. A UK review of the Crown dependencies and overseas territories would not add value to that. The Crown dependencies and overseas territories co-operate with the UK and are committed to meeting international standards on fighting financial crime and countering terrorist finance. I therefore ask the hon. Member for Aberavon to withdraw the proposed new clauses.
I thank the Minister for that feedback. We want to ensure there is a mechanism to check and verify that the FCA is able and resourced to do what we want it to do. Our worry is that if we take a hands-off approach and leave it to its own devices without looking at whether it is achieving what we want it to achieve, in this fast-moving world, we could potentially lose control of the situation. I am sure that that would be a matter of regret to the Minister and the Committee.
New clause 61 is about ensuring that UK authorities can keep a close watch on developments in the overseas territories and take any necessary steps to ensure that we avoid the same kind of race to the bottom that has turned some of those territories into a magnet for a host of dodgy—and often outright criminal—financial transactions in recent decades. There are already reports of rapidly growing cottage industries springing up in places such as the Cayman Islands, aiming to facilitate the incorporation of cryptoasset businesses with, we can only assume, minimal regulatory oversight.
I thank the Minister for his comments, but will he say a bit more about how we are ensuring and building robust approaches to regulating crypto-related risks in our overseas territories, as well as the Crown dependencies, in the light of those growing cottage industries, the increasing risk, and our responsibility for what is happening there? Does he feel that there is anything more that could or should be done?
The hon. Member raises some important points. I do not in any way wish to disabuse him of the view that there is a risk with this industry; crypto has posed challenges to many areas. It is worth pointing out that the FCA has a budget of £600 million and co-operates extremely closely with the overseas territories and their regulatory bodies. It provides not just an oversight function here, but an education function for many others, and it sets an example that many other jurisdictions seek to emulate.
I urge the hon. Member to look at the way in which the FCA actually works, and at the way in which the overseas territories and Crown dependencies already co-operate. That is not to say that there are not problems—there are often problems in such regulatory environments, which we need to address—but the correct thing to do is to work with the FCA, as it is already doing an excellent job, and ensure that it is properly resourced. As I said, £0.6 billion seems like quite a lot, and there are various ways in which we are supporting further improvements via co-operation.
I thank the Minister for those points. We feel that it is a bit of a leap of faith but, on the basis of the assurances that he has given, I am happy to withdraw the clauses. I beg to ask leave to withdraw the motion.