Emma Reynolds and David Postings gave evidence.

We will now hear oral evidence from David Postings, chief executive officer of UK Finance, and Emma Reynolds, managing director of public affairs, policy and research for TheCityUK. We have until 10.40 am for this panel. Will the witnesses please introduce themselves for the record?

Emma Reynolds:

Emma Reynolds, managing director of public affairs, policy and economic research at TheCityUK.

David Postings:

David Postings, chief executive of UK Finance.

Q Good morning. We will alternate questions; I will try to be brief and give you a broad opening question for the benefit of the Committee. Representing practitioners in the industry, could you give us your assessment of our competitiveness, how it has changed over time and how it compares internationally? Could you give us your views on the competitiveness duty in the Bill and where that should sit, and on any other matters that relate to how the Committee should use the Bill to make the most of the economic opportunities available to us? Could each of you take that question in turn?

David Postings:

Thank you, Minister. The UK is an extremely competitive financial services centre, and has been for decades. The exit from the EU provides us with some challenges and some opportunities. The Bill has been worked on by my team in conjunction with HMT and the regulators, and we are very pleased with the content, particularly with regard to wholesale and capital markets. The amendments to EU legislation that it contains are quite detailed and technical, but they help with the competitiveness of the market and of the UK in that market.

Q What is your members’ view on the competitiveness duty in the Bill?

David Postings:

They welcome it. I think it is really important. It gives us balance and the opportunity to make sure that the regulator has regard to that. Ultimately, being a more competitive financial services centre will generate greater tax revenues for the UK and growth—which are really important—as well as stability.

Q Emma, the same question to you.

Emma Reynolds:

Thank you, Minister. I reiterate that the UK is one of the world’s leading international financial centres. I agree with David that exiting the EU has brought both challenges and opportunities. On the opportunities that the Bill presents, we absolutely welcome the new secondary objective on international competitiveness and economic growth. The industry has been calling for that for some time. The Bill is a result of many years of the Treasury consulting our industry, and overall we are very supportive of it.

If the objective is done properly and the regulators meet it, it gives us an opportunity to tailor the UK’s regulation to our market. Obviously, we do not have 27 member states to negotiate with any more, so we have an opportunity to tailor to our market. However, we want high standards, not low standards. We want the benefits of regulation, and any changes to regulation, to outweigh the costs. We want regulation to be proportionate to the risk involved. Obviously, all that will be rooted in many international agreements to which we have signed up as a country.

We think there are great opportunities here to enhance our competitiveness, but the proof will be in the pudding, rather than the Bill itself. The Bill enables that to happen, but it is very important that the Treasury and Parliament hold the regulators to account on their new secondary objective.

Q I have one supplementary. Thank you both for those answers. It was put to me this morning that the UK capital markets raised just 1% of all global equity issuance last year. I will have to verify that statistic, but does that worry you, and should it worry us?

David Postings:

If it is true, it should worry us —absolutely. I think the Bill is a good first step in addressing some of those issues. We have had the Lord Hill review, and its recommendations are contained in the Bill. The changes to the double volume cap and the share trading obligation will help the UK’s competitiveness and our ability to grow that share.

Emma Reynolds:

We are in a very competitive environment, and I think the UK is losing out to New York, when it comes to listings. We need to focus on that. We should not be complacent. Obviously, there is very big competition from the Asian international financial centres, too.

Q Thank you very much for coming in to give evidence. I will ask about the intervention powers and whether TheCityUK and UK Finance have seen or been consulted by the Government on the intervention powers that they are bringing forward. When the intervention powers come in, what risks are there to the international reputation and stability of UK financial services?

Emma Reynolds:

First, let me say that we have discussed this power with Treasury officials, and we have submitted a paper to the Treasury and this Committee about how it could be defined. As one of the regulators said earlier, with greater power—obviously, this Bill and the exit from the EU confer a lot of new powers on the regulators—comes greater accountability.

There is a balance to be struck between enhanced regulatory accountability and maintaining the day-to-day independence of the regulators, which is something that international investors and businesses appreciate, because it leads to a stable regulatory environment. If the intervention power is tightly defined and used as a matter of last resort, you can minimise the risks. We think it could be a very reasonable instrument and power to take, given the circumstances and the transfer of power.

David Postings:

The EU regulation was constructed through primary legislation in the main, with the agreement of a number of countries in the EU. That is now being put into the rulebook in the UK, so the regulators have tremendous capability to amend those regulations. It is not unreasonable to have a power that allows Parliament to scrutinise that kind of thing. We have not seen a draft clause, but we have talked to the Treasury and the regulators about this.

The most important thing is that it is used sparingly and drawn tightly. The best overseas example that we could come up with was the Australian example. I believe that it has never been used, but it is there in extremis. It should be something that is very rarely used and not politicised. We need to get the balance between the scrutiny of the regulators and not politicising it. That is a very difficult trick to pull off, but we should be able to do it.

Q I have a quick follow-up. How do you think “significant public interest”, which is the phrase that is being used, should be defined? At what threshold do you think such a power should be triggered?

Emma Reynolds:

The first question is very difficult to answer. I think it is probably one for the Government, if you do not mind me saying.

The answer to the second question is that there are occasions where regulation is not designed to meet the expected outcome—there could be a case where the regulator is not aware of national security risks—so there are occasions where such a power could be used. As I said before, it needs to be tightly defined. Defining a trigger would be useful, but equally you do not want to define it so tightly that it could never be leant on or even used. Given the amount of power that the regulators are being given, we think it is important that the broader societal and economic impact of the regulation is something that both Government and Parliament have the power to have a say in, if that regulation is deemed not fit for purpose.

Do you have anything to add, David?

David Postings:

I don’t really, no.

Q Good morning, panel; thank you for coming. In their evidence to us a moment ago, the regulator said they would be transparent with regard to their responsibilities for accountability in the metrics and reporting of CBA, but Emma, in your written evidence to us, you suggest:

“The Financial Services and Markets Bill should be amended to include a power to require regulators to transparently report metrics”.

I wonder if you could comment on that a little, please.

Secondly, you have mentioned proportionality, and again in your written evidence to us you suggest that there may necessarily need to be more of it when we consider the risk, the nature and the scope of businesses, who they are there for and who their customers are. Does the Bill set the right tone for proportionality, or do you think there is still more we should consider?

Emma Reynolds:

To take your first question, we think it is important that the regulators are not marking their own homework with regard to the secondary objective. We welcome what the PRA said earlier and the discussion paper it has put out, but we do think the Treasury could take upon itself a power to demand that the regulators report more frequently and when the Treasury has some concern about whether they are meeting the new secondary objective. We do think the Bill should go further in that regard. We do not want this objective to just be in an Act of Parliament and for it to never really be a reality. The question is, “Does this bite?” That is what a lot of our members are saying. We think there are ways that you could hold the regulators to account on that.

Does the Bill set the right tone on proportionality? At its core, it is an enabling Bill, so the proof will really be in the pudding. We hope so. Hopefully, the secondary objective will mean that the regulators will take that very seriously—that their regulation should be proportionate—so we hope so, but it remains to be seen.

Q So, like you have just said with regard to the first question, we should look at ways of making sure that that is firmly set down, rather than just a principle.

Emma Reynolds:

Indeed.

Q May I ask you both about clauses 21 and 22, and digital settlement assets? Ms Reynolds, you talked about high standards. I wonder if you could both say whether you agree that the definition of a digital settlement asset is satisfactory and robust enough to safeguard consumers. It is rather broad.

David Postings:

I think it needs to be broad, because the digital asset environment can change quickly, and if you define things too narrowly, you risk missing the next wave of change. Yes, I think it is good and wise to define it broadly.

Q But if the technology is moving that fast, how is Parliament—and, therefore, any legislation—going to keep up with it? That is a concern.

Emma Reynolds:

The definition is broad and, as I understand it, it gives both the Government and the regulators a way to regulate in this area and bring things into the regulatory perimeter. It is our understanding that stablecoins will be the first of those digital assets. This is a very fast-moving area; the EU has its MiCA—markets in cryptoassets—regulation, which you will be aware of, which is a very broad framework. I think there is some advantage for the UK in being the second mover here, because there is some concern about some of the things MiCA has closed down. For example, it is not allowing stablecoin wallets to accrue interest. We are watching very carefully in this space, but I understand your concern about consumer protection. I think that is front of mind for our firms, and they want a level playing field as well.

Q Would that include the smaller and medium-sized companies that might be involved, not just the big players? That halo effect is a concern for others, because the definition is literally to safeguard them, not the smaller and medium-sized players in the market.

Emma Reynolds:

That could be a concern, yes.

Q David, may I ask you about the role of banks in tackling fraud? The legislation focuses narrowly on APP scams. Would you welcome the introduction of a broader national strategy to tackle fraud, delivered by key Government Departments and agencies, law enforcement, major banks and wider partners in the financial services sector? Would you welcome something on fraud that is a bit broader than what is in this Bill?

David Postings:

I am not sure this Bill is the right mechanism for it. We have been working closely with Government and regulators on a fraud strategy for some time, so anything that takes the agenda forward has to be welcomed, because fraud is a huge burden on society and a rising crime, but I am not sure that this Bill is necessarily the right Bill.

Q For example, would you support new provisions in this Bill to facilitate data sharing agreements on financial crimes that extend beyond the banks to include fintechs, electronic money institutions, cryptoasset firms and payment systems operators? Wider data sharing agreements could be covered by the Bill. Would you find that helpful?

David Postings:

The ability to share data is one of the key things in terms of helping to prevent fraud and, after fraud has taken place, sending money back to the right place. I would need to look at the wording, because that is not in the Bill at the moment.

Q It is not, but, in principle, something in the Bill to facilitate ways—

David Postings:

Anything that we can do as a country to stem fraud has got to be welcome.

Q Would you welcome something else in the Bill to look at banks unlocking suspended accounts so that money can be used for fraud prevention?

David Postings:

There is provision to do that already, or at least we have taken steps to do that.

Q Okay. So, in general, would you welcome anything that we can do to strengthen provisions against fraud?

David Postings:

Yes.

I just want to pick up on one thing you said, David. Can you confirm that the removal of the share trading obligation will make the UK a more competitive and open market?Q

David Postings:

Yes, it will.

Thank you. More broadly, concern has been expressed about the Bill in some quarters that a freer derivatives market will push up commodity prices. Do you have a view on that?Q

David Postings:

I do not have a view on that, I am afraid.

Do you believe that derivatives in general and competitive trading markets push up commodity prices?Q

David Postings:

They can change the volatility in the market. They do not necessarily push the price up, but they can change the volatility.

Thank you. Do you have a view on that, EmmaQ ?

Emma Reynolds:

I defer to David.

Q Clause 1 proposes to repeal around 250 pieces of European legislation, pretty much at the stoke of a pen. The rest of the Bill then expects the Treasury to replace all those bits of legislation by a process that will allow for very minimal parliamentary oversight. Do you have concerns either that there may be a period where parts of the market are inadequately regulated or, alternatively, that there is uncertainty as to what the regulations are, because of the process of repealing something before you know what is going to replace it?

Emma Reynolds:

From what is in the Bill, I do not think that is the Government’s intention. As I understand it, the Bill gives the power to the Treasury to transfer—restate—EU legislation, and we have encouraged the Treasury to think of this as a sequence, because we do not want big regulatory change in one go, as the compliance costs are quite high. We absolutely see that there is an opportunity to tailor EU legislation to our markets, so I do not think it is the case that this legislation would not apply; I think this is going to be done in a phased way.

Q You are using terms such as “transpose” and “translate”, and the representatives from the FCA that we heard from earlier used similar terms. Are we talking about almost literally translating all these documents into the English of the United Kingdom or are we talking about significantly changing the legislation as part of that process?

Emma Reynolds:

That is a matter for the Government. The Bill gives the Government broad legislative powers to amend the legislation that they have transferred, as I understand it.

Q I have another question for both you. There have been suggestions that the Bill should place responsibility on the regulator to promote competitiveness. There have been suggestions that matters such as consumer protection and compatibility with the UK’s climate change obligations should be given the same importance in the regulator’s responsibilities as international competitiveness. If the Bill was amended to put that in place, would it cause significant difficulties for the financial services sector?

David Postings:

It is not in the Bill at the moment. We would need to see the wording of what was proposed and the timescale. If you think about your first point, which I did not respond to, the difference is that the regulation will now be through rules rather than in legislation. We have had a fruitful working relationship with the Treasury and the regulators over the past year and a half since Brexit to produce what is in the Bill. Those changes have been well thought through with industry involvement and therefore get the balance right between protection, regulatory stability and the ability to be commercial. I would hope that, as the rules get translated over time, that process would continue.

On the green agenda, it is difficult for me to comment on something that is not in the Bill at the moment. What I would say is that we need to be thoughtful about the transition to net zero, as opposed to just the taxonomy and the drive to get to net zero. There is a danger that, in prescribing that financial institutions have a balance sheet in a particular form by a particular day, you risk not having a transition to net zero, so that whole thing needs to be well thought through. We risk financial exclusion on the back of that for consumers as well. I would urge caution rather than lumping something into the Bill at this late stage.

Q Are those comments made within the context that achieving a permanent change in net zero targets is not optional? It is absolutely necessary.

David Postings:

The banking industry is 100% behind that transition, but the transition is the important point, not just greening the balance sheets of the firms.

Emma Reynolds:

May I add to that? There is a huge commitment from financial services, and we also represent related professional services, in playing a part in enabling the transition to net zero. Financial services and financial regulators are an important part of a much broader picture, which is why green finance is actually led by the Department for Business, Energy and Industrial Strategy, not His Majesty’s Treasury. It is about not just the supply of green finance, but the demand for such products. If we have a transition to net zero, it has to be about every sector pursuing a transition. Financial services has a critical role to play, but that has to be done in tandem with the transition in other sectors too.

Q Good morning. Looking at the culture in the regulatory system and the culture of the regulators, do you think our regulators need a culture change? For example, do they need more commercial experience? We are looking at rules. There is a need for speed. Speed is of the essence when trying to make decisions or make things happen. Is that something we need to focus on?

Emma Reynolds:

I certainly think there is room for a more commercial mindset in the regulators. This is not just about regulation by the way; it is about operational efficiency. One of the things we have been working on is delays in authorisations for senior managers, which can slow things down. There are other authorisations as well. We are encouraging the regulators to have a more commercial mindset and to be aware of the businesses’ priorities. It is not just about regulation; it is about how efficient they are. If, for example, you want to bring in a senior manager to a bank or other institution in the UK and it takes you 18 months to 2 years, you could be doing that elsewhere, and that puts us at a competitive disadvantage. So, absolutely, we think that there is room for improvement in having a commercial mindset in the regulator.

Q And more speed and less regulation.

Emma Reynolds:

Proportionate regulation and—we have not got into the cost-benefit analysis panels—careful consideration of the benefits of regulation to make sure that the costs and burdens of regulation do not outweigh the benefit.

David Postings:

I agree with Emma. To give a couple of examples, the cost-benefit analysis of the consumer duty had costs but no benefits—no financial benefits. The intent in the Bill to ensure that the FCA and FOS are aligned is really important as well, because it is very difficult for a financial services firm to operate in an environment where we are not clear what the rules are when it comes to interpretation down the line. That makes people cautious, which can add to financial exclusion. The point that Emma made about authorisations is also really valid: there are still significant businesses awaiting authorisation post Brexit from large foreign institutions.

Q That causes serious hold-up and affects our economic growth.

Emma Reynolds:

And our competitiveness. If that can be done more quickly in another jurisdiction, business might well go there to set up or expand.

David Postings:

Fundamentally, what we want is a competitive UK. We are only a small island off the mainland of Europe, but we want to generate big tax revenues to support growth in the economy. Anything we can do to help that is vital. Good, strong regulation is a key aspect of that. A nimble, commercially minded set of regulators to set that stronger regulation is vital.

Q We have a few minutes left. One perception is that this is about the City of London. Your members, I assume, hail from all parts of the UK, creating employment and wealth in Edinburgh, Glasgow and some of our other great cities. Will you expand on that a little for the Committee?

Emma Reynolds:

Sure. We represent the financial and related professional services industry, which employs 2.2 million people, and two thirds are outside London, contrary the characterisation that financial services are mainly in the City of London. We are the biggest net exporting industry, and more than 40% of our exports come from outside London.

David Postings:

Yes, we produce higher-paid jobs, and there are big concentrations in Glasgow, Belfast, the north-east, the north-west and down on the south coast. It is a thriving industry and one that we need to support and nurture.

We have two minutes left. Any quick questions for a quick response?

Q Very quickly, the hon. Member for Mitcham and Morden raised the issue of access to cash and the reduction in banking services. The Bill contains substantial provisions to safeguard access to cash and halt the decline in banking closures and free-to-use ATMs. Do they go far enough? Will the Bill work?

David Postings:

Absolutely it will work. This is something that we have been working on. We kicked this off as an industry 18 months ago. I have worked with the Treasury, the FCA and the consumer groups for the past 18 months on this. The aim is to make sure that cash provision for the most vulnerable—indeed, for all of society—is protected. The Bill will absolutely do that—through cashback without purchase, ATMs that are free for consumers to use, post office counters and shared banking hubs. Twenty-five shared banking hubs have been announced so far, and that number will increase. All that will provide the right level of cash access going forward. The banks will be subject to LINK as a body to decide what goes where, based on detailed local analysis, and then there is an operating company that banks own, which will implement the solution.

Q Is there anything you want to add, Ms Reynolds?

Emma Reynolds:

No. I defer to David. UK Finance provided leadership in this area—that is where the expertise sits.

Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank the witnesses on behalf of the Committee.