Financial Services and Markets Bill – in a Public Bill Committee at 12:15 pm on 27th October 2022.
With this it will be convenient to discuss clause 26 stand part.
I will speak to clauses 25 and 26 in order. As I set out in previous comments, the Government remain committed to reaching net zero greenhouse gas emissions by 2050, as set out in section 1 of the Climate Change Act 2008. Clause 25 reflects the Government’s commitment by introducing a new regulatory principle for the FCA and the PRA to contribute towards achieving compliance with the net zero emissions target. FSMA 2000 sets out eight regulatory principles that the FCA and the PRA must have regard to when discharging their functions. These existing principles aim to promote regulatory good practice across the regulators’ policy-making. The principle in section 3B(1)(c) of FSMA 2000 requires the FCA and the PRA to have regard to the desirability of sustainable growth in the United Kingdom economy in the medium or long term.
The November 2021 future regulatory framework review consultation proposed amending the sustainable growth principle to explicitly incorporate the UK’s statutory climate target. Following feedback to the consultation, and given that the Bill introduces new secondary objectives for the FCA and the PRA to facilitate international competitiveness and growth in the medium to long term, clause 25 removes the sustainable growth principle for the FCA and the PRA to avoid unnecessary duplication.
Clause 25 replaces the sustainable growth principle with a new regulatory principle to require the FCA and PRA to have regard to the need to contribute towards achieving compliance with section 1 of the Climate Change Act 2008. This new regulatory principle will cement the Government’s long-term commitment to transform the economy in line with our net zero strategy and vision to make the UK a net zero financial centre by ensuring that the FCA and the PRA must have regard to these considerations when discharging their functions. A similar requirement will be introduced for the Bank of England and the Payment Systems Regulator, which we will cover in more detail later.
Clause 26 makes consequential amendments to FSMA 2000 to take account of the new regulatory principle in clause 25, and the new growth and competitiveness objective for the FCA and PRA in clause 24. Clause 26 also requires the FCA and PRA to explain how they have advanced the new growth and competitiveness objectives, as well as their existing statutory objectives, in their annual reports to the Treasury, which are laid before Parliament. This requirement aligns with the PRA’s current reporting requirement for its secondary competition objective. I therefore commend clauses 25 and 26 to the Committee.
I have not tabled an amendment to the clause, but the Minister will be aware that on Second Reading there was a huge amount of support across the House for strengthening these proposals on net zero and nature. I hope we will see some movement on these issues as the Bill progresses through Parliament.
I want to start by saying why net zero and nature matter and looking at the situation in France and Germany. The German regulator already has a sustainability objective, with a focus on combatting greenwashing. The French regulator already looks at overseeing the quality of information and has set up the Climate and Sustainable Finance Commission. I want the Minister to note that our competitors are already moving ahead in this area.
One thing that came out of the written evidence, which I have just been re-reading, was the need for net zero transition plans and the establishment of a transition plan taskforce. The Minister has not really mentioned that. The purpose of the transition plan taskforce was to look at a gold standard for climate transition plans, but it is not stipulated in the Bill that companies will be expected to develop these and move them forward.
Disappointingly, although the Bill talks about net zero, it says nothing about nature. I wish I could recall who from the Bank of England came to give evidence to the Treasury Committee, but it was incredibly interesting to hear that, in looking at the risks to our country and our future financial sustainability, it is starting to look at the risk to nature and what the decline in nature will cost us all. We have heard much about climate change and the obvious risks it poses to our country and our financial sector, but people are starting internationally to look at the impact that a decline in nature has on our economic wellbeing. Again, nature is not mentioned in the Bill at all.
I raise this not because it is woolly and we like nature—although I do like nature—but because there is an impact on our economy. I think that needs to be addressed. As I said, there is a lot of support for that. There are huge opportunities too. We need only look at the problems our country has had over the past 12 years with low growth, and at the current economic situation and the decisions the Chancellor of the Exchequer will have to make. Surely something that would boost our economy, which looking at net zero and nature has the potential to do, should be taken more seriously by the Government.
Fifteen years ago, Sir Nicholas Stern described climate change as “the biggest market failure” we have ever seen. If we do not address nature now, we will be having the same conversation in 15 years about why we did not take the opportunity of this Bill to address it seriously. As I said, I have not tabled amendments at this point, but there is always Report stage if we do not feel that these issues are being taken seriously enough by the Government.
I will speak specifically to clause 26. It is really welcome that this measure has been brought forward, but I have a big worry that the wording of the clause is open to interpretation. I have therefore tabled a new clause that we will get to later. The main change is to amend the wording in the clause that the regulator has complied with the competitiveness duty, “in its opinion”. I think that is quite worrying. There is a worry that it will turn into a tick-box exercise. As Emma Reynolds from TheCityUK pointed out, there is concern that the regulator will end up marking its own homework. The regulator was not even aware that other jurisdictions had international competitiveness duties.
We should also find it concerning that Charlotte Clark from the ABI said in her evidence that she could not recall a new insurance company being set up in this country in the last 10 to 15 years, yet they are being set up in other countries, including in the EU—countries with which we have equivalence. The main reasons seem to be the time that it takes to get regulated and the cost. As my hon. Friend the Member for Wimbledon said, in some instances it is up to 14 times more expensive to get regulated here than in similar jurisdictions that are similarly robust.
I therefore think that the provision needs to be much tighter and to have some proper key performance indicators and metrics. It was good to hear the FCA say that it was looking at those, but we need to set them out clearly. The types of thing that could be in there are an understanding of who is leaving the country for other regimes and why; rule monitoring and evaluation; the level of duplication in the rulebook; the speed and responsiveness of the regulator; and our success in attracting new applicants. As I said, I have a new clause, which we will come to at the end, but it would be great if I could meet the Minister beforehand to talk this through and to see whether it can be incorporated into the Government’s thinking.
Again, there is largely agreement about the aims of clauses 25 and 26. We are on the cusp of a complete transformation in the way our economies have to work. Sometimes, I think we do not quite understand the extent of the transformation that will be needed and the speed at which it will have to be done, given that we are so behind in our attempts to reach net zero and avoid catastrophic climate change. It really is the last few hours, in terms of the biodiversity and climate stability of the Earth, for us to be able to do this.
The scale of the required transformation is mind-boggling. Virtually every piece of infrastructure in existence in our society will have to be transformed. That will have to be done through public-private partnerships, investment to lead the market in areas where there is market failure and investment in innovation in financial services to help to provide that investment, but also through proper regulation, which is what these clauses are about. All those things have to be done in a timely way to create the circumstances for realising all the capital investment potential that will be needed to make this change happen, especially in established economies with old infrastructures, which are often the largest emitters of carbon, as it happens. All of that has to be done virtually in parallel, so that we can try to reach these important targets.
It is very important that, through these clauses, the Government have agreed to incorporate the legislative target of reaching net zero by 2050 into this part of financial services law. However, they have amended it by replacing what was there before—the “have regard to sustainable growth”—with the target. Is that the right way to go about it? By getting rid of that “have regard”, do we lose an opportunity to make progress, rather than just focusing on a future output? That is not a philosophical question; it is a practical one. Why have the Government decided to replace the “have regard”, rather than enhance it? Will the Minister reassure us that, in the context of having to retool the way we do almost everything in all our infrastructure, we could not have gone with both? Will there be the potential for people to think, “We’ll put everything off until closer to 2050,” because the “have regard” has been replaced with an end-date output target? Can the Minister justify why the Government thought that was the best approach?
When regulation is being refocused on net zero, there will be those who wish to greenwash what they are doing—I will use that phrase; the Minister understands what it means—in order to continue to attract investment and piggyback on the good will of people who wish this change to happen when, in the case of those companies, it is not happening. I suspect there is a little bit of that going on at the moment. How does the Minister envisage enforcement mechanisms and proper regulation being put in place to ensure that greenwashing is not going on everywhere? Such greenwashing would move us away from meeting the target. Not only would it be to the detriment of consumer interests; it would squeeze out more genuine activities, firms and investment if it were allowed to be too prevalent.
I am not sure whether I am supposed to, Dame Maria, but I refer the Committee to my entry in the Register of Members’ Financial Interests.
Like many Members, I welcome the thrust of clause 25 and think it is important that we are setting the principle of net zero in legislation. However, I agree with my hon. Friend the Member for North Warwickshire. Clause 26 amends FSMA 2000 in relation to the content of the annual report. I will not go through all the arguments that we may well make when my hon. Friend’s new clause is debated, but I want to register with the Minister my concern about the phrase “in its opinion”. There is a reputational risk for the regulator, as much as for anyone else, if someone were to examine it later. I will not detain the Committee any longer, but I will want to speak to this point quite extensively when my hon. Friend’s new clause comes up.
I ask the Minister to look at the phraseology and consider whether it is appropriate. As we have all said in Committee, during the evidence sessions and in widespread discussion of the Bill, the need for clear metrics, regulatory transparency and regulatory accountability is key. That is one of the things we have all welcomed in the Bill.
We welcome clause 25 and the new regulatory principles for the FCA and the PRA, which will require the regulators, when discharging their general functions, to have regard to the need to contribute towards compliance with the Climate Change Act 2008—legislation that, I remind the Minister, was brought in by a Labour Government.
However, we think that the Bill lacks ambition on green finance. The Government promised much more radical action. We were promised that the UK would become the world’s first net zero financial centre, but we are falling behind global competitors. In the evidence session, William Wright, the managing director of the New Financial think-tank, stated that the UK is a long way behind the EU on both the share and the penetration of green finance in capital markets. Research by the think-tank has suggested that green finance penetration in the UK is at half the level of the EU and roughly where the EU was four years ago.
I will discuss what the Opposition would like to see in the Bill on green finance when we discuss new clause 9. For now, will the Minister set out what assessment he has made of the impact that clause 25 will have on investment decisions and other financial service activities in the sector?
In the evidence session, William Wright suggested that there is “a disconnect” between the Government’s stated position that the UK is already a global leader in green finance and the ambition for the UK to become the leading international green finance centre. Does the Minister really believe that the provisions in clause 25 are sufficient to close that gap? How much further will the Government go on this agenda? Does the Minister think we have been as ambitious as possible in the Bill, considering that the problem is on our doorstep and is so important for future generations?
A lot of valuable points have been raised by Members on both sides of the Committee. This is the right moment for colleagues to make those points, and I hope it is acceptable to the Committee if I take some of those points away and follow up with further information later, rather than dismissing them trivially here.
The hon. Member for Kingston upon Hull West and Hessle raised something that is close to many of our hearts: nature. She is quite right that the Bill is focused on net zero and climate. She is absolutely right that we cannot achieve our climate goals without acknowledging the vital role of nature. That should concern us all, as it is part of the carbon ecosystem. I will take her points away to see whether there is anything else that can be done. I hope she will accept that the datasets and the maturity with which some aspects can be measured are not as sophisticated as in the science of climate change. That might be one impediment to the Government moving forward and baking it into statute, but I will take it away and follow up with the hon. Lady.
The hon. Member for Wallasey is absolutely right about the transformative scale of moving to a low-carbon economy. It will change every single aspect of how we generate energy, the activities we engage in, the homes we live in and our financial centre. We are at one on that. I believe that the wording of the clause and the replacement of the “have regard” achieves that objective, combined with the legislative commitment—by the Labour Government, if the hon. Member for Hampstead and Kilburn so wishes—that is being incorporated into the duty by reference. It does do that. There is an ambition there, and we should seek to satisfy it.
I heard my hon. Friends the Members for North Warwickshire and for Wimbledon; it is, of course, right that nobody should mark their own homework. I will meet my hon. Friend the Member for North Warwickshire to discuss his new clause. Again, I will take that away and see if there are ways to incorporate it on Report.
Having taken a very consensual approach, I take deep issue with what the hon. Member for Hampstead and Kilburn said about our credentials as Europe’s leading—if not the world-leading—centre of green finance. Rather than take up the Committee’s time this morning, I will write to the hon. Lady and set out what I believe to be the true position, because we do have a proud record. While there is always more to do, I do not think that we should talk ourselves down on that.
Obviously I do not want to offend the Minister, but I point him to the facts. I would like to hear what he has to say in response to the evidence given by William Wright, who, I would point out, is not a Labour MP but is independent. The think-tank’s research found that green finance penetration in the UK is at half the level of the EU, and roughly where the EU was four years ago. When the Minister writes to me, will he point me to specific evidence that contradicts what we heard in the evidence session?
I will. I look forward to writing to the hon. Lady to set out my case.
The hon. Member for Kingston upon Hull West and Hessle mentioned transition plans. Our progress on those is absolutely on track and I look forward to that being another area in which the UK is leading.