Financial Services and Markets Bill – in a Public Bill Committee at 3:00 pm on 27th October 2022.
With this it will be convenient to discuss the following:
Clause 39 stand part.
Amendment 51, in clause 40, page 54, line 26, after “persons” insert “, at least two of which must be external to the FCA, the Treasury, or the Bank of England,”.
Amendment 52, in clause 40, page 54, line 31, at end insert—
‘(9A) The FCA must consider representations that are made to it by non-governmental bodies and recognised industry or trade association bodies.”
Amendment 53, in clause 40, page 54, line 32, leave out “from time to time” and insert “annually”.
Amendment 54, in clause 40, page 55, line 22, leave out “from time to time” and insert “annually”.
Clauses 40 to 42 stand part.
There is quite a lot in this group. If you refer to the selection list, you will see what is to be taken together.
I will first speak to clauses 38, 39, 40, 41 and 42, and I will then turn to amendments 51, 52, 53 and 54.
Clauses 38 and 39 concern the FCA’s and the PRA’s statutory powers. As we have already discussed, FSMA 2000 requires the PRA and FCA to set up and maintain stakeholder panels, also known as statutory panels. These panels provide valuable insight, advice and challenge to the regulators’ rule making, drawing on the experience and expertise of their respective memberships. The regulators have regular meetings and discussions with those panels, in which most major early policy and regulatory proposals are presented for comment. The confidentiality of the panel’s contributions allows the regulators to engage the panels when policy is in the early stages of development ahead of public consultation, and enables the panels to act as a critical friend. The panels represent a diverse range of stakeholders, including consumers, small businesses and market practitioners.
In addition, the FCA also voluntarily operates the listing authority advisory panel, which operates in a similar manner to its statutory panels, and represents the interests of issuers of securities and advises on the FCA listing function. In addition to its statutory practitioner panel, the PRA voluntarily operates an insurance sub-committee for that panel, which represents the interests of insurance practitioners.
Clauses 38 and 39 amend FSMA, to place the FCA’s listing authority advisory panel and the PRA practitioner panel’s insurance sub-committee on a statutory footing. These clauses also set requirements for the FCA and the PRA in relation to these panels, in line with the existing requirements for other statutory panels. That includes appointing a chair to be approved by the Treasury.
Clause 40 requires the FCA and the PRA each to establish and maintain a new statutory panel dedicated to supporting the development of their cost-benefit analysis. CBA is an important part of the regulators’ policymaking process. It helps the regulators to understand the likely impacts of a policy and to determine whether a proposed intervention is proportionate.
Under FSMA 2000, the FCA and the PRA are already required to undertake and publish a CBA when consulting on draft rules, unless certain exemptions are met. Respondents to the October 2020 future regulatory framework review consultation expressed significant concerns about the rigour and scope of the regulators’ CBAs and supported enhanced external challenge as a way to improve the quality of the regulators’ CBAs.
Clause 40 addresses these concerns and requires the FCA and the PRA to consult their CBA panel on the preparation of a CBA. The Government recognise that requiring the CBA panel to provide detailed comments on all of the regulators’ CBA before publication could cause delays to the policymaking process. To avoid these delays, or an overly burdensome process for minor rule changes, the clause enables the regulators to agree thresholds with the CBA panel for when the panel does not need to review an individual CBA before publication. These thresholds will be set out in the regulator’s statement of policy on CBA, which is provided for in clause 41. The Government consider that the CBA panels can play an important role in improving the production of CBAs by the regulators.
Clause 41 responds to feedback from respondents to the FRF review consultation, who expressed concerns that it is not clear when and how regulators decide to conduct CBA and what the process involves. The clause creates a new statutory requirement for the regulators to each publish a statement of policy on their approach to cost-benefit analyses and sets out requirements regarding the information the regulators must include. This includes the regulators’ methodology for preparing CBA. The clause also requires the regulators to set out in the statement how they ensure that they appropriately consider any comments on CBA in response to the consultations, and provides transparency of the regulators’ CBA processes.
Clause 42 amends FSMA 2000 to require the PRA and the FCA to
“prepare and publish a statement of policy” in relation to how they appoint members to their statutory panels. Ensuring the right membership of the panels is crucial to each panel’s success in providing challenge, a range of expertise and differing perspectives, and to fulfilling their role as a critical friend to the relevant regulator. Respondents to the November 2021 FRF review consultation raised concerns regarding the lack of representation of some groups in the current panel membership: for example, vulnerable consumers. The clause therefore requires the regulators to make sure there is a clear and transparent process for appointing members to ensure that the membership of panels represents the full diversity of stakeholders.
Amendments 51 to 54 seek to introduce specific requirements for the FCA in relation to its approach to CBA and the creation of its CBA panel. Amendment 51 seeks to add a requirement for the FCA, when appointing persons to its CBA panel, to appoint at least two members who are
“external to the FCA, the Treasury, or the Bank of England”.
I agree with my hon. Friend the Member for Wimbledon that the composition of regulators’ panels is crucial. The Committee should be aware that the FCA’s existing panels are already made up of external stakeholders. Given the important role of the panels to act as a critical friend to the regulator, it is implicit that their members are made up of those outside of the financial services, regulators and the Government.
Amendment 52 would require the FCA to consider representations made to it by non-governmental bodies and recognised industry or trade association bodies in relation to its development of a CBA. Section 138I of FSMA requires the FCA to undertake and publish a CBA when consulting on draft rules, unless certain exemptions are met. Therefore, the FCA is already required to consider any stakeholder representations relating to CBA.
Amendments 53 and 54 would require the FCA and PRA to publish annual responses to the representations made to them by their CBA panels. If taken with amendment 52, the FCA would also be required to publish annual responses to representations made to it by non-governmental bodies and recognised industry or trade association bodies. Amendments 53 and 54 would restrict the flexibility for the FCA and the PRA to choose how frequently to publish responses to representations from their CBA panels, which may indeed be the point that is being made.
The Government do expect the FCA and the PRA to publish responses to representations at appropriate intervals. That may generally be annually, but it could be more frequent if appropriate. It may not always be appropriate for the Government to direct the regulators on operational matters such as this in statute.
Although I am, again, sympathetic to the intention behind these amendments and I regret somewhat that we are even in this position—that, as the regulator perhaps does not have the industry’s confidence in its existing CBA process, the Bill Committee would need to discuss this matter—I ask my hon. Friend the Member for Wimbledon to withdraw amendments 51 to 54. I commend clauses 38 to 42 to the Committee.
Again, I direct the Committee to my entry on the Register of Members’ Financial Interests. I warmly welcome the creation of cost-benefit panels. In my view, the greater the understanding of the cost and benefit of a regulation, the greater the understanding of the impact, and therefore the effectiveness, of the regulation, and the greater the transparency of that process.
I am pleased that the Bill includes this clause because it sets out the agenda, membership, metrics and outputs that each of these panels should make. I guess the real answer I am trying to get from the Minister—I have listened carefully and I think we have had most of the response, but I want to test him a little more—is that, if we are to get all the desirable outcomes from setting up these panels, we must know how much they are a creature of the regulator and how much they are independent of the regulator.
The Minister clearly said that there is an implicit assumption that the regulator would follow an independent line for these panels. If the purpose of the panels is purely to provide evidence and they are controlled by the regulator, those recommendations will be accepted, but it is key that there is an independent panel.
I agree that regulators are not in ivory towers, as Martin Taylor said in his evidence to us. I do not think there is substantial implicit control, nor do I think there is not an implicit desire to see independence, nor do I think that there is not implicit influence by His Majesty’s Treasury. However, if we want to build the world’s leading regulatory regime, it must be seen to be tough and proportionate, and that is why these panels are very helpful. I therefore support the aim of clause 40.
My amendments seek to address the concern that the panel has marked its own homework—the excuse that “the dog ate my homework”—and the point about independence. I understand that members of the panel could already be external, but I want to make it clear that “could” is not enough; there should and must be external members. I hope that the Minister will be able to give me that further reassurance that that is very much the intention of the Bill.
I take on board exactly what the Minister said about my amendment 52, in that the FCA already has to consider the representations and place them on record. However, I am quite concerned by the wording. I think the Minister got my point, which is about the wording “from time to time”. Those of us who have had the honour to stand at the Dispatch Box will have been asked questions such as, “When is that happening, Minister?”, to which the response is often, “Soon,” or, indeed, as we heard the Minister say this morning, “In due course.”
The regulator might say to us that it is going to publish the responses “from time to time”. I take the point that the Minister does not want to fetter the regulator, but I am concerned that, if there is not something either in implicit guidance to the regulator or potentially set out, “from time to time” could be whenever the regulator chooses and potentially not annually. Therefore, if it were to say “annually or more frequently” I would be a lot happier. I listened to the Minister’s comments and I think he probably has sympathy with what I am saying, but I will listen to his response to my remarks.
Before I bring in the next speaker, I apologise to the hon. Member for Wimbledon, who I probably should have brought in first. I apologise for that; it is a bit awkward.
It is odd hearing the Minister’s response before we have spoken to the amendments. I just want to make a few comments about cost-benefit analysis, which is not an easy science. I am an avid observer of the Government’s attempts to do a cost-benefit analysis. Let us put it this way: it often leaves plenty to be desired when we start looking at how the Government have decided to cost the effect of their legislative suggestions, and we go into the detail of it and see how back-of-an-envelope and dubious some of it is. I do not want to sound too sarcastic, but perhaps if the CBA panels get to be good, they could teach the Government a thing or two about how to do their own analyses.
It is often a difficult but desirable thing to try to estimate the cost of particular suggestions, especially when regulators impose them in other areas. It is important that regulators think about proportionality for the industry itself. Also, in an industry where all the costs are likely to be passed on to the consumer, it is extremely important that it can be done sensibly, properly and in a way that stands up to scrutiny, and I hope that the scrutiny would be there for others to look at.
One often comes up against quite blank walls when trying to interrogate Government cost-benefit analyses, and one ends up going down dead ends and not really understanding how the judgments about the costs have been made, so the better we can get at the science in whatever context, the better for everybody.
It is important that clause 42 exists to try to provide balance and transparency about who will be on the panels, because we would not want them to be captured by particular parts of the structure. We need to have some objectivity if their work is to have credibility and deserves to be taken into account in regulators’ decision making.
Apologies if I spoke out of order.
I will be brief. The hon. Member for Wallasey has great experience of these matters. I suspect we are all familiar with the analogy of Government regulatory impact assessments, which, as the hon. Lady says, are probably vulnerable to the criticism of being opaque, with the science and data not fully laid out. Indeed, I am aware of past suggestions by bodies such as the Institute for Government that there be specialist committees and support given precisely for that purpose. That is analogous, although it concerns not the working of Government legislation, but regulators exercising their rule-making powers. All those observations are pertinent to this point.
My hon. Friend the Member for Wimbledon came back to me on the point about the reasonableness of the phrasing “annually or more frequently”. He makes a good point. As we know, there are many cases in statute where it is specified that something should be annual. Every Government Department is required to lay its own annual reports before Parliament, and we impose that annual burden on many private and third sector enterprises, whether via the Charity Commission or the Companies Act 2006.
Indeed. We ask the FCA to produce an annual report as well, so this is not out of line with other expectations.
My hon. Friend has finished my point for me. This is not uncommon in statute, so while the Government do not accept the amendment and will vote against it, I have committed—and I do so again—to meet my hon. Friend and consider these matters further before Report.