Financial Services and Markets Bill [HL]

Committee (2nd Day)

16:15:00

Northern Ireland and Scottish legislative consent sought . Relevant document: 2nd Report from the Delegated Powers Committee .

Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)My Lords, before we start, I ask noble Lords, as I did on Monday, to declare their interests before they speak. If they did not do that on Monday, they need to do it today. In addition, as per paragraph 8.82 of the Companion , when it comes to pressing or withdrawing amendments at the end of the debate, I ask noble Lords to keep that debate short. We are not supposed to rehash and repeat the whole debate, so please keep it succinct.

Schedule 2Payment systems regulation

Amendment 47A

Moved by

47A: Schedule 2, page 72, line 11, at end insert— “6A After section 1QA insert—“1QB The Payment Systems Panel(1) Arrangements under section 1M must include the establishment and maintenance of a panel of persons (to be known as “the Payments System Panel”) to represent the interests of—(a) participants in regulated payment systems, and(b) those who use, or are likely to use, services provided by regulated payment systems.(2) The FCA must appoint one of the members of the Payments System Panel to be its chair.(3) The Treasury’s approval is required for the appointment or dismissal of the chair.(4) The FCA must appoint to the Payments System Panel such persons to represent interests and expertise relevant to the FCA’s payment systems objectives.””Member’s explanatory statement Schedule 2, paragraph 6 removes the Payment System Regulator from the FCA’s statutory panel composition provisions and does not replace it with any payments-specific representation. This amendment and another in the name of Lord Holmes of Richmond seek to provide such representation.

Lord Holmes of Richmond (Con)My Lords, it is a pleasure to open day two of Committee on the Financial Services and Markets Bill. As it is the first time I have spoken in Committee, I declare my interests as set out in the register around technology, as an adviser variously to the Crown Estate, Endava plc, Simmons & Simmons LLP, and as non-exec director of Avalanche BVI Inc and the Avalanche Foundation.

I had hoped to take part in day one of your Lordships’ deliberations on the Bill, but unfortunately there was a direct clash with the Sporting Events Bill in the Chamber. I was hoping to be able to perform some kind of Bill biathlon but, sadly, time clearly caught up with me and I found myself stuck on the track in there. However, it is a pleasure to open day two of the Bill. I will move Amendment 47A and speak to the other amendments in this group in my name. I give more than a nod to the other amendments in this group and I thank my noble friend Lady Neville-Rolfe for co-signing two of my amendments.

In essence, these amendments can be seen as a connected group. The intention set out in the Bill is clear that the PSR is no more and its functions are to move over to the FCA. That is a defensible and clear objective and it has been communicated. The difficulty is that it is not what the Bill currently achieves. In many ways, these amendments could be summed up by “Lost in Translation”, because key elements of the functions of the PSR, not least those critical elements around competition and innovation, have not come over and certainly have not been reproduced in the Bill to the same extent as they appear in their original statutory form. This is clearly a gap in the Bill that we have before us.

Amendment 47A suggests a payment systems panel. This goes to the second element of “Lost in Translation” in the Bill. Representation of those involved in and affected by payments has similarly disappeared and has not come across from the wording in the originating statute. This is critical, not only because it does not fulfil the Government’s stated intention with these parts of the Bill but because, when you think about it, so much in life involves a payment. Something is either started with a payment or ended with a payment and, if it is neither started nor ended with a payment, odds-on it is probably a payment in its own right. This needs to be put right in the Bill and I suggest that the payment system panel achieves that.

The remaining amendments in my name very much go to putting back those requirements and obligations, as set out in the originating statute, around competition and innovation. The Government have talked variously about the growth objective, not least the role that regulators have to play in it. Indeed, they summoned regulators to No. 11 for a regulators’ showdown— I am not sure what the collective noun for a group of regulators is, but it was certainly a gathering—focused solely on growth. Well, competition and innovation are critical to that growth objective.

I suggest that this suite of amendments fills the gap that is left in the existing draft of the Bill. I very much look forward to the Minister’s response and to the debate on this and the other amendments—those who have put them forward have all done so on similar and related issues. I beg to move.

Baroness Bowles of Berkhamsted (LD)My Lords, I shall speak to my Amendment 48. It addresses a simple but important point: the quality of regulation depends on the quality of consultation. At present, consultation periods vary unpredictably. Some run for many weeks; others, even on significant policy shifts, have been compressed into days. That inconsistency makes a system difficult for firms to plan around, inaccessible for consumer groups and individuals, and challenging for Parliament to scrutinise. I am a serial responder to consultations—I have been for over 20 years, not just on financial services—and I have experienced this difficulty myself.

The Lords Financial Services Regulation Committee, on which I serve, along with several other Members who are present in this Committee, heard extensive evidence on this. In our report Growing Pains , we concluded that the FCA and PRA need a better understanding of the lived experience of regulated firms in coping with consultations, policy statements, “Dear CEO” letters and the plethora of regulatory tools now used. That is a polite way of saying that the system is overloaded and fragmented.

My amendment would introduce proportionate, predictable windowsfour to six weeks for minor changes and six to eight weeks for material ones. I seem to recall that, in Brussels, the time allowed was two months and for more complicated things an extension was available of three months. It would also be in line with that, so not out of line with international thinking. The amendment also sets out the factors that regulators must consider when deciding whether a proposal is minor or material. That embeds proportionality but without rigidity. I envisage that there could be, again, the opportunity for extensions in difficult cases. The FCA quite often does that, but usually quite late, after you have had a panic. Crucially, regulators may depart from these windows in exceptional circumstances, as I have said, but they must explain why. That is transparency, not constraint. It ensures that urgency can be accommodated but not used as a blanket justification for compressed consultation.

Predictable consultation matters because it is the only point where Parliament, industry, consumer groups, individuals and civil society generally can influence policy and rule-making. If windows are unpredictable or too short, smaller firms and resource-constrained consumer bodies are effectively excluded. Trade associations cannot consult their members, but their responses are important, as we know that many firms are reluctant to respond directly, for fear of being seen as criticising regulators and suffering supervisory consequences.

The various advisory panels have their place, of course, but they are not a substitute for open consultation. They rely on the knowledge of individuals, not the pooled experience of the market or the public. Industry has asked for this amendment, which tells us something important: the current system is not working as it should. Consultation should not be a matter of luck or timing; it should be predictable, fair and transparent. This amendment would support better engagement and better outcomes. It is a modest but essential part of the culture change that the Lords committee called for, and I hope that the Government will look on it favourably.

Lord Vaux of Harrowden (CB)My Lords, I have a number of amendments in this group that relate to the PSR. Before I run through those, I want to comment on Amendment 47A, moved by the noble Lord, Lord Holmes of Richmond. I must say that I am attracted by the idea of a payment systems panel. Payment systems are such a critical part of our financial services structure. They are used more often by more people and more businesses than any other financial service. If they go wrong, or become too expensive, or fail to prevent fraud or error effectively, the impact on individuals and businesses would be very significant. The abolition of the PSR risks dilution of attention to payment systems, so the creation of a panel has very real merit, and I will listen to the Minister’s answer with interest. I will also be interested to hear why the payment systems competition objective in the Bill is missing elements originally included in the Financial Services (Banking Reform) Act 2013, as the noble Lord, Lord Holmes, has pointed out.

I move on to my Amendment 49, which is simply a request for clarification and understanding. I have read new subsection 131Z3(2)(d)(ii), inserted by Schedule 2, a number of times, but have been struggling to understand the double negative in it. I think I now understand that it means that any system that includes any arrangements using digital settlement assets may be a payment system even if that system’s primary purpose is not that of enabling persons to transfer funds. Is that correct? If so, why is that? Why do we treat systems not primarily intended to be used for the transfer of funds, but which include digital settlement assets, differently from systems that do not include digital settlement assets?

Amendments 50 to 53 are all related and designed to reduce the discretion of the Treasury to designate or not designate a payment system as a regulated payment system. As it stands, the Bill gives the Treasury complete discretion. The Bill sets out when the Treasury may designate a payment system to be regulated, but whether it does so is entirely at its discretion, subject only to some consultations. If it does not wish to designate a payment system as a regulated payment system, it does not even need to consult. Similarly, new Section 131Z6 gives it complete discretion to withdraw any designation at will at any time. Why does that matter? That might be best illustrated by a completely hypothetical and obviously completely made-up example. Stablecoins are generally recognised as being primarily a payment system. Let us imagine that there might be a politician who has received a donation of, shall we say, £5 million from an overseas billionaire who is a major shareholder in the world’s leading stablecoin issuer. Perhaps that politician may not have registered such a donation. Let us imagine that that politician gains a position of influence over the Treasury and feels that the interests of his benefactor might be assisted if stablecoins, or indeed a particular stablecoin, were not designated as a regulated payment system. The Bill, as drafted, would allow exactly that to happen. Does the Minister agree that this feels somewhat inappropriate and open to potential abuse?

My amendments would reduce that discretion so that the Treasury must—“must”, not “may”—designate a payment system as a regulated payment system if it is satisfied that any deficiency in the design of the system, or any disruption of its operation, would likely have serious consequences for those who use or are likely to use the services provided by participants in the system. It would have to withdraw a designation if satisfied that those grounds are no longer met.

My Amendment 55 is another request for clarification; I recognise that it may not be required. Prior to being abolished, the PSR does not have a secondary competitiveness and growth objective such as that of the FCA. It has an objective to promote effective competition in the market for payment systems and services and an innovation objective, but those are different things. It was not clear to me when I read this whether, as the PSR becomes part of the FCA, the regulation of payment systems will become subject to the FCA’s wider set of objectives or not. This amendment aims to put that beyond doubt, but perhaps the Minister could confirm the position.

16:30:00

Baroness Kramer (LD)My Lords, I will make a few comments on amendments in this group and speak particularly to my Amendments 54 and 57. I say very gently that I agree with the other amendments in this group. My noble friend Lady Bowles is looking for consistency in the consultation period. Unless someone has been on the other side of a consultation period—not setting it but trying to respond to it—they may not know that the real-life difficulties of the inconsistency, frankly, are often a barrier, not just an annoyance. Amendment 47A is in the name of the noble Lord, Lord Holmes, and yes, it makes sense to have a payment systems panel on an issue such as this: we need to make sure that a full range of views and experience is taking a look at such a crucial piece of the financial plumbing.

On Amendment 55, I could not understand why ease of use should have been removed from the competition objective. That made no sense if we are thinking about people and consumers. I do not know whether the Government could explain that. I very much support the noble Lord, Lord Vaux. It had struck me but I did not do anything about it and I should have. His Amendment 49 deals with this capacity to exclude digital payment assets from definitions in payment systems, which just seems fundamentally wrong. We are moving in the direction of digital, these are coherent parts of the payment system and it is going to be relevant to the two amendments that I am about to discuss.

My Amendment 54 recognises that we are in a fast-changing world. We are increasingly in a time in which the payment system is made up of many more entities than just the conventional players. New schemes, platforms, exchanges and all kinds of services are coming on stream; these are key and many are digital. Amendment 54 emphasises that the FCA must, in its service-user objective, focus on “consumers”, a much clearer term than “users”. We have seen in the past that consumers get lost in this overall definition of users. It would require the FCA to look at the issues of inclusion, redress, access to cash, choice and interoperability from the perspective of the consumer in this increasingly complex world. As we move forward, many consumers will simply be bemused. A simple example arose for me when, very recently, I spoke to an American firm planning to offer payroll services in the UK using 100% stablecoin. The firm is very confident that this will be in place shortly after the regulations are approved by the FCA. How does an employee receiving 100% of their salary in stablecoin turn that into cash at an ATM? Obviously, there are huge issues of access to cash, interoperability and who will pay for the necessary software and hardware changes.

Amendment 57 carries on with this theme and picks up an earlier group, addressing the need for all participants in the payment system, including tech companies, to pay their fair share. That is why the definition of “payment system” really matters and should not exclude digital assets. As the payments world changes so significantly, financial inclusion will be a far more complex issue, and it is untenable for the costs of this to fall just on the banks. My amendment makes it clear that every participant across all recognised payment systems must step up: we need a level playing field.

The intent of these really quite simple amendments is to help overcome the incredibly fragmented and confusing payments landscape in the UK, particularly when we look at it from the perspective of the consumer. It is an obstacle course and, frankly, general confusion and fragmentation let overseas entities take advantage of us. I am very troubled that the National Payments Vision of the Bank of England does not have digital assets in scope. The Bank issued its policy announcement on systemic stablecoin on Monday, and it says that its work will be in parallel with the National Payments Vision, but I am still trying to work out why the two are not properly linked together and coherent. There are new players in this field, and some are asserting that we need a single sovereign payments system to respond to core consumer needs and to join up the dots with consumers at its heart. I met the Canadian company Interac, and that is exactly what happens in Canada, so there are international examples, which do not seem to be under consideration in any of the material that I have been looking at.

Baroness Neville-Rolfe (Con)My Lords, I am grateful to noble Lords for bringing forward this group of amendments, which raises several important questions around the future shape of payments regulation once the Payment Systems Regulator is brought within the FCA. I am particularly grateful to my noble friend Lord Holmes for introducing Amendments 47A and 101A with simplicity and clarity; I note the support from the noble Lord, Lord Vaux, and the noble Baroness, Lady Kramer.

Despite the arguments of the noble Baroness, Lady Kramer, I do not favour extending the FCA’s service user objective to include consumer redress or access to cash; indeed, I am against a levy for such purposes. In any event, payment system operators do not deal with customers. That is done by financial services firms.

I am more receptive to the amendment from the noble Lord, Lord Vaux, on applying the secondary growth and competitiveness objective to the regulation of payment systems. Does the Minister intend to do this? If so, can it be done by the proposed regulations or does it need to go into the Bill? I should add that, as with so much in the Bill, the framework is broad while the substance is left to later regulations. That is a real concern, as it leaves a lacuna in parliamentary accountability.

We have been through the arguments on consumer credit and in-person banking, but I log them again for good order. I want also to address two central themes running through this group: first, the need for proper industry engagement and accountability in regulation-making; and, secondly, the question of whether the new regime is sufficiently clear and future-proofed.

On the first point, we welcome the amendments that seek to strengthen the consultation requirements and ensure adequate time for meaningful industry engagement, as the noble Baroness, Lady Bowles, set out in her Amendment 48. That would have a dual effect. First, it would increase transparency and accountability for regulators. If regulators are required to consult properly, explain their reasoning, engage with those affected and publish clear strategies, we have a better chance of understanding not only what they are doing but why they are doing it. One point that is clearly of concern to other noble Lords is the extent of the discretion afforded to the Treasury in designating and de-designating payment systems.

The second effect is that this would ensure that those affected by regulation have a meaningful opportunity to have some input in our deliberations on the Bill and our discussions with industry. It has become clear that the regulatory environment seems to be planned and developed at some distance from the firms that are expected to comply. New regulations, handbooks and guidance may make sense to the people sitting in the FCA or the PRA, but they do not always make sense to those at the coalface: firms, compliance teams, payment providers and market participants. They have to interpret them to implement them and live with the operational consequences.

In this case, those with an interest go way beyond the regulators’ normal clients. For example, concerns have been expressed by retailers, which are usually quick to spot practical problems. I remember well that, when I was at Tesco, we were introducing the euro into our businesses in Ireland and elsewhere. Because of inadequate consultation, the timing was wrong, with training and IT changes needed during the busy Christmas period—a recipe for cost and chaos.

This is a real problem. If regulation is developed in a silo, away from the experience of market participants, even well-intentioned regulation can become impractical, disproportionate or poorly targeted. We end up with the regulator and the regulated working from different understandings of how the market actually functions. That is why I hope that the Minister will look constructively at the amendments that seek to strengthen consultation, transparency and meaningful engagement both with professional bodies and with market participants. Without proper planning, there will be a risk to growth—and, indeed, to the UK’s reputation on payment systems, which has generally been good.

The second major issue is the question of what exactly is covered by the regime. Is the Bill regulating the market as it exists today or preparing the UK for the market as it will exist in a few years? We will speak about digital finance and digital assets in later groups, but the point is highly relevant here, as the noble Baroness, Lady Kramer, mentioned. If the Bill is to modernise and improve regulation, why does it feel in places as though it is being designed for a market that may already be out of date? We have the legal system, the financial services expertise, the markets, the professional services ecosystem and the technology capability to be a world leader, but leadership requires clarity and confidence from the Government and I do not think we are yet seeing enough of either in this Bill.

That brings me to the wider point about accountability and scope, which was raised on Monday. If the PSR’s functions are to be absorbed into the FCA, how will this new regime be properly held to account? How will the Government ensure that payments regulation does not become simply one more area lost within the wider FCA structure? I would be grateful if, in addition to my initial questions about growth, competitiveness and the level of delegation, the Minister could address three points.

First, how will the Government ensure that industry and professional bodies are brought into the regulation-making process early enough for their input to make a meaningful difference? Secondly, how will the Government ensure that the new regime is sufficiently clear and future-proofed to capture new forms of payments and digital finance, rather than regulating for the market of the past? Thirdly, how will the new payments regime be held to account once it sits within the FCA and what mechanisms will exist to ensure that Parliament, industry and consumers can properly scrutinise its operations? A lot of clarity is needed on this part of the Bill, which we of course support in principle. I very much look forward to the Minister’s reply.

The Minister of State, Department for Business and Trade and HM Treasury (Lord Stockwood) (Lab): My Lords, I am grateful to the noble Lords, Lord Holmes and Lord Vaux, and the noble Baronesses, Lady Kramer and Lady Bowles, for tabling these amendments, and to the noble Lords who have spoken in this debate. I will speak first to the amendments concerning the regulation of payment systems and then turn to Amendment 48 tabled by the noble Baroness, Lady Bowles, which raises a separate issue concerning the consultation processes of the FCA and PRA.

There is no doubt that payment systems are critical economic infrastructure. They must be secure and resilient, but also support competition, innovation and good outcomes for the households and businesses that rely on them. That is the purpose of the Bill. It consolidates the Payment Systems Regulator’s functions within the FCA to create a more coherent framework. This is an institutional reform and should not be seen as weakening consumer protection, competition regulation or regulatory standards. The PSR has been effective in driving competition and innovation among payments firms, but the current framework is too fragmented. The Bill will reduce the number of regulators with which firms need to engage.

It is worth stating that the Government have not rushed into this. We consulted on this proposal almost a year ago, in September 2025, and have been working on the details ever since. We published a detailed response in April this year. Throughout this process, the Government have been clear: the intention is not to fundamentally change how this part of the sector is regulated; it is about changing who regulates it to produce a more streamlined system. When I respond to each amendment, I hope that noble Lords will keep this in mind. I hope to reassure noble Lords that the Bill already provides the right framework.

I understand that the desire of Amendment 47A is to ensure payments-specific expertise and that the interests of users and the industry are heard in the FCA. However, the Government do not consider a new statutory payments system panel to be necessary, because the Bill ensures that the FCA’s general duty to consult in relation to its general policies and practices includes participants in regulated payment systems, including those who use or are likely to use services provided by participants in payment systems. We believe that this will ensure that their views will be considered without needing to recreate separate structures within the newly simplified regulatory framework.

I understand the concern in Amendment 49 about whether systems that involve digital settlement assets fall within the definition of a payment system. The Bill attempts to be clear that they can and are capable of designation, even where enabling the transfer of funds is not their primary purpose, reflecting how they may support payment activity within wider platforms.

Amendments 50 to 53 seek to make designation mandatory once the relevant payment systems definition and designation threshold is met, and to restrict the Treasury’s discretion to revise or withdraw designation notices. The Government do not consider that appropriate. As I have already stated, payment systems are technologically dynamic. The Treasury must retain discretion to assess the circumstances and to regulate proportionately, taking into account the relevant factors. Making designation automatic, or withdrawal too restrictive, could introduce rigidity and unintended consequences. Therefore, the Bill preserves the existing position whereby the Treasury may designate a system where it meets the definition of a payment system, and only where the relevant threshold is met. The Government have determined that it is appropriate to maintain a designation regime for payment systems because it facilitates more targeted and proportionate regulation.

16:45:00

Amendment 54 concerns the service-user objective. I recognise the importance of inclusion, redress, access to cash, choice and interoperability. However, the Bill gives the FCA a broad service-user objective, alongside innovation and competition objectives equivalent in substance to those held by the PSR. Listing specific matters in statute risks narrowing that objective and limiting future flexibility.

On the issues the amendment raises, action is already being taken. The FCA has statutory responsibilities on access to cash. APP fraud reimbursement protections will be preserved and taken up by the FCA. Wider payments reform, including progressing open banking and next-generation retail payments infrastructure, will support greater choice, interoperability and better outcomes for end users.

Amendment 55 concerns the FCA’s objectives. The Government consider this amendment unnecessary. I reassure the noble Lord that the Bill already applies the FCA’s strategic objective, competition duty, and secondary international competitiveness and growth objective to payment systems regulation. The FCA’s payment system objectives are based on the PSR’s existing objectives and remain the right basis for payment systems regulation, ensuring that the FCA can promote competition and innovation while acting in the interests of service users.

Amendments 55A, 55B and 55C seek to amend the FCA’s payment systems competition objective. I agree that the FCA must be able to consider user access and market entry by infrastructure—

Lord Vaux of Harrowden (CB)I am not sure I fully understood the Minister’s response to Amendment 55. Does the FCA’s secondary growth and competitiveness objective apply to payment service systems under the Bill? That was the clarity I sought.

Lord Stockwood (Lab)It does indeed. Returning to Amendments 55A, 55B and 55C, I agree that the FCA must be able to consider user access and market entry by infrastructure and payment service providers. The Bill already achieves that. The FCA’s payment systems objectives are intended to be equivalent in substance and scope to the PSR’s existing objectives.

The noble Lords, Lord Holmes and Lord Vaux, asked about drafting differences between the FCA and the PSR objectives. Changes in drafting of the FCA’s payment systems objectives are for simplification only. The FCA’s payment systems objectives retain the substance of the PSR’s objectives.

Turning to Amendment 57, the Government are committed to improving financial inclusion, but a new levy on payment system participants is not the right mechanism. The better course is targeted and proportionate action, including through the Government’s financial inclusion strategy and the recent allocation of £132.5 million in dormant assets funding to Fair4All Finance.

On Amendment 101A, the Bill already provides for the secondary competitiveness and growth objective to apply to the payment systems’ general functions. Any reporting on that secondary objective would include its application to payment systems’ regulation, as appropriate. Therefore, the Government consider the amendment unnecessary and are satisfied that the Bill already gives the FCA the right objectives to support innovation, competition and growth.

Finally, Amendment 48 seeks to introduce maximum and minimum lengths for the consultations undertaken by the FCA and PRA. I understand the desire to ensure that, where regulators consult on proposed rule changes, stakeholders have a fair opportunity to consider the proposals and respond properly. However, this amendment would impose a rigid statutory timetable on consultations, which will cover a very wide range of issues that vary considerably in complexity, urgency and market impact. The Government’s view is that it is appropriate to allow the regulators to determine the appropriate consultation period, rather than being bound to timings set in primary legislation. The noble Lord, Lord Vaux, is right on how we describe the interpretation of the drafting; I commend him for his skill in reading a very technical provision that I have had difficulty reading. He asked why payment systems that involve digital settlement assets are treated differently. This reflects the particular characteristics of digital settlement assets and the way the market is developing. It also reflects the existing arrangements under the PSR framework.

The Bill preserves flexibility to bring relevant systems within the scope of payment systems regulation, where they support payment activity. That does not mean automatic regulation. The system must still be designated by HMT before the FCA’s main powers apply. This approach ensures that the new framework is both future-proofed and proportionate. The noble Baroness, Lady Neville-Rolfe, raised the issue of consultations with industry. The FCA works closely with industry, and the Bill sets out clear consultation requirements on the FCA to support this as it takes on this new role.

As I said at the start, I cannot accept these amendments, but I appreciate the spirit of where they come from. The Bill is aimed at ensuring that we have the right institutional framework for this part of the sector, while ensuring that we do not weaken those consumer protections. I therefore ask the noble Lord to withdraw his amendment.

Baroness Neville-Rolfe (Con)Before the Minister sits down, may I come back to the question of consultation? We are being asked to have a high degree of delegation with this change of governance for the Payment Systems Regulator. The Minister seems sure that the regulator will meaningfully consult the right people at the right time. It seems extraordinary to leave so much discretion with the regulators, particularly, as I explained, when they are moving into very new areas. He has rejected the idea of a panel, which would be one way of getting expertise into the system, and I wonder if he will think further about this.

Lord Stockwood (Lab)To come back on that, we have heard the criticism of the FCA loud and clear. The intention is for further debates to come back to what we believe is the current state of oversight and governance, and we are open to the conversations that the debates will lead to.

Lord Holmes of Richmond (Con)I thank all noble Lords who have taken part in this important debate. One of the key themes that ran through it and the Minister’s response is the question of clarity, or the lack thereof. Certainly, as a consequence of these changes as currently drafted, there is less clarity on payment systems regulation and on how the competition and innovation requirements will be satisfied in a broader context. I fully support the comments of the noble Lord, Lord Vaux, on his amendments, and I will come to the important amendment of the noble Baroness, Lady Bowles.

I am disappointed that the Minister did not take the opportunity to offer a consultation about consultations. The reality is that the Minister could take this opportunity to bring clarity to increasing and varying levels of opacity and unnecessary levels of control in the hands of the regulator, where they currently exist. We have seen this in financial services in recent Bills that we have considered; it goes beyond financial services to this sense of leaving regulators with greater powers as a consequence of significant statutes passed, as opposed to Parliament debating and determining these decisions, which in no sense would tie the regulators’ hands. In fact, the amendment of the noble Baroness, Lady Bowles, would assist the regulators, because it would bring clarity on how to operate these consultations. There is a significant issue with consultations in financial services, and a significant issue with government consultations across the piece. It is not a party-political point; it has been the case for years. This is an opportunity to bring clarity to this and enable more firms, more individuals and more perspectives to be brought into what would then be better consultations and better outcomes as a result of that consultation process. I very much look forward to the noble Baroness, Lady Bowles, bringing her amendment back on Report. It is strong; it would not let too many cats out of too many bags—even though I stand with a Labrador at my feet—and I do not think that this will be the last we see of a number of these amendments. For now, I beg leave to withdraw my amendment.

Amendment 47A withdrawn.

Amendments 48 to 55C not moved.

Amendment 56

Moved by

56: Schedule 2, page 78, leave out lines 27 to 30 Member’s explanatory statement This amendment would remove a subsection which duplicates section 131Z19 of the Financial Services and Markets Act 2000 (inserted by paragraph 18 of Schedule 2).

Lord Stockwood (Lab)My Lords, the purpose of the government amendments in this group is to ensure that the relevant provisions of the Bill operate clearly, consistently and in line with the Government’s original policy intent. They are technical and corrective in nature and do not change the underlying policy of the Bill. However, it is important that noble Lords understand the purpose of the amendments so that they can agree that they are minor and technical, so I will explain them briefly.

Amendments 56, 60 and 63 make minor, technical corrections to Schedule 2, which, taken with Clause 13, abolishes the Payment Systems Regulator and gives broadly equivalent functions to the FCA. Amendment 56 removes a duplicative provision from new Section 131Z9 to the Financial Services and Markets Act 2000 that is already covered by new Section 131Z19. Amendment 60 corrects a cross-reference so that the Bill refers to the correct FCA payment system powers when setting out how the Competition and Markets Authority is to determine an appeal.

Amendments 61, 62 and 63 ensure that references to the chair of the PSR, which will be obsolete after the PSR is abolished, are deleted in the correct places in Schedule 1ZA to the Financial Services and Markets Act 2000, which concerns the FCA’s constitution and governance.

Amendments 143 to 145 are also minor and technical amendments. Amendment 143 and 144 ensure that Section 66A of FSMA is amended in a coherent and orderly way, regardless of whether the amendments to that section made by Clause 27 are commenced first or the amendments to that section made by Clause 36 are commenced first. Amendment 145 amends subsection (4) of new Section 55AA, inserted by Clause 29(3), to ensure that the language used there is consistent with the language used elsewhere in FSMA. The amendment simply replaces the words “is in force” with “has effect”. These amendments do not change the policy or legal effect of the affected clauses. They are drafting amendments for the purposes of coherence and consistency only.

I now turn to Amendments 147 to 150, to Clause 33. Clause 33 allows firms to apply for senior approval, subject to conditions or a limited period; they are known as permitted conditional applications. This helps support a more flexible approvals process. Amendments 147 to 150 are technical amendments that fix an error in the original drafting and will ensure that the framework operates as intended. Without these amendments, there is a risk that decisions will not be properly formalised and that the period for determining applications will not be applied consistently.

Amendments 147 and 149 provide that the period for determining permitted conditional applications is the same as for other senior manager applications. Amendments 148 and 150 provide that regulators must give written notice when they approve a permitted conditional application. Taken together, these amendments will ensure that the statutory framework works clearly and consistently in practice.

In summary, this group of government amendments makes technical corrections to ensure that the Bill works as intended. I hope that noble Lords will join me in supporting them.

Baroness Noakes (Con)My Lords, I have given the Minister notice that I intend to object to these amendments, so if he presses them, I will object and therefore they will not pass. It has been the custom of our House that when the Government table amendments to Bills, they notify all Members of the House—because the Government cannot determine which Peers might be interested in which amendments—and explain the amendments. It may well be that some of these amendments are technical and mean simply the correction of errors, but Members of your Lordships’ House should have the opportunity to consider them properly.

I became aware of this only late last week, when I suddenly realised that several government amendments had been put down—these and others—and that I had had no letter. I do not believe that anybody else has had a letter. Because of that, we ought to maintain the customary practices of your Lordships’ House. As I said, I will object to these amendments if they are put.

17:00:00

Lord Altrincham (Con)My Lords, I will speak briefly to the government amendments in this group and declare my interest as a director of South Molton Street Capital, which is regulated by the FCA. I thank the Minister for explaining so clearly these amendments. He has described them as minor technical amendments and as descriptions around making language consistent with FSMA. Notwithstanding that, at the outset, we welcome these amendments in so far as they are intended to make the Bill clearer, correct cross-references, remove duplications and ensure that the legislation works as intended. The amendments before us are technical in character and, where they improve the coherence and operability of the Bill, we do not object to them.

However, following the words of my noble friend Lady Noakes, I want to raise a broader procedural point, because I think it matters for how this Committee is able to scrutinise the Bill properly. We understand that not all noble Lords who have taken a close interest in the Bill were engaged by the department on these government amendments. That is a concern. I would be grateful if the Minister could give us a clear commitment that, ahead of future stages, the Government will make every effort to engage with not only the Opposition Front Bench but noble Lords across the Committee who have raised substantive concerns, and to provide timely, written explanations of any further government amendments.

I understand that my noble friend Lady Noakes will be writing to the Minister about the way in which the Government have handled engagement and oversight around these amendments. Given the reservations of my noble friend and of her committee, it is right that we do not agree to these amendments today but rather see them reintroduced on Report, as a matter of principle.

Lord Stockwood (Lab)My Lords, I am happy to apologise to the noble Baroness for any mix-up. It was my understanding that it was not necessary to do an all-Peers letter for only a handful of technical amendments. With that in mind, we believe that the amendments we have proposed are minor and technical in nature and were tabled in good time before the Committee’s first debate. They are on drafting errors and remove duplicate and obsolete provisions, ensuring that the relevant provisions in the Bill and FSMA operate clearly and consistently. I trust that my explanation has given the noble Baroness the information she needs, but I will withdraw the amendment for now and bring it back on Report.

Amendment 56 withdrawn.

Amendments 57 to 64 not moved.

Schedule 2 agreed.

Clause 14Anti-money laundering and counter-terrorist financing supervision

Amendment 64A

Moved by

64A: Clause 14, page 16, line 35, at end insert— “(1C) Regulations made under subsection (1A) may make provision in relation to— (a) the Financial Conduct Authority, in respect of its functions under the Financial Services and Markets Act 2000;(b) the Financial Conduct Authority, in respect of its functions relating to payment services or electronic money;(c) Ofcom;(d) the National Crime Agency;(e) the National Economic Crime Centre;(f) law enforcement agencies.”Member's explanatory statement The amendment seeks to require more effective intelligence sharing between supervisory authorities.

Lord Holmes of Richmond (Con)My Lords, it is a pleasure to open on this group of amendments, which in many ways builds on the first group. This Bill is light on the use of technology and on the use of intelligence between the regulators which are spread across the financial services landscape. As my noble friend Lady Neville-Rolfe said in responding to the first group, in many ways the Bill feels as if it is written for a time which is already rapidly evaporating. There are new payment mechanisms and new financial instruments. In fact, there are new products which are already dominating key parts of the market.

It would seem to make sense to have provision for more intelligence-sharing across the regulators, and indeed the broader landscape. Modern technologies are deployed by both participants and bad actors in this arena. Thus, it would seem to make sense to have combined activity, connected action and shared intelligence among the regulators and, within that, to bring technologies such as AI and others to bear in achieving it. I look forward to the debate on this amendment and others in this group, and to the Minister’s response.

Lord Hope of Craighead (CB)My Lords, I should like to speak to Amendments 64B and 69AA in this group, which are in my name. They direct attention to matters arising from the provisions in Clause 14 that are of great concern to the Law Society and the Law Society of Scotland. I apologise to the Minister for their late arrival; they are based on draft amendments that were not sent to me until Monday of this week. I am grateful to the Table Office for its help in drafting them at short notice.

The background to these amendments is as follows. The Law Society and the Law Society of Scotland are both regulatory authorities. Their current regulatory roles include responsibility for supervising compliance by solicitors, in their respective jurisdictions, with the UK’s anti-money laundering and counterterrorism financing frameworks. They are, therefore, supervisory authorities of the kind referred to in the amendment to Section 49 of the Sanctions and Anti-Money Laundering Act 2018, as set out in Clause 14(2).

However, the regulation of anti-money laundering and counterterrorism financing is only part of the responsibilities that these two societies exercise as regulators. Solicitors play an important role in tackling economic crime. The societies’ roles as AML supervisory bodies are a key component of their functions as regulators of the solicitor profession. This is a task that both societies take very seriously. I am told that the Law Society of Scotland employs a team of dedicated specialists with detailed, up-to-date knowledge of the trends in economic crime and the risks that are associated with the provision of legal services; I have no reason to think that the way in which the Law Society of England and Wales handles its responsibilities is any different.

The effect of the amendments proposed in Clause 14 would be to transfer, through regulations that we have not yet seen, the front-line AML supervision of the solicitor profession to the Financial Conduct Authority, as the single professional services regulator. The Law Society believes that this will amount to a seismic shake-up as to how law firms and their AML/CTF obligations are regulated, which risks sending shockwaves through the sector. It also says that adapting to this change has the potential to divert attention, resources and time from supporting clients and developing solicitors’ businesses, with effects that it would be quite hard to cope with.

The Law Society of Scotland strongly opposes this change. Its point is that it will lead to the duplication of systems of regulation. On the one hand, the society will continue to have its role as the profession’s regulator; on the other hand, there will be the FCA. Solicitor firms, large and small, will have to deal with them both in future, increasing the time spent and the cost of being regulated. This will bear heavily, especially on small firms in the remoter areas of Scotland, which often operate on very narrow margins. The population is thinly spread in these areas, as are the firms that exist to provide essential legal services there to the people who need them. Much will of course depend on how the FCA approaches its task, but anything that might lead to the disappearance of these firms due to the consequences would be very much to be regretted. That is what lies behind the Law Society of Scotland’s objection.

The Law Society of England and Wales, for its part, is concerned that, without a clear statement of their position by the Treasury and the FCA, Parliament is being asked to legislate for powers to enable the detail of the reforms to be enacted that remain unclear and which the sector has not yet seen.

My Amendment 64B focuses on the points that are of particular concern. I shall mention in relation to each one, as briefly as I can, the questions for which answers are sought from the Minister. Proposed new subsection (1C)(a) asks that the regulations be “proportionate and risk-based”. The question is whether the FCA intends to import its banking model into the process for all solicitors’ firms, small as well as large, or instead to take a risk-based approach. Should not the supervision in regard to this profession be tailored to the risks posed by the different sectors within it? Firms vary from the very small, with perhaps just one partner in a remote part of Scotland, to the very large international firms found in the City of London. How will the Government ensure that the small high street firms up and down the country are not disproportionately burdened by the system that they propose to operate?

Proposed new subsection (1C)(b) seeks appropriate protections for legal professional privilege and client confidentiality. Can the Minister confirm that nothing will be done under Clause 14 that will weaken legal professional privilege, which has a vital role in securing access to justice? The Solicitors Regulation Authority of the Law Society of England and Wales at present keeps all LPP material confidential. It may be used only for investigation and enforcement proceedings against the solicitor or the firm that it regulates. It may not be used in relation to proceedings that may be taken against its clients. Will the FCA follow the Law Society’s practice? Will it also accommodate the duty of confidentiality that underpins much legal work? Further, will it respect the obligations of the solicitor or the firm to the court?

Proposed new subsection (1D) seeks to avoid duplication. It is feared that the Treasury will introduce a broader system of regulation than the current regime, with the risk that this will duplicate the Solicitors Regulation Authority’s oversight, create unnecessary burdens and delay routine transactions. What practical mechanisms can be put in place to prevent solicitors from being subjected to overlapping requirements from both the FCA and the SRA?

Proposed new subsection (1E) calls for an impact assessment. How can the appropriateness of these powers be judged without seeing the underlying regime? Will the regulations be accompanied by assessments of their impact on those to be subjected to the system of supervision for which they provide? What estimate has been made of the compliance costs for these law firms? Will the powers be compatible with the way that legal services are regulated in Scotland, which has a different legal system from that in England and Wales?

My Amendment 69AA asks for a review of AML and CTF supervision within three years and a report that includes an assessment of each of the points to which I have drawn attention. I do not expect the Minister to answer my questions this evening. I have set them out because I hope that they may form the basis of some discussion, if the noble Lord is willing to meet me at some point before Report to go over these thoughts at greater leisure and in more detail.

Lord Mackinlay of Richborough (Con)My Lords, I add some comments to what the noble and learned Lord, Lord Hope, has said and what he is trying to achieve. I put on record my interests in the register as a chartered accounts and chartered tax adviser—I am very well versed in the burdens, I suppose, of the AML regulations in smaller practice. These are burdens that we all suffer almost daily if attempting to move money between one very regulated institution in the UK to another very regulated institution in the UK. We have all suffered it: you transfer funds from one to another, yet the receiving institution asks the same questions all over again, including proofs of source of funds, as the original organisation, in the UK, asked when you put those funds into that institution.

Frankly, the AML regulations have got out of control. We could do it in this Bill, and I think it is time to streamline what has become a real blockage in the UK. I had a quite ridiculous situation recently in purchasing a property: they wanted proof of funds for a transaction that I conducted in 1992. I struggled to find it, because it had long gone through the shredder, as one might imagine.

17:15:00

Closer to home, we have a network of 22 professional bodies which are registered for AML and that whole ambit of requirements. The firm that I am still associated with—I am no longer a partner but one of those consultants that one becomes afterwards, when one is busy in the House of Lords—is registered with the ICAEW. The beauty of that regulation is that the ICAEW, the Chartered Institute of Taxation and, as the noble and learned Lord, Lord Hope, said, the legal institutions know the risks of the sector that those institutions are working in. More than that, when an accountancy practice has a regular review and visit from the institute to make sure that everything is working well in terms of audit regulation and general practice management, that ICAEW inspector also examines our AML and what are we doing. Are we doing it properly and adequately?

The worry here is that, with one of those visits—it may happen in the legal services industry, chartered accountancy, tax advisers and maybe trust-providing bodies—will the bodies that they are professionally subscribed to be doing that check, and then the institution will wait for yet another knock on the door from the FCA to do a similar check? I would have hoped that this legislation would give us the opportunity to cut through a bit of the nonsense and strengthen what the professional bodies are doing very well.

This whole legislation is full of acronyms, such as the OPBAS. I tried to find out what it actually meant—it is the Office for Professional Body Anti-Money Laundering Supervision under the FCA. I have to say that, before this legislation, I was unaware that the OPBAS existed. We already have a body within the FCA charged to look at the whole issue of anti-money laundering and anti-terrorist financing rules, yet it has been proven not to have done a lot. I assume that that FCA sub-institution will now be withdrawn and the FCA will do its function through legislative procedure, and we hope that there will be a better outcome. I find that a little peculiar.

I think this will develop as we get to Report, but my request is that we look at this all over again and say that professional bodies have been doing this very adequately for a long time. It goes along with the maxim, “If it ain’t broke, why are we trying to fix it?”.

Baroness Kramer (LD)My Lords, I will make some comments on the amendments that have been discussed and then speak to the amendments in my name. I have some sympathy with the issues raised by the noble and learned Lord, Lord Hope, and I very much hope that the Minister can clear up this issue of professional privilege and client confidentiality, because it seems to me that it is not in any way interpretable from the legislation or the Explanatory Notes, and it is key.

I also see that the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham, have tabled Amendment 69A to require a report on the transfer process, which seems very sensible. The noble and learned Lord, Lord Hope, has an amendment calling for a review of anti-money laundering and counter- terrorism financing supervision within three years. All those make some sense to me. I will look particularly at Amendment 64A from the noble Lord, Lord Holmes of Richmond, because it hits part of the problem on the head. It seeks to require more effective intelligence sharing between supervisory authorities. It is that failure of intelligence sharing that many people consider to be the fundamental underlying cause of many of the problems we have today. It is not very clear that the proposals the Government are bringing forward are the easiest way to remedy that. I will say more on that later.

For my amendments in this group, I thank the Chartered Institute of Taxation and the Association of Taxation Technicians for both clarifying issues and proposing legal language. Despite all the steps we have taken over recent years, London remains the global centre of choice for laundering dirty money, whether from crime, sanctions busting or political corruption. Estimates suggest that 40% of all laundered money globally goes through the City of London or the Crown dependencies—up to £325 billion a year. The primacy of the London money laundromat is not an accolade we wish to retain.

Part of the problem has been the fragmentation of oversight by 25 separate public and professional bodies, supervising not just financial institutions but the many enablers, ranging from accountants to solicitors, property agents and service companies. In 2018, the Government set up within the FCA what they hoped would be the answer: the Office for Professional Body Anti-Money Laundering Supervision, which the noble Lord, Lord Mackinlay, described as the OPBAS—I thought it was an acronym, not an initialism. It was put in place to oversee the 22 professional body supervisors, not the public ones. We need to acknowledge that it has had some real successes, but it has not been as effective as we had hoped. That goes back to the issue raised by the noble Lord, Lord Holmes, who is no longer in his place: the primary reason for this, in most people’s opinion, seems to be relatively poor communication and co-operation between OPBAS and the law enforcement agencies. Frankly, I cannot find anything in this Bill that begins to deal with that.

One approach to remedying this situation would have been to have given OPBAS proper resources and more teeth. Instead, the Government have decided that the FCA should take on directly all supervisory responsibility for anti-money laundering and counter- terrorism financing. Many in the professional bodies are very correctly worried that the FCA lacks the expertise and capacity to carry out the role it is being given, which is much more complex than just enforcement.

Many of the firms that the FCA will supervise on these AML issues are small to tiny. The FCA has no significant history of supervising small and tiny firms, and no understanding of the different operations and pressures of these entities or their specialist activities. The firms—this has been one of the strengths of the professional bodies—need compliance support, education, expert helplines, hand-holding and guidance from a supervisor that knows their business model.

My Amendments 65 to 69 should be seen as part of a whole. They are collectively intended to try to tackle that problem, and to clarify and ensure a workable transition process. Amendment 65 addresses education guidance and compliance support. Amendment 66 requires a proper transition timetable. Amendment 67 requires the FCA to have the necessary expertise and experience in tax, accounting, legal services, trust and company service provision—it does not have that at the moment. Amendment 68 requires transparency on supervisory costs and the fees that the FCA will levy. Amendment 69 requires a report in six months on how effective the new anti-money laundering system is.

Frankly, all of that should have been in the Bill, and none of it should be controversial. Once again, we have a situation where the Government seek to pass primary legislation that gives Ministers and regulators a blank sheet of paper to fill in as they wish with secondary legislation. At this point, as far as I can understand— I looked but could not find it—we do not even have a promise to publish the regulations for consultation.

Baroness Neville-Rolfe (Con)My Lords, I will speak to the stand part notice on Clause 14 and Amendment 69A in my name and that of my noble friend Lord Altrincham. I am also grateful to my noble friend Lord Holmes, to the noble and learned Lord, Lord Hope of Craighead—whom it is a particular pleasure to welcome to the Committee on this Bill—and to the noble Baroness, Lady Kramer, for bringing forward a number of useful amendments in this group. My noble friend Lord Mackinlay of Richborough is right to summarise the concerns about and nonsenses of the money laundering regulations in general, which we should try to address as part of reform. We certainly support that.

The question we have to ask is whether the Government’s chosen mechanism is sufficiently clear, proportionate and workable. At present, I am concerned that it is not. Clause 14 represents a major structural change, moving front-line AML supervision for professional services from the existing professional body supervisors to the FCA. The Bill will allow FCA supervision of money laundering to be extended to several new areas—to 22 bodies in all, as we have heard, including solicitors, law firms, accountants, trust and company service providers and, in practice, estate agents. Yet, as with so much in this Bill, the framework is broad while the substance is left to later regulations. That is a real concern.

My Amendment 69A seeks to address that in part by requiring the Treasury to report to Parliament on the process for transferring responsibilities under Clause 14. That report would force the Government to set out how the transfer will work in practice, what steps will be taken to manage the transition, how costs will be assessed, how duplication will be avoided and how the FCA will acquire and maintain the necessary sector expertise—all points that have been raised in the debate.

We have heard serious concerns from industry and professional bodies about spiralling costs, duplication and regulatory uncertainty. The Law Society described the proposal as

“a seismic shakeup to how law firms and their AML … obligations are regulated”.

It warned that the change risks diverting

“attention, resources and time from supporting clients and growing their businesses” towards adapting to a new and uncertain compliance regime. That concern should be taken seriously. The Government and the FCA should be seeking to simplify requirements, reduce duplication and minimise the compliance burden, while maintaining strong safeguards against economic crime.

The risk of duplication is particularly important. Solicitors are already subject to a distinct regulatory framework. They have professional obligations, ethical duties, responsibilities to the court, duties under the rule of law and obligations around client confidentiality and legal professional privilege. If the FCA is now to be added to that landscape as a supervisor, the Government must explain precisely how the new system will avoid overlapping or conflicting expectations.

Like the noble Baroness, Lady Kramer, I am particularly concerned about sector expertise: if the FCA is to take on these responsibilities, it must have people within it who understand the professions and bodies that they will be supervising. It must understand how law firms operate, how client accounts work, how professional privilege functions and how smaller or high street firms differ from large practices.

Costs are another major concern. I emphasise that small and high street firms are worried that a move to FCA supervision may result in higher fees and new compliance costs. Many of these firms are already under pressure. They serve individuals, families and small businesses in communities across the country. If the effect of this reform is to impose disproportionate new costs on them, it could have real consequences for access to legal services. The FCA does not understand how to deal with thousands and thousands of such firms.

We also need to understand how regional capacity will be maintained. Professional services are not confined to London; it is one of their charms. AML risks and compliance responsibilities exist across the whole country. The existing professional body model has the advantage of sector-specific and, in many cases, locally embedded knowledge.

There is also a specific territorial issue here, as we heard from the noble and learned Lord, Lord Hope. The Law Society of Scotland has opposed the change and raised concerns about the compatibility of FCA supervision with the regulation of legal services in Scotland. The Government need to explain how these reforms will interact with devolved and existing statutory frameworks, as well as how they will avoid creating a two-track or conflicting regulatory regime. The noble and learned Lord also emphasised the SME issue, which seems to be a particular difficulty in Scotland.

17:30:00

The wider concern behind our stand part notice on Clause 14 and Amendment 69A is that Parliament is being asked to legislate now for powers whose practical effect will become clear only later. I have already challenged this approach elsewhere in the Bill. The industry is telling us that the lack of certainty is leading to pre-emptive behaviour, which is negatively affecting the sector. Firms are trying to plan for a regime whose shape they do not yet know and are having to make difficult assumptions.

The Minister has presented this as a deregulatory Bill, and we have been very supportive on that basis. However, I fear that that will be reversed once the compliance costs of this change are added, since the costs will be spread across the country and into big and, even more importantly, smaller organisations and firms. My fear is that this move could kill vital service sector growth as those affected struggle with change.

The noble and learned Lord, Lord Hope, had a very powerful list of questions. I also have some questions, some of which overlap. I would very much appreciate an answer before Report, perhaps in a letter. First, how will the Government ensure that the transfer of responsibilities does not lead to duplication between the FCA, existing regulators and professional bodies? Secondly, what assessment has been made of the likely cost impact of this change on firms—particularly small and high street practices such as estate agents and accountants and so on? Thirdly, how will the FCA acquire and retain the necessary sector expertise? Fourthly, when will the Government set out a clear timetable for implementation? People need to know when these new rules are likely to come in. Fifthly, how will the Government ensure that professional obligations, legal professional privilege, client confidentiality and this distinct framework of legal practice are properly protected? Sixthly, how will the Government address the concerns raised in Scotland and ensure that the new regime does not cut across devolved or existing statutory arrangements?

I have spoken at length because the Government need to show that this reform will be proportionate, sector sensitive and practical. Clause 14 is too vague. Too much is being left to later regulation. The sector is being asked to prepare for a regime whose shape remains unclear in an industry that is rapidly changing, as we heard from my noble friend Lord Holmes. We will need to return to this area on Report, but some helpful answers would make that process easier.

Lord Stockwood (Lab)My Lords, I am grateful to the noble Baronesses, Lady Kramer and Lady Neville-Rolfe, the noble Lords, Lord Altrincham and Lord Holmes of Richmond, and the noble and learned Lord, Lord Hope of Craighead, for tabling these amendments relating to the implementation of anti-money laundering and counterterrorism financing supervision reform. I would be more than happy to meet the noble and learned Lord to discuss his points in detail before Report. I thank him for that kind offer. I am also more than happy to write to the noble Baroness, Lady Neville- Rolfe, on her questions, although I will cover professional privilege in my response.

I recognise the broad concerns that sit behind these amendments. We all want to get this right. However, the Government do not believe that these additional statutory requirements are necessary. I will start by setting out why Clause 14 should stand part of the Bill. Because the UK is a global financial hub, we face heightened vulnerability to illicit finance, as has already been mentioned. The UK has a robust set of anti-money laundering rules, but the supervision of those rules is simply not consistent. The Government understand the burden of compliance, but their recent statutory instrument made money laundering regulation more proportionate by ensuring that requirements are enforced when and where the risks are highest, and reduced where they are not.

In October 2025, the Government announced their intention to reform the supervision framework, with the FCA becoming the supervisor of compliance on anti-money laundering and counterterrorism financing rules for professional services firms. Clause 14 is designed to support this transition and ensure that the new supervisory regime can function effectively. It is worth restating that we believe that the vast majority of companies take seriously their responsibility to ensure that their clients’ funds are clean. We are grateful for their efforts; they are important gatekeepers, protecting the integrity of the UK economy. This reform will bring professional services firms in line with other regulated sectors, such as financial services, which are already overseen by a public sector supervisor. This is fair and proportionate.

The Government have recently published their updated anti-money laundering and counterterrorist financing national risk assessment. It found that all professional services in scope of this reform remain high risk for money laundering, based on an extensive analysis of the available evidence and intelligence. Clause 14 is essential to ensure the effective implementation of these supervision reforms. Without it, the Government would lose the ability to make important provision in respect of co-operation and information sharing between the FCA and professional bodies.

Ongoing co-operation between the FCA and professional bodies will be key to ensuring that firms’ reform is effective; it has been mentioned by many noble Lords today. It will mean that additional burdens on firms, including dual regulation and issues around enforcement, are minimised. Without this, implementation of reform will be less effective, and firms will likely face additional burdens, which the Government are determined to avoid.

The Government’s objective is to simplify and strengthen the fragmented supervisory system, improve consistency across sectors and support more effective action against economic crime. Effective supervision depends on robust co-operation and information sharing between supervisors and other partners across the wider AML/CTF framework. Co-operation and information-sharing mechanisms will ensure that additional burdens on firms, including dual regulation and issues around enforcement, are minimised, addressing key concerns raised by stakeholders. Clause 14 provides the basis on which those future arrangements can be established. The Government therefore consider Clause 14 essential and strongly support its inclusion in the Bill. To re-emphasise the objective here, this is about simplifying and strengthening a fragmented supervisory system, improving consistency across the legal and accountancy sectors and ensuring that firms are supervised to a consistently high standard. There is no proposal to introduce new anti-money laundering obligations on businesses.

I turn now to Amendments 65 and 67, which are concerned with whether firms will continue to receive appropriate support and whether the FCA will possess sufficient sector-specific expertise, which has been raised by many noble Lords today. The Government agree that these are important issues. However, they are already central to implementation planning. The Treasury’s recent consultation on the FCA’s duties, powers and accountability demonstrated the importance that stake- holders place on sector expertise, guidance and engagement. The Government have been clear that implementation must involve the development of specialist expertise within the FCA and close engagement with existing supervisors and representative bodies.

The FCA also starts from a strong foundation. It already supervises firms for AML/CTF purposes and oversees legal and accountancy professional body supervision through the Office for Professional Body Anti-Money Laundering Supervision. This gives the FCA substantial experience of both AML/CTF supervision and the professional services landscape. The FCA will also ensure that there is clarity for practitioners on sector-specific issues, such as guidance on the treatment of documents covered by legal professional privilege.

The Government have also recognised the value of practitioner expertise. Consultation responses strongly supported practitioner-led guidance, and the Government have indicated in their response to the consultation, published on 18 June this year, that engagement with sector experts and existing guidance bodies will remain an important feature of the future regime. The Government therefore agree with the importance of preserving sector expertise and ensuring that firms continue to receive effective support. However, these issues are already being addressed through implementation planning, continued engagement with existing supervisors and representative bodies, the development of specialist capability within the FCA, and future guidance arrangements. The Government do not believe that additional statutory obligations on either the Treasury or the FCA are necessary to achieve those objectives.

Amendments 64B and 69AA reflect important stakeholder concerns surrounding the need for proportionality and a risk-based approach, appropriate protections for legal professional privilege and client confidentiality, and the need to minimise duplication and impact on supervised persons. These concerns were raised by respondents to the recent consultation, and the Government agree that they are very important issues. Amendment 64B would require regulations made under new powers to consider proportionality and a risk-based approach to supervision, provide appropriate protections for legal professional privilege and client confidentiality, and avoid duplication between regulators. It would also require the Treasury to publish an impact assessment prior to making regulations.

However, the money laundering regulations, or MLRs—the legislation that provides for our supervision regime—already provide protections in respect of the need for a risk-based approach and legal professional privilege. The risk-based approach underpins our supervision regime and is already set out in the legislation. The Government took additional steps to ensure that the existing regulations are proportionate through changes made via statutory instrument on 9 June 2026. The MLRs are kept under regular review to ensure that they are proportionate. The noble and learned Lord, Lord Hope, and the noble Baroness, Lady Kramer, particularly asked me to cover this point, so I take the opportunity to do so. The FCA will not be able to compel disclosure of legally privileged material under new responsibilities. It will provide guidance to ensure that privileged material is appropriately protected during supervisory activity. That is because this Government are committed to respecting the distinctive obligations that the legal sector has. Regulation 72 of the MLRs provides explicit protection for legal professional privilege. This will apply to regulations made under the new power conferred by Clause 14.

Finally, the power in Clause 14 will ensure that reciprocal co-operation and information-sharing between supervisors and professional bodies is central to the new regime, minimising duplication. Regulations made under the new power in Clause 14 will be subject to the draft affirmative procedure. In making regulations, the Government consider the impact on firms; this is formally set out in our published regulatory impact assessment. Therefore, the additional requirement introduced by Amendment 64B would be duplicative of this process.

Amendment 69AA would require the Treasury to review regulations made under the new power in Clause 14 within three years of them being made, and to lay before Parliament a report summarising the conclusions of that review. The Government are already required to review the MLRs at intervals not exceeding five years, a requirement that would also apply to regulations made under the new powers in Clause 14. As a result, the Government regularly review the regulations to ensure that they are effective and proportionate, and to respond to emerging threats. This is evidenced by regular updates made to the regulations via secondary legislation, with the most recent changes made this month.

The Government’s aim is to minimise duplication and burdens on firms and to protect legal professional privilege and client confidentiality. These will be the most important factors when considering reviewing existing regulations. Consideration of these issues is already fundamental to our supervision regime, and the regulations are consistently reviewed to ensure that they continue to be fit for purpose. Therefore, the Government consider these additions to be unnecessary.

Amendments 66 and 69 are ultimately concerned with readiness and implementation. They seek assurances that the FCA will be capable of supervising professional services firms across different regions of the UK, and that the reform will proceed according to a clear timeline. The Government share the objective of ensuring the implementation is successful. While significant implementation planning has already taken place, substantial work will continue ahead of commencement. The Government have consistently recognised that this requires careful preparation, phased delivery, detailed transition planning and close collaboration with existing supervisors.

The Government have also been clear that effective implementation will require the development of sector-specific and jurisdiction-specific expertise, including a strong understanding of the legal sector, as mentioned, and of professional services firms of all sizes across all parts of the United Kingdom. HMT will work closely with the relevant bodies in Scotland and Northern Ireland to ensure that implementation reflects the distinctiveness of their legal systems and is aligned with existing legislative and regulatory frameworks. This is already managed through governance and business planning. The FCA already operates nationwide and has confirmed that it anticipates having a significant presence for the new regime in its offices outside London, to ensure it has the capacity to supervise these additional sectors.

However, the Government do not believe that placing reporting requirements or implementation timetables in primary legislation is the right approach. Implementation of this reform is a complex programme involving systems development, recruitment, training, funding arrangements and transition planning. The Government must retain sufficient flexibility to ensure that these activities are delivered effectively. However, that does not mean firms will be left without certainty. The Government are already working closely with the FCA, HMRC and existing supervisors to ensure reform is implemented in an orderly way, including ensuring that businesses are clear about when transition will occur and have sufficient time to prepare for change. A statutory timetable risks becoming outdated and may constrain the Government’s ability to manage implementation in the most effective manner.

Furthermore, the detailed provisions on supervision reform will ultimately be delivered through future secondary legislation. This means that the Government will retain control over commencement and can ensure that functions are conferred only once appropriate implementation preparations have been completed.

17:45:00

Amendment 69A would require the Treasury to lay before Parliament a report on the implementation of supervision reform before the Act comes into force. The Government fully recognise the importance of transparency and effective implementation. The issues identified in the amendment, including transition arrangements, the proportionality of burdens on firms, support for the supervised population and stakeholder engagement are important considerations that are already being addressed through implementation planning. As I have already set out, implementation planning has been a priority throughout the development of these reforms.

The Government are working closely with the FCA, HMRC, existing supervisors and representative bodies to ensure that transition arrangements are effective and that firms have sufficient clarity and time to prepare for change. However, we do not believe that requiring a further statutory report before commencement is necessary. These reforms will be implemented through secondary legislation, which will provide appropriate parliamentary scrutiny while preserving the flexibility needed to manage a complex transition programme effectively. The Government therefore do not consider this amendment necessary.

Amendment 68 seeks greater certainty regarding supervisory fees and the impact of reform on firms, especially small firms. The Government recognise the importance of ensuring that the future supervisory framework remains proportionate, particularly for smaller firms. However, detailed fee arrangements will necessarily be developed alongside implementation planning and stakeholder engagement. The future supervisory model will be funded through supervisory fees, as is standard for regulatory practice, but the Government have also committed to substantial start-up and transition funding through the economic crime levy to facilitate implementation and support the development of the new regime, which will be achieved via the funding authority in Clause 48. The Government remain committed to engaging closely with all stakeholders as implementation develops and to ensuring that the future framework is proportionate and sustainable. We therefore do not consider this additional statutory requirement necessary.

Amendment 64A seeks to expand the power to make regulations providing for co-operation and information sharing to cover the FCA, Ofcom, the National Crime Agency, the National Economic Crime Centre and other law enforcement agencies. The Government fully recognise the importance of effective co-operation across the UK’s economic crime framework. AML/CTF supervision relies on close co-ordination between supervisors, law enforcement agencies and other parties responsible for tackling illicit finance. The money laundering regulations—the relevant secondary legislation in this place—already provide for extensive information-sharing powers between AML/CTF supervisors, including the FCA, the Treasury, law enforcement agencies and Companies House. These powers may be used to tackle money laundering or terrorist financing, to preserve the integrity of the international financial system for law enforcement purposes or otherwise to fulfil the relevant bodies’ regulatory functions under the money laundering regulations.

Clause 14 ensures that the FCA will be able to co-operate fully and effectively with the professional bodies after they cease to have AML/CTF supervisory functions, following the implementation of AML/CTF supervision reform. However, provision about wider co-operation between the FCA and law enforcement bodies is not needed, since this is already provided for in the money laundering regulations. Therefore, while the Government agree that appropriate arrangements for information sharing and operational co-operation are important to successful implementation, we do not consider this amendment necessary.

I hope I have explained the purposes behind Clause 14 and responded to the amendments to the Committee’s satisfaction. I ask the noble Lord, Lord Holmes, to withdraw his amendment.

Baroness Neville-Rolfe (Con)Since it is Committee, I have a couple of points to raise with the Minister before we finish this important section. First, I think the industry needs some idea of the timeframe for these reviews and for the implementation of these changes. That may already exist in ministerial statements, but it would be extremely helpful if the Minister could look into that and let us know. We have had the experience of the defence investment plan, and the uncertainty that can be created when you do not know when major changes are being made is bad for the sector. Secondly, on parliamentary privilege, a very niche point, do the plans to protect it apply to in-house counsel as well as external legal counsel? Small companies, such as estate agents, would not want to have to employ expensive solicitors and lawyers if they do not need to.

Lord Stockwood (Lab)I will have to write to the noble Baroness on those points, to make sure that my answers are correct.

The Deputy Chairman of Committees (Baroness Bull) (CB)My Lords, as the noble Lord, Lord Holmes, is not here to withdraw his amendment, I will take it that his amendment is withdrawn.

Amendment 64A withdrawn.

Amendment 64B not moved.

Clause 14 agreed.

Amendments 65 to 69AA not moved.

Clause 15 agreed.

Clause 16FCA and PRA long-term strategies and recommendations

Amendment 69B

Moved by

69B: Clause 16, page 18, line 33, leave out “5” and insert “3”

Lord Ashcombe (Con)My Lords, unfortunately, I was unable to speak at Second Reading—like the noble Lord, Lord Vaux of Harrowden, as he mentioned on Monday—but I am delighted to be back in time to speak in Committee. I declare my interest as an employee of Marsh, an FCA-regulated firm.

The amendment in my name in this group, Amendments 69B and 73A, propose that our financial regulators move from a five-year to a three-year strategic planning cycle. At its heart, this is a straightforward proposition: regulators must keep pace with the world they regulate. In financial services, the rate of change has accelerated to such an extent that a five-year strategy can quickly become outdated. When the FCA and the PRA last set their strategies, few could have anticipated the speed and scale of the developments that followed. The volatility seen in digital assets, the rapid emergence of artificial intelligence in financial decision-making, the growing importance of cyber resilience to financial stability and the impact of geopolitical tensions on global markets have all evolved far more quickly than expected. Yet regulators remain bound by frameworks conceived for a very different environment.

A three-year cycle offers a more realistic and proportionate approach. It is not an arbitrary shift. It better reflects the pace of change in financial services, aligns more closely with the Treasury’s spending review cycle and mirrors the planning horizons adopted by many firms. It also corresponds more closely to the time it takes for innovation to move from novelty to something requiring clear regulatory oversight. Some may argue that a five-year cycle provides greater stability, but stability should not be confused with rigidity. A strategy that is clearly out of date does not offer certainty; it risks losing credibility. True stability lies in a framework that is regularly reviewed and refreshed, so that it remains relevant and dependable. Nor would a shorter cycle create unnecessary disruption. It would not require regulators to constantly change direction; rather, it would ensure that their strategies are revisited at appropriate intervals and updated where necessary. That strikes the right balance between continuity and responsiveness.

There is a practical consideration. Industry participants have consistently highlighted that five-year strategies can be overtaken by events well before their conclusion, making it harder for firms to plan with confidence. In reality, regulators have already had to adapt to unforeseen shocks—whether economic, geopolitical or technological —outside the normal review cycle. For that reason, this is not a radical proposal but a pragmatic one.

It is important that financial regulation does not rely on a planning horizon that no longer reflects the realities of the market. The FCA and the PRA are strong institutions, but even the most capable regulators cannot be expected to operate effectively within five-year strategies in a period of such rapid change. A three-year cycle is a measured reform. It would help to ensure that regulation remains responsive, credible and accountable, while fully respecting the independence of our regulators.

These are probing amendments. As such, can the Minister say why the Government chose to fix five-year periods for strategy reviews? I believe that is too long, so I look forward to hearing his thoughts on that. I also support the amendments in the names of my noble friend Lady Noakes and the noble Baroness, Lady Bowles of Berkhamsted. I beg to move.

Baroness Noakes (Con)My Lords, I will speak to Amendments 70, 71, 73, 74 and 76 in my name. I thank the noble Lord, Lord Vaux of Harrowden, for adding his name to Amendments 70, 73 and 76.

At first sight, Clause 16 looks like a bit of “motherhood and apple pie” legislation. After all, what is not to like about five-year strategies, which are what most businesses do in the UK and internationally? A closer look at Clause 16, however, reveals a bit of a mess. The position we have at the moment is that the PRA is required to determine a strategy, and it does this by way of annual business plans. There is no requirement in statute for the FCA to do anything but it has routinely issued annual plans; last year, it issued a five-year strategy as well. So this is clearly a slightly messy area, and the Government are right to try to tidy it up.

I fear, however, that the solution in Clause 16 will make things worse. First, the requirement for a strategy seems to be a static one, requiring a five-year strategy to be set and then replaced when the five years have nearly run out. The subsections of new Sections 1JZA and 2E, to be inserted by Clause 16, envisage that the strategies can be revised or replaced, but it is unclear what the trigger for that is other than when the Treasury issues new recommendations in a remit letter. In the business world, strategies are kept under review and are often revisited annually—certainly more often than every five years. I believe that Clause 16 needs a positive requirement for the regulators to keep their strategies under review, if only to confirm their continuing validity. My noble friend Lord Ashcombe’s Amendments 64A and 73A would partly get round the problem by shortening the period, but they still envisage a static strategy; it would be three years and then, at two years and nine months, you would do another one, which is not a satisfactory approach to drawing up strategies.

The Explanatory Notes explain that these strategies are expected to be

“high level and focus on the FCA’s and PRA’s top priorities”.

That is fine, but it is not very useful for the regulated firms that want to know how the regulators’ actions will affect them in practice. If these five-year plans are anything like the FCA’s five-year strategy—all 20 pages of it are full of drawings, photographs and big letters—firms will be very disappointed. The FCA’s four priorities of being a smarter regulator, fighting financial crimes, supporting growth and helping consumers are so high level that they mean nothing to regulated firms.

At the moment, both regulators annually set out the detail of what they plan to do for the following year. Can the Minister say whether this will continue once the Bill becomes law? There will be no requirement in law for either the FCA or the PRA as a consequence of the Bill, and, given the lightweight content of the FCA’s five-year plan and the Government’s intentions for only high-level strategies, it would be a serious error if the regulators were not required to publish their detailed annual plans as well.

These are deficiencies in Clause 16 but they are not covered by specific amendments, mainly because, when I drew up my amendments, I was working on the naive premise that asking for a five-year strategy was a sound, if unexciting, proposition. As I have explained, I now see that as flawed in many ways. For this reason, I fully support the Clause 16 stand part notice in the name of the noble Baroness, Lady Bowles; I am sorry that I did not have time to add my name to it.

On the amendments that I have tabled, I will start with Amendment 70, which requires the FCA’s strategic priorities to include its secondary competitiveness and growth objective. The equivalent provision for the PRA in new Section 2E, inserted by Clause 16, says that the strategic priorities of the PRA include secondary objectives, whereas the drafting of new Clause 1JZA for the FCA does not extend to the secondary objectives. The Minister has helpfully written to me today to say that the Government sort of accept that but that they will work up their own amendment. I thank him for that and I look forward to seeing the text of that ahead of Report.

18:00:00

Amendments 71 and 74 would amend new Clauses 1JZA and 2E so that the FCA and the PRA are required to consult persons affected by the strategy, including of course the firms that they regulate. One of the apparent aims of the Bill is to eliminate or reduce consultation by the regulators, and we will come on to that later. In Clause 16, consultation is simply ignored. This would be bad practice for any regulator but it is incredibly bad practice when the regulators have such a big impact on the firms which together comprise the largest sector in our economy.

I am sure that the regulators have been whispering in the ears of Ministers that they would love to do all the things that Ministers want them to do, if only they did not have so many pesky requirements to do boring things such as consultation with the wealth creators in the economy. Shame on Ministers if they are taken in by that. Public bodies, especially unaccountable ones such as the FCA and the PRA, have to accept that they have positive responsibilities to engage with the sector that they regulate. My amendments also include consultation with anyone else affected by the strategies, not only those they regulate. This should be non-negotiable.

My Amendments 73 and 76 concern the Treasury’s recommendations to the FCA and the PRA. Under Section 1JA of FSMA, the Treasury has the power to make recommendations to the FCA on a lot of things, including how to advance its operational objectives, how to discharge its competitive and growth objectives, and the application of the regulatory principles. There is a slightly shorter list for the PRA in Section 30B of the Banking Act 2009. Clause 16 eviscerates these provisions so that the Treasury’s power of recommendation now extends only to the flimsy five-year strategies required by Clause 16.

When I tabled those amendments, I described them as probing because I thought it would be interesting to hear why the Treasury, which had previously carefully specified the areas in which it could make recommendations to the regulators, has decided that it only wants to do these high-level things now. If I were being uncharitable—which of course I am not—I would suspect the Treasury of wanting to ensure that no blame for anything that happens in the regulators can ever be pinned at the Treasury’s door.

This clause also appears to run against the grain of recent developments, such as the half-yearly so-called performance review meetings between the Economic Secretary and the regulators. What is the purpose of such meetings if the Treasury can take no action, such as making recommendations, once they have had the meeting? This is another reason to oppose Clause 16 standing part of the Bill.

In conclusion, I should also say that I support Amendments 72 and 76 in the name of the noble Baroness, Lady Bowles of Berkhamsted.

Baroness Bowles of Berkhamsted (LD)My Lords, I will speak to Amendments 72 and 75 and to my opposition to Clause 16 standing part of the Bill. I also support the other amendments in this group and their intentions: I think we could talk quite a lot longer about them all.

My Amendments 72 and 75 would require the regulators’ long-term strategies to include a review of their rulebooks, with the aim of identifying outdated or unnecessary requirements. That is a sensible and uncontroversial idea. No one disputes that the regulatory rulebook should be kept under review or that unnecessary or duplicative requirements should not be removed. Indeed, the FCA’s own handbook review consultation acknowledges that parts of the rulebook are outdated, unclear or internally inconsistent. I hope that this review idea can be taken up.

However, these amendments presently sit within Clause 16, which is where the problem lies. Clause 16 creates a statutory duty for the FCA and the PRA to produce long-term strategies. In principle, that is not objectionable; regulators have produced strategy documents before, and it is entirely proper that Ministers should be able to input as long as it is transparent, but there are other problems that have been elaborated on by the noble Baroness, Lady Noakes, which I do not need to repeat. In practice, however, Clause 16 is the delegation engine for Clause 17. It is part of a process of downgrading the day-to-day requirements, the regulatory principles on rule-making, into a commentary in a five-year strategy document. This is a profound change in the constitutional architecture of financial regulation. What were once operational regulatory principles, enforceable by judicial review—even if that route is rarely pursued—become strategic aspirations, influenced by Ministers, unchallengeable by others and reviewed only every five years. The long-term strategy is being used as a vehicle to downgrade regulatory principles and apply them in a minimalist, non-operational way—just talk, no walk. If Clause 16 is to remain, it must be made significantly better and not simply operate as a Trojan horse.

The key thing about regulatory principles is how to make them sensibly relate to operational matters— I say sensibly because that has not happened. That is the problem. It may work for some of them to be dealt with more thematically and rather more regularly than five-year intervals, but others need consideration at the rule-making and supervisory level. While Ministers are meant to stay clear of day-to-day operational interference, like the noble Baroness, Lady Noakes, I query whether Clause 16 overly restricts ministerial input. FSMA 2000 has always had a difficult settlement to keep government away from day-to-day decisions, but—as the financial crisis showed—it is inescapable that the buck stops with government. Clause 16 does not strike the right balance there.

My Amendments 72 and 75 point to rulebook review. As I said in a previous group, and as noted by the Lords Financial Services Regulation Committee, it is effectively the regulators’ system that is cluttered, fragmented and difficult to navigate. It is a lot harder to navigate than a few regulatory principles that the regulators complain about, but which are the only way to challenge that regulatory clutter. In the Lords committee report, a central finding was that culture change, not structural tinkering, is what is needed. Regulators must be clearer, more predictable and more proportionate in how they exercise their powers. The Clause 16 regulatory strategy does not deliver that; it substitutes what were enforceable operational requirements about proportionality with unenforceable talk.

It rather looks as though the regulators will avoid having to step up to the mark. They did not much like the committee’s report or its suggestions of culture change, and, as we will discuss when we get to Clause 17, in the words of one City commentator, it looks like the regulators have done a job on Parliament. Clause 16 is not about transparency, nor is it new in suggesting a strategy document. It is just a vehicle to diminish the accountability and effectiveness of the regulatory principles, and I oppose it.

Lord Vaux of Harrowden (CB)I have added my name to three of the amendments tabled by the noble Baroness, Lady Noakes, in this group. To be honest, I am not quite sure why I did not add my name to her other two; I should have done, so I apologise. The noble Baroness has already explained those with her usual clarity, so I will try hard not to repeat what she said.

Briefly, on Amendment 70, I was going to say that I assumed that the omission from the FCA’s strategic priorities of its secondary objective was an oversight. The noble Baroness, Lady Noakes, has kindly shared with me an email she has received from the Minister that effectively confirms that, and that it will be sorted out at a later stage. Can I very gently say to the Minister that when he writes to noble Lords, it should be copied to all who have signed an amendment? On Amendments 73 and 76, I will listen with interest as to why the Treasury should be able to make recommendations to the FCA and the PRA only in relation to the long-term strategies—that is, every five years. I suspect that the Treasury will come to regret that restriction.

I have also added my support to Amendments 72 and 75 in the name of the noble Baroness, Lady Bowles, both of which would require the FCA and PRA to carry out a review of their regulations as part of the five-year strategy process, with a view to eliminating any unnecessary regulations. Rulebooks have a habit of growing—being added to—and scope has a tendency to creep, so a five-year spring clean must be a good thing and would be a good discipline that I would wholeheartedly support. I finish by saying that I share the reservations that have already been raised about the whole of Clause 16.

Lord Massey of Hampstead (Con)My Lords, the Bill reflects the very substantial transfer of power, as mentioned by my noble friend Lady Neville-Rolfe, from Parliament and from existing regulators, such as the PSR and the 22 professional bodies with specialised knowledge of the sectors, as we discussed earlier. This reflects a high degree of centralisation of regulatory supervision, which may lead to a lack of clarity and, in some cases, as my noble friend Lord Mackinlay mentioned, double regulation for small firms. As the noble Baroness, Lady Bowles, said earlier, the system is also already overloaded. In that context, given the extensive proposed changes and the real possibility of unintended consequences, it seems that the Government should consider the setting of strategy for the future as an important component of the Bill.

Although I support all the amendments in this group, I emphasise the need for consultation with regulated firms and the regular review of the rulebooks as provided for in Amendments 71, 72, 74 and 75. The Bill indeed provides for the publication of a document and consultation with one party—the Court of Directors of the Bank of England is specifically mentioned as a party that will be consulted—but seemingly not with any regulated firm, despite the fact that regulated firms could clearly be very helpful in the setting of long-term strategy. Amendments 71 and 74, proposed by my noble friend Lady Noakes, therefore seem essential additions to the Bill, as would Amendments 72 and 75, proposed by the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux.

Baroness Lawlor (Con)I say a word of support in favour of these amendments. This industry, financial services, is one of the most innovatory and dynamic industries in this country and has led the world in its imaginative, entrepreneurial approach for centuries. What we are seeing—I am glad to follow my noble friend—is the centralisation of regulation in one ever greater regulatory body. This will mean that the slowest ships of the regulatory convoy will determine the pace.

For these reasons, it is imperative that the strategic review takes account, much more regularly than every five years, of the updating of business actions, business transactions and the tools used by the sector; and that, as my noble friend Lady Noakes pointed out, it talks to the people who are the wealth creators whom it will regulate. For all the reasons that have been enunciated in the course of this short debate, including those from the noble Baroness, Lady Bowles, I support these amendments.

18:15:00

Baroness Kramer (LD)My Lords, I am going to be exceedingly brief. I support the amendments in this group.

My noble friend Lady Bowles has hit on the fundamental reason for my strong opposition, which is the constitutional issue. By chance, I happened to speak to a senior regulator in the financial services sector—I am not going to use their name because it would not be fair to do so—shortly after the Bill came out. We started looking at its clauses, and that person said to me, “Ah, but, in the long-term strategy, we will be able to explain to people in detail why we are doing what we choose to do”. To me, that absolutely summed up the issue as a whole. There was no concept at all that there would be parliamentary insight, parliamentary oversight or engagement; it was simply going to be a much better vehicle to explain to people why certain things that had been identified as necessary were necessary and were going to happen. There was no sense of challenge anywhere at all. That is a really dangerous way for us to move our legislation.

Baroness Neville-Rolfe (Con)My Lords, I am grateful to all who have taken part in this short debate. We are sympathetic to the broad purpose of requiring regulators to think strategically, but, if the regulatory strategies are to be meaningful, they must not simply become static documents published every few years then left on the shelf. As my noble friend Lady Noakes said, that is not the way we do it in business. Common practice is for five-year strategies, reviewed annually, and annual plans. The amendment tabled by my noble friend Lord Ashcombe would reduce the strategy period from five years to three years. He is right that markets can change very quickly, as we keep hearing. A five-year strategy risks being set in stone for too long, unless the Minister is able to clarify that the plans will be updated regularly. If not, a shorter period, such as three years, would have real benefits. Perhaps the Minister can explain why the period of five years has been chosen and how he believes the strategies will remain agile and flexible.

I am delighted that the Minister said that he was prepared to accept Amendment 70 on competitiveness and growth. As I have said several times, the growth of the UK financial services sector is key to growth more generally. Regulation should say how the Government—or the regulator—understand that objective, how they are giving effect to it and how their regulatory approach is supporting growth in the market, because the UK has a large and dynamic financial services sector. My noble friend Lady Lawlor emphasised that point, which we should not forget, and we cannot assume that its international position is guaranteed. Regulation has a direct effect on investment, innovation, listings, lending and market depth, as well as on the attractiveness of the UK as a place to do business, so, if regulators are not required to think explicitly about this, the growth objective risks being honoured in theory but neglected in practice.

Amendments 71 and 74 on consultation are very welcome. As we have said in our debates on previous groups, bringing experts into the room in a timely way is a vital part of the regulatory process.

In my view, the boards of regulators have a part to play in the strategic plans, but my recollection is that those engaged in regulated companies were excluded from the non-executive roles on the PRA and the FCA. Is this still the case? My own board experience is that conflicts of interest can be managed. I believe that regulators will benefit from current knowledge from the industry, particularly given these new statutory strategies, the digital changes to which we keep referring and the expansion of the scope of the FCA. I would like to hear from the Minister what the current rules are—perhaps in a letter, as I have not raised this point with him before.

I also support the principle behind Amendments 72 and 75 in the name of the noble Baroness, Lady Bowles. They would require the FCA and the PRA to review their rulebooks and explain how they will simplify or remove rules that are outdated, unnecessary or duplicative. Regulation, as has been said, tends to accumulate. New rules and duties are added, but old rules are not always removed. Guidance, expectations and supervisory practice develop over time. A long-term strategy is not only about what new initiative the regulators want to pursue; it should also be about what the regulator can simplify. If a regular rulebook review is done with a view to making regulation less burdensome, cheaper to operate and supportive of growth, that will be a very positive step.

The amendments on Treasury recommendations also raise a serious question around accountability and regulator independence. There is, of course, a balance to be struck. We do not want day-to-day political interference in regulatory decisions but nor should independent regulators operate without clear strategic accountability to Parliament and the Government of the day, as my noble friend Lord Massey and the noble Baroness, Lady Kramer, explained better than I can. The Government should explain why the Treasury’s recommendation-making power is framed as it is, why it is limited in the way proposed and how Ministers expect it to operate in practice.

Finally, on the Clause 16 stand part notice, I understand the concerns raised in the debate. The value of that clause will depend entirely on whether the strategies produced are meaningful, responsive and capable of being scrutinised. If they become generic documents with broad statements of aspiration, they will add little. If they provide clear commitments, measurable priorities, proper engagement with growth and competitiveness, and a disciplined approach to reviewing the rulebook, they will be useful.

I very much look forward to a full response from the Minister to the points that have been made.

Lord Stockwood (Lab)My Lords, I begin by explaining the Government’s purpose behind Clause 16 and why it should stand part of the Bill.

The Government have often heard feedback calling for the regulatory system to have an overall long-term strategy with clear goals, where the regulators consider the cumulative impacts of their policies and the interaction between supervision and rule-making. The reforms introduced by Clause 16 are intended to address this feedback and will improve transparency around the regulators’ long-term direction and focus, which the Government consider will support effective oversight and scrutiny of the regulators.

Clause 16 requires the FCA and the PRA each to prepare and publish long-term strategies so that stake- holders, including regulated firms, can better understand the regulators’ approach to the sector, and so that the Government and Parliament fully understand the regulators’ priorities and can more effectively hold them to account on how they are translating their objectives into actions and results. When the Government consulted on this proposal, it received strong support: 83% of respondents supported it and agreed that the regulators taking a more strategic and cohesive approach would benefit the sector by helping firms know what to expect.

I have listened carefully to the concerns raised by noble Lords. However, the Government remain firmly of the view that Clause 16 will support scrutiny. By requiring a clear long-term strategic overview, Clause 16 will help the sector understand and plan more effectively for regulatory initiatives and will help interested parties engage with the regulators at a strategic level. Without Clause 16, there would be no requirement for the regulators to set out, in one place, their long-term priorities and approach in advancing their objectives. The aim of the strategies is to make it easier, not harder, for Parliament and stakeholders to scrutinise whether the regulators’ actions are coherent and aligned with the framework that Parliament has set.

On Amendment 70, the Government agree with the noble Baroness, Lady Noakes, that the FCA’s secondary international competitiveness and growth objective should be central to the formulation of its long-term strategy. Growth is the number one priority for this Government and the financial services sector, as many have noted, is key to delivering this. The Government always intended the FCA’s long-term strategy to set out its priorities for advancing our international competitiveness and growth objective. We are looking into this point to determine if this is fully clear within the drafting of the clause, and we are open to tabling an amendment on Report should we determine that it is needed. I thank the noble Baroness for bringing this to my attention and commit to keeping her and other noble Lords informed as this consideration progresses.

I turn to Amendments 69B and 73A. The noble Lord, Lord Ashcombe, and the noble Baroness, Lady Neville-Rolfe, asked me to explain the Government’s thinking behind the time periods here. The Government have set the length of this strategy as five years because, as has been noted, it is the standard time period for organisational strategies and is very common in the business world, as many noble Lords will appreciate. It also aligns with standard parliamentary terms and therefore the requirement for the Treasury to issue recommendations to the regulators at least once per Parliament. However, the Government recognise that financial services markets can evolve quickly and it is important that the regulators’ strategic documents remain current and useful.

The noble Baroness, Lady Noakes, asked me how the strategies would be kept under review. The Bill provides flexibility for the regulators to revise or publish a new strategy within the five-year period if circumstances require it, or to publish a strategy for a shorter period of time than five years. If they do the latter, it will need to be with an explanation about why this is appropriate. Five years is therefore a maximum interval, not a requirement to wait five years before making a change. For example, the Bill requires the regulators to consider whether they need to update their strategy or issue a new one whenever new Treasury recommendations are issued. The Government’s view is that this strikes the right balance between providing a long-term, stable framework and allowing regulators to respond when market, economic or regulatory conditions change.

On Amendments 73 and 76, the Government’s approach here is deliberate. The need for the regulators to take account of Treasury recommendations at a strategic level, rather than at the level of general functions, has been carefully considered. Under the new framework, the Treasury’s recommendations to the regulators regarding its economic priorities will inform the development of their strategic priorities. This is aligned with the change to the way that the regulatory principles will be applied, and I hope it demonstrates the Government’s confidence that influencing the regulators’ strategies is an effective mechanism for ensuring that they have an appropriate focus and are performing well.

Further to this, the framework has been carefully designed to ensure that Treasury recommendations are taken fully into account. As I mentioned earlier, regulators must consider updating or producing a new strategy whenever the Treasury sends a new recommendation letter. The regulators will continue to be obliged to respond annually to the Treasury on their actions in response to the recommendations separately from the strategy document. This will support continued transparency and accountability regarding how the regulators are taking government recommendations into account.

Baroness Kramer (LD)I just ask for clarification. The Minister talked about the way in which the Treasury will make recommendations and the regulator must take them into account. I did not hear the word “Parliament” anywhere in that. Where is the capacity for parliamentary recommendations and oversight to make sure that they are taken into account? Or is the purpose of this legislation to make sure that that does not exist?

Lord Stockwood (Lab)I think this is part of a broader discussion. I am informed that this takes into account existing practices for how the reviews and overviews take place. Unless we decide, in the following debates, that we need an amendment to provide parliamentary overview, this will apply to the current regulatory framework as the oversight currently exists.

Baroness Noakes (Con)I may be being a bit dumb, but I did not understand that at all.

Lord Stockwood (Lab)I do not want to get confused about this. My understanding is that this is already existing practice, but I will take this away and write to the noble Baronesses just to confirm that this is exactly correct. We are trying not to defer from the practice as it exists today, but I will write to clarify that.

Baroness Kramer (LD)I just add that the point of the principles is that they are, in effect, Parliament’s recommendations set in law. I am struggling to see how that fits into the question of who can recommend from this point in time.

Lord Stockwood (Lab)I will write to the noble Baroness to clarify that.

Baroness Bowles of Berkhamsted (LD)I do not understand what happens when the strategy is right but the rules are wrong. What happens then? That does happen. We have, as I have called it before, the example that keeps on giving: when the FCA got the motor finance rules wrong. What happens then, when there is no way to correct that? The strategy, to treat customers fairly, might be right, but the rules produce something that is patently unfair. How can that be changed? There is nothing to measure against that now —the principles have gone.

18:30:00

Lord Stockwood (Lab)Again, we are trying to stress that the oversight that exists today will not be changed. The Treasury’s annual review should be able to take that into account. We believe that what we are putting forward here should not change the existing profile.

Baroness Bowles of Berkhamsted (LD)I am sorry, but if you change something in primary legislation and rub out what is happening in existing processes, you have changed it. You cannot change something at a higher level than primary legislation.

Lord Stockwood (Lab)We will have to come back to these points at a later date. This is a broader conversation on oversight, and points have been made on this subject outside the Room. I hope noble Lords will allow me to come back to these points, as I think this will come up in further debates both during and after Committee.

Turning to Amendments 72 and 75, the Government agree that regulation should be proportionate and support the objectives behind these amendments. Indeed, the Bill forms part of the Government’s broader effort to reduce the burden of regulation on businesses, ensuring that the UK has a regulatory environment that supports growth while maintaining high standards. The Government have made a commitment to cutting the administrative burden of regulation by 25% by the end of this Parliament. The financial services regulators are actively contributing to this agenda. For example, the PRA is implementing new insurance reporting requirements that will cut paperwork by one-third, contributing to savings for firms of £66 million per year, and the FCA has proposed removing some transaction reporting that would save firms over £100 million per year.

However, the Government do not think it would be appropriate to impose a requirement that every long-term strategy must include a full review of all regulations and a plan for eliminating them. A universal rule review exercise each time a strategy is prepared or revised would not be proportionate and would reduce the regulator’s capacity to focus on other priorities. There are existing requirements in FSMA which require the regulators to keep their rules under review and to publish statements on policy and on their approaches to reviewing the rules. The Government consider that this is a proportionate approach.

Amendments 71 and 74 seek to require the FCA and the PRA, when preparing and revising their long-term strategies, to consult persons they consider would be affected, including those they regulate. I understand the intention behind these amendments. If the regulators are to produce long-term strategies that are meaningful and credible, it is clearly important that they are informed by engagement with those who are affected by them. The Government have a clear expectation that the regulator’s strategies will be informed by that engagement.

Baroness Noakes (Con)Can the Minister explain why that is not included in the Bill? The Government expect them to engage with the industry. One would normally write consultation expectations into legislation. That is the normal practice. Why was it not done in this case?

Lord Stockwood (Lab)Again, we will have to come back to that point. One of the things we are trying to consider is how we do not overburden by creating more regulation, but we will have to review that point and come back to the noble Baroness.

Baroness Bowles of Berkhamsted (LD)On that point, it seems to me that nothing is being done to challenge the burden of regulation on firms—instead, the obligations on the regulator are being reduced. When you reduce the obligations on the regulator—for example, to be proportionate—the corollary of that is that they are unrestricted in the way that they can then increase the burdens on firms. That may not be the talk, but that is the consequence of the legal construct that we are now looking at.

Lord Stockwood (Lab)There is a broad philosophical point being made about trusting the FCA and the regulators. Again, we will come back to this in further debates. It is a view that I understand, and we need to develop this through the process of the debate, but it is definitely not the intention to give them free rein to make laws randomly. I think we will have to come back to that later in Committee, if that is okay.

Baroness Kramer (LD)My Lords, I ask for some clarification on this complex area. Under Clause 16, new Section 1JZA(7) states:

“A strategy may be revised by publishing a revised version of the strategy”.

Is the Minister confirming that, as it says in the Explanatory Notes, no consultation goes with that revision process?

Lord Stockwood (Lab)That is correct.

Amendments 71 and 74 seek to require the FCA and the PRA, when preparing or revising their long-term strategies, to consult persons they consider would be affected, including those they regulate. The Government have a clear expectation that the regulators’ strategies will be informed by engagement with industry, consumer representatives and other stakeholders. However, adding a statutory consultation requirement could lead to long delays between a new Government setting direction through a recommendation letter and the regulators putting a strategy in place.

The noble Baronesses, Lady Kramer and Lady Noakes, asked how the Government’s remit will work under the new system. The FCA and the PRA will now be required to have regard to their remit letters when producing or updating long-term strategies. The regulators will continue to be required to respond annually to remit letters, setting out the actions to which they will respond. The noble Baroness, Lady Neville-Rolfe, asked about non-executive directors; I will write to her on that as I do not have the answer to hand.

The accountability of the financial services regulators is clearly an important matter of huge interest to the Committee. I have heard a range of views today on exactly what this should look like, and we will continue to debate this issue in relation to subsequent clauses. However, regardless of views on the wider matters of transparency and accountability, I am confident that the majority will agree that long-term strategies will add to our understanding of the regulators’ strategic priorities and approach, which must be a good thing. I therefore ask that Clause 16 stands part of the Bill.

Baroness Noakes (Con)I have some questions for the Minister. Does he believe that the FCA’s five-year plan provides a model for what the Government have in mind for compliance with Clause 16, if it becomes law? I will start with that question.

Lord Stockwood (Lab)I apologise. Can the noble Baroness repeat that?

Baroness Noakes (Con)Does the Minister believe that the FCA’s five-year plan, which started last year, is the model on which Clause 16 has been based? Is the Minister expecting that sort of document to be produced in response to Clause 16?

Lord Stockwood (Lab)What the clause is trying to represent is that this is the starting point. There is definitely work to do and it needs to be improved.

Baroness Noakes (Con)Can the Minister expand on that?

Lord Stockwood (Lab)What we have set out in answer to that question is that there is clearly a need for greater transparency and thinking about what the five-year plan looks like. In terms of the interaction with the Treasury, the hope is that we can get it into a position where it has greater clarity and certainty about long-term planning. It will be an emergent process, to ensure that it is improved on.

Baroness Noakes (Con)I put it to the Minister that this clause has no specificity around it: no ability for the Treasury to agree the format or content of a five-year plan; no requirement for consultation; and no requirement for the involvement of parliamentary committees. We are being asked to give a blank check with these rather vague requirements. There are words in the Explanatory Notes about the Government expecting these to be “high level”, which is why I asked for the Minister’s reflections on what is clearly a very high-level document from the FCA. I am not getting any sense of what is likely to come out as a response to that.

Linked to that is my second question. I asked earlier what the Minister’s response would be to the question of whether annual plans were required. At the moment, both regulators produce annual plans for what they will do in the year, which provide a very rich source of information for the regulated community on what they can expect. If we are to have those levels of detail, it may not matter at all if an airy-fairy five-year strategy document is produced, full of drawings, pictures and stuff like that. If, however, we will not have anything else, and if the Bill takes out the one existing requirement on the PRA to produce annual plans, then we have a problem.

Lord Stockwood (Lab)I can clarify that an annual plan is required and will still be required. Let me write to the noble Baroness to confirm that.

Baroness Noakes (Con)Can I conclude my remarks with a plea to the Minister? He has taken away a number of issues arising from this debate, on which he will be writing one big letter or several medium-sized ones. It is normal, when something as contentious as this arises, for all Members of the Committee to be copied in on any such letters, not simply the one noble Lord who raised a specific query.

Lord Stockwood (Lab)Understood.

Lord Massey of Hampstead (Con)May I ask the Minister for a clarification? In his answer to the question about not having consultation in the Bill itself, I think he said that the FCA would engage with firms but that he did not want this in statute. Do I understand that correctly?

Lord Stockwood (Lab)That is correct.

Baroness Bowles of Berkhamsted (LD)Why not?

Lord Stockwood (Lab)The sense is that it creates an administrative burden. We are trying to cut down on regulation as part of trying to accelerate growth, and we believe that that is the right balance.

Baroness Noakes (Con)Do we not want to reduce regulation on regulated firms, rather than regulators?

Lord Stockwood (Lab)They are obviously related.

Lord Ashcombe (Con)My Lords, what an interesting debate this turned out to be. There are a number of flaws, which have been extremely well demonstrated by all noble Lords on this side of the Room. I thank the Minister for his answer to my question. I am also extremely grateful to my noble friend Lady Noakes for improving my amendment significantly by talking about annual plans, which is quite correct. However, it is imperative that we continue to have parliamentary oversight of the regulators. From the discussion we have had this afternoon, there is no doubt that this clause still has a number of legs in it, and the horse race will continue for some time. I am sure we look forward to coming back to this on Report but, with that, I beg leave to withdraw my amendment.

Amendment 69B withdrawn.

Amendments 70 to 76 not moved.

Clause 16 agreed.

Amendment 77

Moved by

77: After Clause 16, insert the following new Clause— “Review of regulatory principles(1) Within 12 months of this Act coming into force, the Treasury must carry out a review of the regulatory principles in section 3B(1) of the Financial Services and Markets Act 2000.(2) The review must in particular consider whether—(a) the regulatory principles duplicate other requirements in the Financial Services and Markets Act 2000 or elsewhere, or(b) are no longer required.(3) The review may make recommendations as to whether section 3B(1) needs to be amended or whether there are other mechanisms which can achieve the same result.(4) The review must be laid before each House of Parliament.”Member’s explanatory statement This amendment calls for a review of the regulatory principles in section 3B(1) of FSMA.

Baroness Noakes (Con)My Lords, Amendment 77 calls for a review of the regulatory principles in Section 3B of FSMA 2000. I am grateful to the noble Lord, Lord Vaux, for adding his name to it. My amendment calls for the Treasury to review the regulatory principles and, in particular, identify those that are duplicated or no longer required. As we have already discussed in outline and will discuss further in a later group next week, FSMA currently requires the FCA and PRA to have regard to the regulatory principles in their general functions, but Clause 17 downgrades this by confining them to the new five-year strategy documents.

When your Lordships’ Financial Services Regulation Committee reported last year on the secondary competitiveness and growth objectives for the PRA and the FCA, it took eight pages of our report to describe the web of objectives, principles and “have regards” that the regulators have to live with. In fact, the eight pages covered only some of the “have regards”. The FCA told us that it had around 80 “have regards”, on top of the Chancellor’s remit letters and the regulatory principles themselves. The PRA said that its number was 25. My Amendment 77 should probably have required a review of all the “have regards”, and if I bring it back on Report I may well extend it to that.

In Committee, my amendment is focused on the regulatory principles, because, via Clause 17, these have become a contentious part of the Bill. There are currently eight regulatory principles in Section 3B, plus a vestigial reference to a ninth, and they include some very significant ones, such as proportionality, which we will also be discussing later in Committee. There were seven in the first iteration of FSMA, but they have been changed many times over the years and only three of the current principles directly read across to the original list—namely, efficiency and economy, proportionality and consumer responsibility—which suggests that not all the Section 3B principles are enduring in nature. We should expect the regulatory principles to represent the essential elements of how regulation should operate in practice and have some form of enduring quality. It is relatively clear that Section 3B of FSMA does not meet that test.

18:45:00

It is useful to compare and contrast with the regulatory principles set out in the Legislative and Regulatory Reform Act 2006, to which we will also be returning in a later group. That is admirably succinct and says that regulatory activities should be transparent, accountable, proportionate and consistent, and they should also be targeted at cases only in which action is needed. While the 2006 Act does apply to the financial services regulators, several of the requirements in it are duplicated in Section 3B. The regulatory reform Act applies to all regulators, not just the financial services ones; any additional principles or additional wording around principles in FSMA should be justified as being essential for financial services regulation.

The current list includes the desirability of publishing information as a means to advance objectives. The actual wording is much more convoluted than that, but that is the sense. I am sure that the publication of information could be quite a useful tool in regulation, but is it an enduring regulatory principle to which the regulators must have regard? I think not. One of these Section 3B principles is that consumers should take responsibility for their decisions, which would be good—it would be good if the FCA did have regard to that. But the exact same wording is also found in the “have regards” for the consumer protection objective in Section 1C of FSMA, so Section 3B contains duplications.

I do not believe that the climate change principle, which found its way on to the list via the 2023 Act, is a regulatory principle at all in the sense of describing an essential element of how regulation should operate in practice. As drafted, this so-called principle refers to the need to comply with a net-zero target, but only where the regulators think that it is relevant to regulation. This will not necessarily please all those who have been trying to get green objectives into legislation, but it cannot be an essential element of regulation if the regulator has to decide whether or not it is relevant. I could go on in relation to the current regulatory principles, but I will not, for now. I will be challenging all those who have tabled amendments to this Bill that try to add new regulatory principles to justify why and how they are an essential and enduring element of regulation, as opposed to a current object of interest.

I have much sympathy for the regulators who must navigate an array of “have regards” as they do their work. The whole “have regard” area could do with a review, which is what I initially thought the Government’s Leeds reform was going to do. That is clearly outstanding business. My amendment, as I said earlier, starts with the regulatory principles, but that is not by any means the whole of the problem. I beg to move.

Lord Vaux of Harrowden (CB)My Lords, I hope to keep the noble Lord, Lord Wilson, happy by being very brief. One of the things that came out of the committee’s report was the proliferation of principles and “have regards”, et cetera. It is ripe for a review and an overhaul, and I agree with the noble Baroness, Lady Noakes.

Baroness Kramer (LD)My Lords, I very much suspect that the noble Baroness, Lady Noakes, and I would find significant differences in our ideal list of the regulatory principles in Section 3B(1) of FSMA. I will argue in the next group for a “have regard” to the risks of the private credit market to financial stability. In group 8, my colleagues will argue for a “have regard” on sustainability and in group 10 for a “have regard” on financial inclusion.

These are all probing amendments, but they reflect the need for principles to be reviewed, debated and potentially changed by Parliament, so that a review would have input from the regulators and from the Government, but the final decision would rest with Parliament, as it has always done in primary legislation.

To pick up one of the issues that the noble Baroness, Lady Noakes, made about durability, constant churn is unacceptable and would leave the regulators and the financial sector in confusion, and none of us wishes for that. But I think that on the whole, we can look back and say that Parliament has behaved responsibly. Not everybody likes all the principles, but the financial system and the regulators have not had difficulty in delivering, or considering and making sure it is having regard to, those particular principles, particularly when financial stability is at stake.

To me, what underlies all this is the democratic process. I do not believe that principles can be abdicated to a regulator, which is what happens with the Bill—they go off into the long-term strategy. I believe this is for Parliament, and I would very much always support a review. Parliament has that right and that responsibility.

Some of us rather suspect that the removal of the principles to the five-year strategy has been to provide a covert way to diminish the climate change principles. The noble Baroness, Lady Noakes, whom I respect, would move them through the front door, but for many of us there is a strong suspicion that this is removing them through the back door so that the Government do not get the opprobrium that would follow from groups that are concerned about net zero and climate change. Some in the financial services sector are actually very dedicated to achieving climate change targets, but there are also plenty of voices that regard every climate change target and every net zero as a cost and a regulatory burden, and it seems to me that those voices have had very strong sway with the Government.

I suspect, frankly, that we would never have had climate change in among the principles had it not been for Mark Carney, and I very much doubt they will survive in any substance as part of the long-term strategy unless there is something of a volte- face in attitudes as we keep going through very extreme weather conditions and it becomes apparent that there is a huge financial cost and a huge risk to financial stability from the extreme weather conditions and the consequence damage to our overall economic circumstances.

As I say, if the Government wish to change the principles, they should do it through the front door in the way that the noble Baroness, Lady Noakes, proposes: raise the issues, tell Parliament that they wish to make changes and argue in favour of those changes. But that is a fundamentally different approach from taking principles, which I suspect they dislike, and moving them to a long-term strategy so that they will, over time, dwindle but without visibility or any parliamentary input.

Lord Altrincham (Con)My Lords, this is a welcome amendment because it raises important questions about the structure of our regulatory framework and in particular about whether the regulatory principle set out in Section 3B of FSMA—the eight principles—remain coherent, useful and properly calibrated to the circumstances in which we now find ourselves.

Over time, FSMA has accumulated objectives, secondary objectives, regulatory principles, “have regard” duties, reporting requirements and consultation obligations. Some of those are individually sensible and many were introduced for good reasons, but taken together, there is a real risk of regulatory layering. Duties and principles are added and new obligations are placed on regulators, but very little is ever taken away. The result is a framework that is increasingly complex and it is not always clear which duties genuinely drive regulatory behaviour and which simply sit on the statute book without translating into meaningful change. The amendment asks the Treasury to review whether those principles are duplicative or remain necessary, and whether the framework could be simplified or improved. There is also a wider question, which was raised by the Financial Services Regulation Committee in its report last year, about whether these sorts of duties actually translate into anything meaningful in practice. It is one thing for Parliament to place a duty on a regulator to have regard to a particular principle or consideration—as my noble friend Lady Noakes mentioned, that is exactly what the Leeds reforms are trying to streamline—but quite another for that duty to shape decisions in a clear, measurable and accountable way.

Needless complexity matters for firms as well as for regulators. A complicated regulatory framework does not stay confined to the regulator; it filters down into consultations, supervisory expectations, compliance systems, legal advice and business decisions. If the statutory framework is unclear or duplicative, the burden ultimately falls on the firms that have to comply with it. At a time when we are asking financial services to support growth, investment and competitiveness, we should be especially alert to unnecessary regulatory complexity. The UK’s high regulatory standards are not in question, but there is a question as to whether the framework through which those standards are delivered is as clear, efficient and proportionate as it can be.

I therefore hope that the Minister will engage constructively with the amendment. I would be grateful if he could explain how far the principles have already been reviewed in preparation for this Bill, in the light of the comments from the Financial Services Regulation Committee. Do the Government accept that the accumulation of regulatory principles and duties can create complexity, and do they believe that the existing Section 3B principles remain fit for purpose? This amendment raises a valuable point; I look forward to hearing the Minister’s response.

Lord Stockwood (Lab)My Lords, I am grateful to noble Lords for their thoughtful contributions to this debate. This clearly animates a lot of discussion. I particularly acknowledge the noble Baroness, Lady Noakes, and the work of the Financial Services Regulation Committee in effectively scrutinising the work of the regulators. It is important work, and we intend through this process to support that and not diminish it in any way. As was clear from those contributions at Second Reading, noble Lords place a strong emphasis on getting the regulatory principles right. The Government also take this matter very seriously.

Amendment 77 would require the Treasury to carry out and lay before Parliament a review of the regulatory principles in Section 3B(1) of FSMA. I am sympathetic to efforts to streamline the process of making regulation and to giving regulators a clear and manageable set of issues on which to focus. However, the Government have already considered this question and have carried out a review of the regulatory principles, as well as the other “have regard” provisions mentioned by the noble Baroness, Lady Noakes. The Government committed to this review in the Regulation Action Plan published in March 2025, and carried out the review with a view to identifying opportunities to rationalise those principles. As a result of that review, the Government concluded that each of the regulatory principles in the Financial Services and Markets Act 2000 is individually important; that they do not materially overlap with each other or with other requirements set out in legislation; and that they play an important role in providing transparency and supporting the Government and Parliament’s oversight of the regulators. However, the Government also found that the “have regard” provisions can reduce regulators’ ability to act strategically and with a clear focus.

Currently, the way that the principles operate results in the production of large volumes of information that do little to support effective overall scrutiny of a regulator’s performance. The Government have drafted the measures in this Bill with a view to rationalising how the regulators take these regulatory principles into account, without amending the principles themselves. We recognise that this is an area where there is significant interest; issues related to this amendment will continue to be debated during the passage of the Bill, when there will be an opportunity to discuss this area in greater detail. A further statutory review, beginning after Royal Assent, would duplicate the work that the Government have already undertaken.

I will come back to noble Lords’ specific questions in writing if I do not cover them later in the debate. I ask the noble Baroness to withdraw her amendment.

19:00:00

Baroness Noakes (Con)My Lords, I thank noble Lords for taking part in this brief debate on what is, I think, an important area.

The Minister said that the Government have already reviewed the regulatory principles and found them to be absolutely fine. I find that quite remarkable, given that they clearly duplicate other requirements and that some are, frankly, almost incomprehensible; they have grown up over the years in various ways. As the Minister knows, the burden on my remarks was on the proliferation of have regards and not just the regulatory principles, which we will be debating in the context of the Government’s clear desire to downgrade the way in which they operate and to reduce the ability of Parliament to hold the regulators to account. We will return to that issue.

This is an important area for the Government to look at again. They say that they have reviewed all the have regards—there are many of them throughout FSMA—but I cannot believe that they have concluded that no change to the legislation is required. It beggars belief, because the have regards clearly overlap in some areas and are restated in others. I continue to believe that a proper review should be undertaken. I will remind myself of what the Government’s so-called review has already found, because I am not sure that I remember the details of it at the moment—I will check up on it between now and Report—but, as I indicated earlier, I may well return to this theme on Report, if not with this specific amendment. With that, I beg leave to withdraw the amendment.

Amendment 77 withdrawn.

Clause 17Requirements to have regard to the regulatory principles

Amendment 78

Moved by

78: Clause 17, page 21, line 34, leave out subsections (2) to (11) and insert— “(2) In section 3B (regulatory principles to be applied by both regulators), in subsection (1), at the end insert—“(i) the need to consider—(i) the interconnections between private credit vehicles and PRA-authorised banks, insurance companies and pension fund, and(ii) the limitations of the FCA’s regulatory perimeter in managing the interconnection between private credit vehicles and non-regulated financial organisations.””Member’s explanatory statement This probing amendment would replace the removal of the regulatory-principles duties in Clause 17 with a new “have regard” to risks to financial stability arising from the interconnection of private credit markets with banks, insurers and pension funds, as well as with non-regulated institutions.

Baroness Kramer (LD)My Lords, this is very much a probing amendment, but I thought that we ought to raise this issue; the Bill seemed an appropriate place to do so. Frankly, it is an issue on which we have hardly touched in Parliament.

Private credit markets are a phenomenon that has surged since the crash of 2008. Market-based finance accounts for around half of the UK and global financial sector assets, according to the Bank of England. Global private market assets were estimated at $18 trillion in 2025. As Sarah Breeden, a deputy Governor of the Bank of England, said in a speech made this year:

“They have not yet been tested, at that scale and complexity, by a broad based macroeconomic shock in a higher rate environment”.

At the same time, public debt is close to post-war highs, not just in the UK but globally, making it more difficult to respond to any financial shocks.

People sometimes see the private credit sector as distinct from other parts of finance. In the UK, the banking sector has lent to private credit funds at a scale to provide them with liquidity, with pretty much no transparency to evaluate the quality of funds. There is clearly co-investing and interconnections through derivatives. I cannot find good data to work out where the exposure lies, but there have been enough articles raising warning signs to convince me that there is something serious here that must be looked at.

UK pension funds have invested heavily in private assets. The Universities Superannuation Scheme has £7.8 billion in private credit exposure. Institutional providers such as TPT Investment Management have launched schemes specially for the use of UK pension schemes, and the Mansion House Accord encourages even more investment into these private markets. As I listened to the Pensions Minister during the passage of the then Pension Schemes Bill, I heard what sounded like claims that these private assets are high-return, low-risk assets and perfect for pensioners with very little savings. It is because of such a naive understanding of private credit, among other things, that that Bill was so important. That is why protecting the fiduciary duty of pension trustees dominated its passage; the noble Baroness, Lady Noakes, and my noble friend Lady Bowles were instrumental in making sure that that fiduciary duty remained primary.

The insurance companies are deep into this, too. According to the Bank of England, in evidence given to the Lords Financial Services Regulation Committee:

“The interconnections between private markets and the life insurance sector have grown considerably, with analysis by the IMF … showing that approximately 35% of assets held by US life insurers and approximately 23% of those held by UK life insurers were allocated to private credit”.

It is clear that if the private credit market goes wrong, it goes wrong for the whole financial sector. It is not an exaggerated fear: the sector has serious liquidity issues. Anyone who picks up a newspaper can see that firms such as Blackstone, Oaktree, Apollo and Morgan Stanley, to name but a few, are now limiting or refusing redemptions. We cannot ignore the canary in the coal mine.

The Lords FSR Committee published a report on this sector in January, entitled Private Markets: Unknown Unknowns . At the end of that process—I give some credit to the committee—the Bank of England announced that it would conduct a system-wide exploratory scenario that will involve the banks, insurers, private equity companies and pension fund investors, but on a voluntary basis. It will report in 2027. The committee is to be commended for focusing on the issues in this sector, but I do not think that this satisfies a reasonable standard of parliamentary scrutiny or reflects a parliamentary responsibility to the public to make sure that we avoid another major financial crash. Therefore, my amendment is designed simply to put pressure on the Bank of England in order to get proper answers. I am still disturbed that it thinks it will do so only on a voluntary basis. I hope that the Bill as a whole can be amended to restore proper democratic oversight, and then Parliament could engage with finding a solution. One of the reasons so few people in both Houses are aware of the concerns about the issue is that there is virtually no vehicle for a debate, for consideration and for action.

The second part of my Amendment 78 addresses a problem that I have never heard widely discussed. If the private credit market goes bad—and the banks, because they are entangled with that market, begin to divest loans—what happens to small businesses dependent on bank credit? We saw this behaviour in 2008. After the crash, banks continued to fund the big companies but found every way possible—many of them legal but I would consider unethical—to call in loans to small companies. In loan agreements that were being paid in full and on time, there would be a covenant somewhere in the documents that said that if loan-to-property values fell below a certain level, the loan could be called. I am pretty sure that the small business never really thought that that was a significant paragraph in its loan agreement, but it proved the trigger and we saw basically every major bank exercise it.

The FCA refused to act and has always held the line that the regulatory perimeter means that it cannot offer protection to small businesses and that, instead, caveat emptor applies. To me, this is untenable in the complex world of finance that we have today. I want the regulators to take a proper look at the whole issue of the regulatory perimeter, if we are to go into a cycle of financial shocks.

Baroness Bennett of Manor Castle (GP)My Lords, it is a great pleasure to follow the noble Baroness, Lady Kramer, on what may be the most important amendment that we will discuss in Committee, and I hope we might discuss it on Report as well. As she said, there is a huge lack of discussion of this issue in Parliament, whereas if you go to the pages of the Financial Times , for example, you will see, pretty well every day, alarming reports and strong headlines expressing concern about the issue. I am aware that we are operating under heatwave conditions, as is the rest of the nation. As with our credit system, we have all been puffed up by a lot of hot air, much of which has indeed been financed by our financial system, so I will be quite brief, but I want to pick up a couple of points that the noble Baroness made.

The powerful argument about a voluntary engagement with the stress test is just laughable—with a sick kind of laugh. We know what voluntary regulation has done in so many different areas of our business sectors, and that is not the way to go forward. The noble Baroness also talked about pension funds, particularly about investing in private credit and the grave concerns that it raises. There is quite a bit of research that indicates that the people profiting from this are the managers and companies, and pension funds are getting the same or lower returns as they are from other investments.

The most useful way I thought I could add to this was to go through the Financial Times private credit headlines for this month alone. I will give a representative selection of them. The first is:

“Are insurers becoming dangerously addicted to private credit ratings?”

It is a question-mark headline, to which the answer is clearly given as “yes” in the article. Here are some of the others:

“Apollo’s flagship private credit fund hit by 17% redemption requests”,

“BlackRock private credit fund honours less than 40% of redemption requests”,

“Partners Group limits withdrawals at private equity fund for wealthy individuals”,

and

“Cliffwater’s flagship private credit fund redemption requests hit 17%”.

Rather than expound at length, I refer noble Lords to a single bookThis Time Is Different: Eight Centuries of Financial Folly by Carmen Reinhart and Kenneth Rogoff.

There is no reason to think that what we are doing now will be different from where we have been before. Private credit is a new structure of a very familiar form, and we have seen what happens with these new financial-engineering structures. The noble Baroness is doing an important job here of at least starting a discussion on this. That discussion should be held at much greater length in the main Chamber, and its subject should worry us all.

Baroness Noakes (Con)My Lords, the noble Baroness, Lady Kramer, was kind enough to refer to the committee I chair. I will offer a few comments on this area.

First, in line with what I said on the previous group of amendments, I do not believe that this is a regulatory principle in any real sense. It is certainly not one directed just at the PRA and the FCA; for example, the system-wide exploratory scenario, which the noble Baroness referred to, is being undertaken by the financial stability arm of the Bank. She referred to Sarah Breeden—that is her area, and she is not in the PRA or the FCA.

The noble Baroness, Lady Bennett of Manor Castle, read out some headlines from the Financial Times . She is right that there is a lot of noise around private credit. It is all based in the United States at the moment. It is often said that what starts in America comes to the UK, but there are a lot of differences between what has happened in the US, including what has gone seriously wrong, and what has happened here. It is encouraging that the Bank of England has taken the initiative to carry out the system-wide exploratory stress scenario—it is the only central bank in the world to do so.

There was criticism that this was voluntary, and that is because the players in the private credit market are not regulated organisations and so they have no obligation under existing law to provide information. However, it is my understanding that the degree of involvement of the organisations taking part that are not directly regulated by the PRA or the FCA—or are not involved in the activities we are discussing—has been satisfactory.

One thing I considered tabling for this Committee was the question of whether the Bank of England has sufficient powers to get the information from the non-regulated sector if it needed to do so. I would be grateful if the Minister could reflect on that question. All the time the information is being adequately obtained voluntarily, I do not see any need to legislate for it; I am just not aware of whether there is a backstop power, and I ran out of brain power for drafting an amendment to find out about that. I am grateful to the noble Baroness for giving me a cue to raise this issue.

A lot of issues arise in relation to the impact of private credit on the existing regulated organisations—banks and insurance companies—but it is also fair to say that, although there is not complete transparency on what the second-order impact would be if there was a stress in this situation, there is a lot of awareness and supervisory engagement with the key players, as was explained to us during the conduct of the inquiry that my committee undertook. The committee did not find such a scary situation as has been portrayed by other Members of the Committee this afternoon.

19:15:00

Lord Altrincham (Con)My Lords, this amendment raises an important question around private credit and how our regulatory framework should respond to emerging risks in modern financial markets. I look forward to the Minister’s tactful comments on this amendment, given that the noble Baroness, Lady Kramer, spoke so well in favour of private credit in our debate on the fifth group on our first day in Committee. Here we are with the problems of private credit on our second day in Committee. The Minister will be extraordinarily tactful in handling that.

We will have a wider debate on Clause 17 and the regulatory principles in future groups, but this amendment touches on some of those broader questions. The specific issue raised here—private credit—is an important and timely one. Private credit has grown considerably as a feature of modern financial markets; it has, in fact, grown partly as a consequence of regulation. We are dealing now with regulation of a consequence of regulation as the markets have evolved. It can provide an important source of finance outside traditional banking channels, supporting businesses that need capital to invest, develop and grow. For that reason, we should be careful not to respond to its expansion in a way that unnecessarily restricts access to safe and productive credit; indeed, the Financial Services Regulation Committee concluded in its report earlier this year that private credit has developed rapidly and plays a useful economic role.

That is particularly important at a time when we want firms to invest, expand and access the finance they need. We should not create a regulatory environment in which the answer to every emerging market development is simply more regulation without proper regard to the consequences. Indeed, the Government have been keen to support private equity through greater investment from assets such as pension funds in the UK. If they want this sector to continue developing, they must ensure that regulation supports, rather than restricts, access to credit for consumers who choose to use these products.

At the same time, it is right to recognise that financial markets do not stand still. The system changes over time, and the regulatory framework must remain alert to those changes. Areas such as private credit, non-bank finance, digital finance and other fast-moving parts of the system demonstrate the need for regulation that reflects the market as it is developing, not simply the market as it looked when earlier legislation was drafted.

The key point, therefore, is one of balance. We need a market that is dynamic, innovative and capable of providing finance to the businesses on which growth depends, but we also need a regulatory framework that is sufficiently up to date to understand and monitor emerging risks. We should keep in mind, though, that risk can never be eliminated entirely. The role of regulation should be not to remove all risk from the system but to ensure that risks are properly understood, proportionately managed and developed with an eye to supporting economic development and growth.

For those reasons, we will listen carefully to the Minister’s response.

Lord Stockwood (Lab)My Lords, I welcome the focus of the noble Baroness, Lady Kramer, on the vulnerabilities in the private credit system.

Although the Government are clear that the growth of private credit has brought benefits to the real economy, we and the financial regulators are very conscious of the potential vulnerabilities in this sector. Just last month, the Chancellor and the Governor of the Bank of England joined their fellow G7 Finance Ministers and European Central Bank governors in agreeing that potential risks in the private credit ecosystem call for continued monitoring, including that of the interconnections with banks and insurers.

The amendment from the noble Baroness, Lady Kramer, would require the PRA and the FCA to consider private credit’s interactions with the wider financial system in all cases where the regulatory principles are engaged, or else their decision-making could be unlawful. I assure her that the regulators are already working to understand these vulnerabilities deeply and to address them where necessary. This work does not require placing additional duties on the regulators.

I will highlight the existing work of those regulators. First, the Bank of England’s Financial Policy Committee has been focused on the risks of private markets for many years, and the Chancellor’s most recent remit letter to the FPC asks that that work continues. I specifically note the Bank’s system-wide exploratory scenario on private markets, the SWES—as if we needed another acronym. It is examining how a stress scenario could affect the UK’s private markets ecosystem and interconnected banks, insurers and pension funds, with significant participation across the industry. The UK’s system-wide regulator, the Bank of England’s Financial Policy Committee, is the right authority to carry out this work, and its findings will be laid before Parliament when it is complete.

For its part, the FCA also maintains a close focus on these risks, including in its firm-level supervision. Where specific issues are identified, targeted interventions follow. We also welcome the FCA’s work to improve the visibility of risks and data availability through its reviews of the alternative investment fund managers directive framework, and its efforts to raise standards on conflicts of interest, valuation practices and risk management.

I note the noble Baroness’s concerns about the FCA’s regulatory perimeter, but I emphasise that the marketing of funds in the UK is indeed subject to UK regulatory requirements, protecting UK investors. Further, the PRA continues to assess and mitigate risks from private markets to the banks and insurers it regulates. This includes its 2024 thematic review of private equity-related financing activities with banks.

Finally, given the cross-border nature of the private credit ecosystem, the Bank and the FCA are actively engaged in international work, including at the Financial Stability Board, which is chaired by the Governor of the Bank of England. The Government believe that, under our regulatory framework, vulnerabilities in private credit are being understood and addressed where needed, but there is of course much room to improve. I therefore ask the noble Baroness to withdraw her amendment.

Baroness Kramer (LD)My Lords, I will of course withdraw this amendment, but I wanted to get this issue on the agenda, and we need to continue to do so. I say to the Government: do not be complacent in this situation. A few weeks before the crash in 2008, everybody in government would have told you how well the financial sector was functioning. Being a cynic can be quite helpful. I am particularly concerned about the impact on small businesses when we run into the next financial shock, because there will be one. That regulatory perimeter is a serious issue that the Government should be looking at. I do not know whether you can get the regulators to look at it voluntarily. As far as they are concerned, you go to Parliament only to explain; it is not where you take instruction. I am concerned about these issues. I look forward to the amendment in the name of the noble Baroness, Lady Noakes, on private credit, which will come later. With that, I beg leave to withdraw my amendment.

Amendment 78 withdrawn.

Amendment 79

Moved by

79: Clause 17, page 21, line 34, leave out subsections (2) to (11) and insert— “(2) In section 3B (regulatory principles to be applied by both regulators), in subsection (1), at the end insert—“(i) the need to assess the impact on the taxpayer of any provision of backstop arrangements by the Bank of England to private stablecoin.””Member’s explanatory statement This probing amendment would replace the removal of the regulatory-principles duties in Clause 17 with a new “have regard” to the risks to taxpayers should the Bank of England provide a liquidity backstop to private stablecoin.

Baroness Kramer (LD)My Lords, here I am again with another issue that I want to raise. It does not necessarily look like it, but this is another constitutional amendment. Digital money and stablecoin are coming. As I have said in the House before, I am not King Cnut but I am concerned that both the industry and the regulators treat stablecoin as merely a change in plumbing in the payments system. I understand the desire for the UK to be an attractive place for stablecoin companies and the need to build a substantial sterling stablecoin sector. What concerns me is that, at scale, it has huge consequences for the taxpayer to carry the liabilities, and it determines who has their hands on the levers of economic power. I will not pursue that last issue; it would take about 10 minutes and the Committee is beyond coping with that.

In October, the FCA will publish regulations for the non-systemic stablecoin players but, on Monday, the Bank of England launched its policy statement and draft rules for systemic stablecoin. The document is clearly a loosening of rules previously under discussion, but my attention was grabbed by the Bank’s confirmation that it will introduce a central bank liquidity facility for systemic stablecoin. In other words, if there is a run on stablecoin, the taxpayer is on the hook. It is true that liquidity facilities are offered to the banks but to extend this to stablecoin is a major decision. I am not saying that it is right or wrong, but a decision on this scale, with the liabilities that are consequent, is above the pay grade of the regulator. This should be a decision in which Parliament is fully engaged. I beg to move.

Baroness Noakes (Con)My Lords, the Financial Services Regulation Committee has also been looking at stablecoin, so I have a few words to say on the topic. I go back to my earlier point: this is not a regulatory principle that can be applied by the FCA and the PRA. It has very little to do with them, as it is the financial stability part of the Bank of England that has issued the policy. The backstop is just one part of the arrangements, as the noble Baroness, Lady Kramer, will be aware. A very significant part of the assets of stablecoin issuers also need to be held in unremunerated form at the Bank of England—30%, which is a significant amount of money. If the noble Baroness is worried about the cost to the taxpayer, she might also reflect on the gain to the taxpayer for all the time that there is not a crisis because the Bank of England has access to free money, which is part of the whole deal.

The stablecoin package needs to be looked at as a whole, rather than one small part of it being picked out. The noble Baroness may still disagree with it, but it is a calibrated package which balances the risks, including keeping one-to-one asset backing, which will also go a long way to allaying her concerns.

Baroness Neville-Rolfe (Con)I agree with the noble Baroness, Lady Kramer, that digital assets are a serious issue and that they deserve proper scrutiny. We come at it from a slightly different perspective. I note the point made by my noble friend Lady Noakes that this is not a matter for regulatory principles.

This week, as we have heard, the Bank of England published its final policy statement and draft code of practice for sterling-denominated systemic stablecoins. This may go some way to supporting institutional scale-up, but we are concerned by the general reaction, which has been that the fundamentals have not changed and that the prevailing regime we are left with could still leave UK issuers less attractive internationally.

We are very grateful for the work of the Financial Services Regulation Committee, under my noble friend Lady Noakes, with the help of her very distinguished committee. Yet again, it features in almost every part of this Bill. Its report, Stablecoins: W aiting for R egulation , makes it clear that the UK, in its view, is lagging behind the US and EU on stablecoin regulation. Stablecoins and other forms of digital money are no longer simply niche products or theoretical innovations; they have the potential to become part of the wider payments and financial infrastructure.

The danger now is that we risk creating, or at least allowing to persist, a regulatory grey zone. Firms need clarity on the duties, expectations and requirements that they will have to meet. That is why we are calling for a much clearer digital asset strategy from the Government. We need Ministers to take a position of leadership in this area. It is not enough to simply respond to developments as they arise in different parts of the digital stratosphere. We have tabled amendments alongside the noble Lord, Lord Ranger, who is somewhat expert in this area and is not here today, to probe the Government on the wider question of digital assets and digital finance strategy. We will come to those amendments in a later group. I do not want to pre-empt that debate now—not at this late hour, with so few people in Committee on such a hot day.

This amendment touches on the same underlying pointthat the Government need to provide clarity and certainty. They need to provide leadership, whatever that is. I would be grateful if the Minister can briefly explain the Government’s position on stablecoins, and— in response to the point that the noble Baroness, Lady Kramer, has rightly raised—explain how stablecoins will help growth and competitiveness.

Lord Stockwood (Lab)Amendment 79 would require the FCA and PRA to assess the impact on the taxpayer of any provision of backstop arrangements by the Bank of England to private stablecoin when exercising their general functions. I support the noble Baroness’s goal of ensuring that all government and Bank of England activity provides good value for the taxpayer. The Bank of England already has a duty, established in the joint memorandum of understanding with HMT, to

“ensure value for money by minimising financial costs and risks to its capital”.

19:30:00

The Bank of England’s proposals for a backstop facility would allow systemic stablecoin issuers to monetise their sterling-denominated UK government debt securities in exceptional scenarios where they might not otherwise be able to do so, helping to mitigate potential financial stability risks. The Bank has also indicated that access to any such backstop lending facility would only be for eligible, solvent and viable systemic stablecoin issuers. The Government are working closely with the Bank of England to ensure that the regime for systemic stablecoin considers a wide range of factors, including value for money for taxpayers, maintaining financial stability and the UK’s international competitiveness.

I also note that, as drafted, the amendment would place requirements on the FCA and PRA to consider the Bank of England’s regulatory regime when making decisions, which would be inappropriate, as the FCA and PRA are independent bodies with their own objectives. That said, effective co-operation between the regulators is, of course, important. I therefore ask the noble Baroness to withdraw the amendment.

Baroness Kramer (LD)At this hour, the only thing to do is to withdraw the amendment. I thank the Committee.

Amendment 79 withdrawn.

Committee adjourned at 7.31 pm.