Financial Services and Markets Bill [HL]

Committee (6th Day)

16:16:00

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

Clause 39Excluded activities and prohibitions: powers of PRA

Debate on whether Clause 39 should stand part of the Bill.

Baroness Neville-Rolfe (Con)My Lords, our amendments in this group concern the future of the bank ring-fencing regime. I will start by setting out clearly the position that we have reached as the Official Opposition. Through our diagnostic work, we have found a consensus that the bank ring-fencing regime is no longer fit for purpose. It adds costs to banks and their customers and it has been superseded by other rules since its introduction. A regulatory regime should not be preserved simply because it exists. It must continue to justify itself against present-day risks, tools and costs. In our view, the ring-fencing regime no longer does so. The next Conservative Government would repeal the post-global financial crisis ring-fencing regime, bringing the United Kingdom more closely into line with other international jurisdictions. Amendment 160A reflects that policy.

It is worth reminding ourselves what ring-fencing is. The regime was created through the Financial Services (Banking Reform) Act 2013, which amended FSMA 2000. The implementing regulations and orders came into effect in 2019, more than 10 years after the onset of the global financial crisis. At its core, ring-fencing is the structural separation of certain retail banking activities from activities normally conducted by international wholesale investment banks. In practice, that means a separate legal entity, with restrictions on what it can do and how it can interact with the rest of the banking group. Retail and small business deposit-taking is placed inside the ring-fence, while certain other activities must be conducted outside it.

The regime was introduced for serious reasons. The Parliamentary Commission on Banking Standards, convened after the financial crisis, identified three broad objectives: to make it easier to deal with failing banks without taxpayer-funded solvency support; to insulate vital banking services used by households and SMEs from problems elsewhere in the financial system; and to curtail implicit government guarantees, thereby reducing risks to public finances and incentives for excessive risk-taking.

Since ring-fencing was designed, the wider regulatory landscape has changed profoundly. We now have a much more developed resolution regime. We have recovery and resolution planning. We have operational continuity arrangements in resolution. We have stronger capital and liquidity requirements. We have the leverage ratio, the liquidity coverage ratio and the net stable funding ratio. The Bank of England, the PRA and the FPC have a broad toolkit for reducing the risk of bank failure and dealing with failure if it occurs. Moreover, we have sounder management of banks as a result of the senior management regime.

That is precisely the point that we wish to highlight in our amendment. The risks that ring-fencing was designed to address are now addressed through other more modern, more targeted and more internationally coherent tools. The 2022 Independent Panel on Ring-fencing and Proprietary Trading, chaired by Sir Keith Skeoch, reported that the regime has an annual cost to the UK banking sector of around £1.5 billion, which comes from running multiple separate legal entities, duplicating governance systems and raising the cost of capital and lending conducted by non-ring-fenced bodies. This is because large retail deposits inside the ring-fence cannot be used as sources of finance elsewhere in a group to support lending and investment. That review also found that the reduction in the implicit government guarantee and progress in ending “too big to fail” were not attributable to ring-fencing but instead to the development of the UK resolution regime. Ring-fencing is therefore a good example of a broader problem in financial services regulation: rules that are introduced in response to a crisis which then remain in place long after the conditions that justified the change. We are now left with two regimes that are not aligned in the way that they aim to address “too big to fail”. That adds complexity, cost and burden. It also risks making the United Kingdom less competitive than jurisdictions that rely on resolution, prudential supervision and capital frameworks, rather than structural separation of this kind. Clauses 39 and 40 show that the Government recognise that there is a problem. They seek to make changes to the ring-fencing regime and give the PRA more flexibility over ring-fencing arrangements, but in our view these reforms do not go far enough.

Amendment 160A would repeal Part 9B of FSMA and the core statutory ring-fencing provisions introduced after the financial crisis. It would require the Treasury, the PRA, the FCA and the Bank of England to take the necessary steps to unwind the related rules and guidance. It would require an orderly transition, with attention paid to financial stability, continuity of core banking services and the competitiveness of the United Kingdom. Consumer savings would continue to be protected. Banks would continue to be subject to prudential supervision. Resolution planning would remain in place.

This reform matters for competitiveness. Other major financial centres do not operate a UK-style ring-fencing regime. If UK banks are required to carry costs and structural constraints that their international competitors do not face, that affects the cost and availability of finance. It affects the ability of banks to deploy capital efficiently and it affects the attractiveness of the UK as a place to operate and invest in. It also matters for customers. Regulations that increase costs without delivering commensurate benefit feed through into pricing, service innovation and lending capacity.

If the Government believe that ring-fencing remains necessary, will the Minister explain precisely what financial stability objective it now achieves that is not already achieved through the resolution regime and other prudential rules? Ring-fencing was created in response to a particular crisis at a particular moment for reasons that were understandable at the time. But regulation must evolve. It must be reviewed against current conditions. It must be removed when it no longer serves its intended purpose.

Finally, I would add that whatever changes are made, it is right to have a proper process of consultation with business and stakeholders and a follow-up report to Parliament. That is the purpose of my Amendments 159 and 174.

Lord Pitt-Watson (Lab)My Lords, if I may respond to that, I had thought until recently that what we were debating was a response to the Skeoch commission established by the last Government, but we have new amendments now, it seems—Amendment 160A and the abandonment of clauses—that are really throwing ring-fencing out. I guess that they are tabled in response to a speech by the leader of the Conservative Party, Kemi Badenoch—a speech underpinned by a policy document from her party. That speech, the policy document and this amendment are not asking to think things through further from the Skeoch report: they have made their minds up. Kemi Badenoch announced that a future Conservative Government will end ring-fencing—definitive end of discussion. That, I believe, would be a bad idea. So did the review by Keith Skeoch, who was commissioned by the Conservative Government to opine on this and whose recommendations we are now trying to take forward.

Worse still, the evidence for Mrs Badenoch’s statement is based on really questionable claims, numbers and Mickey Mouse logic. For example, the claim was that the Skeoch report reckoned that the cost of ring-fencing was £1.5 billion. In fact, the report notes that that figure was presented to the review and that

“it has not been possible to draw a strong conclusion based on aggregating these costs”.

The report recognises that there are some costs to ring-fencing, but notes that that was expected and acknowledged by the Independent Commission on Banking, which said that that would not be a cost to the economy, but rather

“a consequence of returning risk to where it should be—with bank investors, not taxpayers—and so would reflect the aim of removing government support and risk to public finances”.

The policy paper has a Mickey Mouse logic that costs should be placed on the taxpayer, when they should be paid by the banks and the investors in the banks.

We should of course be in favour of reviewing the ring-fencing regime to be sure that it is properly doing its job. This is what Skeoch did and, now, if this Bill follows that report, I ask the Minister to ensure that we are careful with definitions in the implementation. For example, we should ensure that, within the growth allowance, the definitions are very carefully drawn up. We do not in future want the taxpayer subsidising proprietary trading—what many refer to as “casino capitalism”.

Badenoch suggests that her reforms would release £450 billion in capital—another number from nowhere. I know that the noble Baroness, Lady Neville-Rolfe, will not have a lot of time to sum up, but I would be grateful if she might write afterwards on how these numbers have been derived and what reduction in bank equity capital they assume. If these numbers do not stack up, that pulls the rug from under the policy document and the speech that was made by the leader of the Conservative Party.

The policy paper suggests that we should abandon the Financial Ombudsman Service. In this industry, which represents 8% of GDP but attracts 42% of corporate fines, Mrs Badenoch has decided that the front-line institution that protects consumers should be abolished. We could say that this does not matter and that Kemi Badenoch is unlikely any time soon to be Prime Minister, but it should matter to us. As the noble Baroness, Lady Noakes, has pointed out, there is considerable expertise in financial services across all parties in the House. Although we have differences, we are united, I hope, in trying to set a framework for the industry that allows it better to serve its purpose: to serve the outside world; to help get money from point A, where it is, to point B, where it is needed; to keep our money safe; to help us transact; and to help us share risk.

If the Opposition Benches feel mandated to follow the policy documented last month, we have a problem. I could not find a single reference in that document to any input from any consumer group anywhere. It felt like a lobbyist document from the City, but I have talked to at least one lobbyist who said “No, it goes way further than we would ever suggest”.

Baroness Noakes (Con)In Committee, it is normal to address the amendments and not opposition parties’ policy documents.

Lord Pitt-Watson (Lab)The amendment has been put to us at the last minute. The points that it relates to have been there for weeks, indeed months, but I would argue that what has triggered the amendment is the speech by the leader of the Conservative Party and the policy document that underpins it. If the noble Baroness thinks, like me, that the policy document is lacking, I would be pleased to hear it because, as she knows, it would abolish the FOS and seek to mandate regulatory changes that come close to invading the independence of the regulator.

16:30:00

There is no balanced discussion about why these rules are there in the first place. My noble friend Lord Davies reminded us of Chesterton’s fence: do you remember why that rule was put there in the first place? I went back to what Mervyn King—the noble Lord, Lord King —said after the global financial crisis:

“don’t try to pretend that regulators can ever be so clever as to stop banks from taking risks that will one day be serious, but try to make sure that if those risks do occur, that the system has firebreaks and firewalls within it so that the parts of the system that you really, really care about and cannot afford to go under – the payment system [and] retail deposits – are completely separated from the things that could go wrong”.

That is why that fence was put there. If we are going to remove it, we need a reason and we need to address the dangers that the noble Lord, Lord King, set out. Those dangers were also summarised by Sir Martin Taylor, the former chief executive of Barclays Bank. He said:

“The investment banking activities of a universal bank were at all times parasitic on the retail bank balance sheet. I used that word carefully”.

That is Chesterton’s fence, but the paper contains no consideration of the real experience of savers and businesses or thought about taxpayers and citizens who now stand behind the financial services industry, behind the ring fence.

To return to the Bill, it should help to lay the foundation for a finance industry that can effectively fulfil its proper purposes to the world. I think that we all agree on that. Although we may not agree on everything, I hope that, as we move forward to Report, we will be using the considerable expertise of your Lordships’ House to get this Bill right, not relitigating on Report the unfortunate policy document published last month.

I shall say one final thing before I finish that I hope we will all agree on. The papers from this document make it sound like the finance industry and the City of London are synonymous, except for what looks like a late edit, which tells the reader that the many references to the City of London mean other places, too. Perhaps in the new spirit of devolution, all parties could note that two-thirds of employment in finance is outside London. It is in Edinburgh, Glasgow, Manchester and Leeds. It is everywhere—the cash point, the local bank manager or the call centre. When we think and publish about the purpose of the industry, we need also to think and acknowledge that it is based in the whole of the country and that it is there to serve the whole country.

Lord Tunnicliffe (Lab)I rise to speak to the Motion that Clause 40 does not stand part. As I explained at Second Reading, I have no professional knowledge of the banking industry but, because of circumstances, for more than 14 years I have been in this Room talking about the finance industry and doing my best to pretend to understand at least bits of it.

The one thing that I think I bring to this Bill is my long experience of concern about problems of little likelihood, even small likelihood, but with catastrophic results if the risks mature. It is on that theme that I am concerned that we are creating risks. In 2008 we had the crisis. It is now 18 years ago, just long enough for most people to have forgotten it. We had the Vickers review, which we all felt was pretty good, and after that came ring-fencing, and we convinced ourselves that this would solve most of the problems. There were some other things as well. There was the splendid clause that vested criminal responsibility on the boss of a subordinate who committed some criminal offence. Clearly this was too uncomfortable for the City, so it was changed. I led the opposition to the change and failed with a 200-vote tie. Because we were the Opposition not the Government, we failed.

The preparation for my consideration of this ring-fencing issue caused me to read through a lot of stuff. I came to the conclusion that the ring-fencing was not nearly as effective as we had felt it would be at the time, but, in a sense, I was reluctant to be overly concerned about it because I felt that the resolution regime developed by the Bank of England, in which I had personally taken a great interest, would be good enough to pick up the holes in the Bill.

I was comfortable in this position—almost willing to ignore it—until, at Second Reading, the noble Baroness, Lady Kramer, for whom I have immense regard, rather woke me up. I quote her speech:

“Picking up on the point made by the noble Lord, Lord Tunnicliffe—I disagree with him completely—that in the case of resolution, we do not need ring-fencing because we have a resolution regime in place or we can weaken the one because the other exists. Will the Minister be able to look me in the eye and say that he would activate a bail-in bond scheme if a big bank failed? The consequence would be huge financial instability among those who held those bail-in bonds—I am talking about the insurance companies and pension funds. Many would be on the verge of collapse if we ever exercised bailing in those bonds. That is one of the reasons why, in the financial crises that have happened, no Government have ever taken that step ”.—[ Official Report , 8/6/26; col. 1206.] I do not have the weight of knowledge to be able to disregard such a statement.

The Minister was kind enough to facilitate a visit to the Treasury and the Bank of England to take me through the bail-in regime. It took four people from the Treasury and four from the Bank of England to try to persuade me that it was in good hands. I came out of that uncomfortable. If one is uncomfortable about a potential catastrophe, one feels that one has to pursue it, I am afraid. Then one comes up against the mechanisms of legislation; here, I have to give notice of my concerns. If we are going to remove or take away activity from the ring-fencing solution and replace it with the resolution regime, it is important that that is tested much more intrusively than is proposed. I hope to persuade the Minister that, between now and Report, some mechanisms that are convincing to like-minded, fair-minded people have to be put together so that that balance will be achieved.

I was responsible for all sorts of safety, but particularly in the railway industry. You would not be able to do this in the railway industry. If you make a change that is of critical importance, there is a set procedure that must be gone through, and it must be signed off at the highest level. We should recognise that Clause 40 is of that magnitude. It just so happens that, in yesterday’s Times , there was an article that said:

“The Bank of England is planning to loosen rules it brought in to make the financial system safer after the 2008 crisis despite worries about the proposed changes voiced by some of its own officials … The central bank’s financial policy committee announced on Tuesday that it intended to revamp some regulations on the loss-absorbing capital that lenders must hold because it wanted to tackle the ‘unintended consequences’ of its rules and make it easier for banks to lend to households and businesses … Andrew Bailey, the Bank’s governor, insisted the overhaul would ‘make our capital regime more effective, proportionate and better calibrated to the risks in today’s financial system without unduly compromising the safety and soundness of firms’”.

“Without unduly compromising” is not nearly a powerful enough test. The limited test is that the risk should be lowered—as low as reasonably practicable.

We have all sorts of problems in this world, and all sorts of unprecedented things are happening. We have cryptocurrency. Now, I do not understand cryptocurrency; it seems a series of charades to me, but I suppose the purist would also point out that the dollar is a series of charades, because that is the essence of paper money. Nevertheless, things that can go and down up like that are fundamentally dangerous, given how large they are becoming in the banking world.

We also have the unregulated banking area. Without knowing the detail, but from listening to people who know about it talk about it, that seems to be an increasing threat. We also have wars all over the place. If we are moving to a regime where we give up ring-fencing, depending on resolution, we will need to subject it to a stronger set of tests through the processes of this legislation.

Lord Massey of Hampstead (Con)I support Amendment 160A. I want to start by briefly addressing a couple of issues raised by the noble Lord, Lord Pitt-Watson. Most importantly, I want briefly to quote the conclusions of the Skeoch report. The panel judges that the ring-fence

“is worth retaining at present”

but adds a number of considerations:

“The Panel recognises that the regime’s benefit will likely diminish with time, especially as the resolution regime—designed to ensure the continuation of all critical functions … —is embedded. This is because … UK authorities become comfortable with the viability of the large banking groups’ restructuring capabilities”.

I mention this only because the impression was given—

Lord Pitt-Watson (Lab)I did indeed talk to senior members of the Skeoch commission before writing my speech, and what I said is completely consistent with the conclusions of the Skeoch commission, which was set up by the previous Conservative Government, as I said.

Lord Massey of Hampstead (Con)I am just reading the conclusions from the report, my Lords. They make it very clear that the continuation of ring-fencing made sense at the time the report was written, but the commission clearly envisaged that it might not be needed over the passage of time. I also remind noble Lords that Glass-Steagall was abolished some 25 years ago with no detriment to the American banking system. I say this just to make the point that it is not so obvious.

Lord Pitt-Watson (Lab)I find it difficult to believe that someone has told me that the withdrawal of Glass-Steagall, which took place 13 years before the global financial crisis, had no detriment to the American banking system. As I say, I have read the Skeoch report and discussed it with senior members of Skeoch, and I believe that what I said is entirely consistent with the recommendations that they made to the Government and this House, which is recognised in the Bill.

Lord Massey of Hampstead (Con)I also draw attention to the abolition of FOS, which the noble Lord mentioned. I draw the Committee’s attention to Amendment 172A, which discusses the changes proposed to FOS. It is to be abolished and replaced with something called the financial adjudication service, which is a broadly similar methodology to give redress to consumers and private clients, in the event of problems with the firms that serve them. While it is a change, it is a reform to FOS with an organisation with a different name, but it is not a straightforward abolition of that very important process. This will be dealt with in that later amendment—not in my name, I might add.

Governments, like some businesses, are very good at locking the stable door after the horse has bolted. Our reaction to 2008 was an example of just that. But we are now 18 years on and the banking sector has been solid during that time. However, as we know, growth has flatlined, despite many years of ultra-low interest rates. I am not suggesting that we are an exception here; there has been a similar experience across most of Europe. But we now have a substantial cost of capital for business to bear, with interest rates stuck at 3.75% and sadly not much prospect of a reduction in the near term.

16:45:00

As the Minister understands very well, given his business background, growth will be generated largely through business and, in order to grow, a degree of calibrated risk-taking is essential. I am sure noble Lords would agree with me that we have become a deeply risk-averse society. I recognise that reversing measures that are supposed to reduce risk can be very challenging, but I believe that the Government are missing an opportunity to go further than the measures in this Bill and take more decisive action. The loosening of capital requirements and the ending of the ring-fencing regime could help to kick-start the freedoms that banks need to start lending more to SMEs and others, and this would encourage the sort of business expansion that we all seek.

On the specific question of ring-fencing, the Skeoch review estimated that abolition of the regime would significantly reduce the cost and structural constraints on banks. Four years on, with the resolution regime considerably more mature, we are entitled to ask whether the shelf life of the ring-fencing regime has now expired. The Bill’s impact assessment separately estimates £1.1 billion in admin savings, with a further £550 million in ancillary benefits—some £1.65 billion in total—from the measures already in the Bill. On the Skeoch estimate, which I understand is disputed, abolishing ring-fencing outright would roughly double that figure, while also unlocking incremental lending capacity in the economy. This is not a marginal saving. A report from PwC and TheCityUK estimated the annual regulatory compliance costs for the financial sector at around £34 billion. The combined savings would amount to some 10%, which is an opportunity.

What does ring-fencing really achieve today? We already maintain separate regulation for retail and wholesale banking in any event, without that distinction being enshrined in law. We have separate legal entities, extremely strong cash rules and a retail sector protected by several thousand pages of regulation governing the banking sector. Ending ring-fencing would not change the actual risk that this country is running but would create new freedoms for banks that would remove some structural constraints. The exposure remains, wherever it sits, but this would save the sector an amount potentially in the region of £1.5 billion. It may lead to less business migrating to private credit funds, which, as we know, are themselves partly financed by our own banks. It would remove one more artefact of a regime whose usefulness erodes with every year that passes.

Reform has become hard to distinguish from managed abolition, so I urge the Government to use this opportunity to materially simplify the rules, reduce unnecessary expense and not tinker with the ring-fencing rules but just abolish them.

Baroness Noakes (Con)My Lords, I have some experience of ring-fencing as, in my capacity as the chairman of the risk committee of a major bank, I oversaw the implementation of ring-fencing. At that time, it was a significant risk to the bank that we would not be in compliance with the ring-fencing legislation and therefore this required considerable oversight.

I am clear that ring-fencing has been a very expensive element of the post-financial crisis reforms. The Skeoch report, which has been referred to, put the upfront cost at £2.9 billion and the ongoing cost at £1.5 billion, which amounts to about £14 billion to date. The noble Lord, Lord Pitt-Watson, tried to undermine those numbers, but, from my experience, I do not doubt that order of magnitude. More importantly, the implementation, and, to a lesser extent, the ongoing element—

Lord Pitt-Watson (Lab)There were two points, one of which is that the Skeoch report says that the numbers given are not its numbers. The report is clear that whatever the cost of ring-fencing, it is not a cost to the economy—this is what the Vickers report said earlier —and that, by removing ring-fencing, it suddenly becomes a cost to the taxpayer rather than to the bank’s investor. That is the key point that Skeoch is bringing to our attention.

Baroness Noakes (Con)My Lords, I understand the point that the noble Lord is trying to make, but I argue that the risk of the taxpayer picking up the tab is now considerably lower, which means that it is reasonable to re-examine whether ring-fencing should be an ongoing part of the regime.

I was about to say that, in addition to the cash costs, there was during the implementation, and to some extent on an ongoing basis, considerable diversion of scarce management resource, which will have damaged the banks in a number of ways. My noble friend Lady Neville-Rolfe has registered her opposition to Clauses 39 and 40 standing part of the Bill. I support Clauses 39 and 40 on the grounds that any improvement in the ring-fencing regime is better than none. The flexibility that will come with letting the PRA handle some of the changes via rules is a constructive solution. The PRA is, however, heavily invested in ring-fencing and no one should be under any illusion that the power will be used by the PRA to make significant changes to the regime. That is why I believe that we need to make provision to go further and I support the other amendments in this group.

As we have heard, since the implementation of ring-fencing, the parallel and very expensive requirement to maintain and develop resolution plans has been implemented, and the Bank of England has confirmed that the major banks are resolvable. In addition, bank capital levels are significantly above the levels that they were immediately after the financial crisis and well above regulatory minima. Regulatory capital is expensive and can restrict the ability of banks to lend to support the economy. I am always extremely sceptical about claims that reducing capital requirements on banks will immediately lead to masses of extra lending by the banks—there is some element of truth in it, but the effect is not as great as might be claimed.

We are hugely proud of the robustness of our financial regulation and what we do in the UK is often copied abroad. No one anywhere else in the world has ever copied ring-fencing and that is for a very good reason: it is a very expensive solution to a problem that can be and has been addressed in other ways. That is why I support the amendments from my noble friend, which pave the way for eliminating ring-fencing. It cannot be done away with overnight, so I support the measured approach taken in my noble friend’s Amendment 160A.

Lord Vaux of Harrowden (CB)My Lords, it has been an unusual experience to have had a debate with two sides to it on the Bill; the Minister must be pleased about that. I am afraid that I sit firmly on the fence—indeed, on the ring-fence. I am in two minds on this issue. Ring-fencing requirements were put in place after the financial crisis for very good reasons. You can argue that they went too far and that, to some extent, they have been overtaken by other regulations and that they perhaps overburden and create some restrictions on the banks. But, in the Bill, the Government recognise that. On the other side of the equation, the economy and the banking system are currently facing a whole range of threats, which are arguably greater than have been faced at any time since the financial crisis in 2008. We have the private credit situation and the impacts of AI, to name just a few. Is it really the right time to remove ring-fencing entirely?

I am also not entirely convinced by the argument that removing ring-fencing would have that much impact on domestic lending. Domestic lending is inside the ring-fence. In fact, you could argue that it would have the opposite effect, as banks could then use deposits for more risky non-lending activities. Therefore, I confess that I find that argument unconvincing.

I am open-minded, but I am more minded to support the government proposals to loosen the ring-fencing rules and introduce some flexibility to them. I do not think I am ready to support complete removal at this stage. However, I am drawn to Amendment 159, which requires a consultation and assessment to take place before the proposed changes can be made.

Baroness Lawlor (Con)My Lords, I am delighted to have the debate, and I am very grateful to the noble Lord, Lord Pitt-Watson, for raising questions which have encouraged debate, but I support my noble friend Lady Neville-Rolfe’s opposition to Clause 39 standing part of the Bill. I also support her Amendment 160A about ring-fencing.

Clause 39 gives the Treasury powers to loosen the ring-fencing scheme. It has been anticipated, as others have said in this debate, by a number of announcements and reports, not least the Skeoch report—I hope I have pronounced it rightly, in the Celtic way—and the announcements this year by the Treasury itself. All of these point to and address a real problem. The question before us today is whether the Government’s solution in their Clauses 39 and 40 is sufficient to deal with the problems raised by reviews and announcements going back to the 1 March 2022 independent review of the working of the scheme.

I have a concern. The clause may seem to be the answer to some of the serious questions raised in that review and other concerns, and allow for the mitigation of problems arising from the ring-fencing regime—to allow for “proportionate” changes, to use a word which continues to recur throughout the assessments of how the scheme is working. However, in essence, it protracts the dominance of the regime and the regulators in what should be business decisions under good law, which is the spirit of the common law. It is a law which is permissive of risk-taking rather than prohibitive of the spirit of enterprise, or looking over the shoulder to the precautionary principle.

Officials and regulators can be very intelligent, competent and talented people, but it is not part of their skill set to drive through an entrepreneurial idea from the drawing board to production, sale, expanding their markets, developing a business, taking risk, and hiring and training people—which is an additional cost—while all the time keeping on top of the services sector, one of the fastest growing sectors in the UK and a jewel in the crown. Enabling officials to decide which activities should or should not be prohibited, and under which circumstances, does not tackle the fundamental problem to which the ring-fenced regime has given rise: the artificial and contrived structure. We are dealing with a structural problem—an artificially separated structure.

This structure inhibits the financial services sector from functioning in the best possible way, as an enabling hub for the whole UK economy, to allow small businesses, in particular, to grow and credit to flow. It is unlikely to remedy what we are dealing with, the fundamental problem of risk aversion imposed by ring-fencing law on businesses and the endemic risk aversion in the operation of the law.

Lord Pitt-Watson (Lab)I wonder whether there might be some confusion here. The thing about the ring-fence is that there are activities within it that the Government are promising to bail out. Those things are being insured. By the way, the move in the ring-fence proposed by the Government will extend these a little, but they include lending to the small businesses that the noble Baroness has talked about. The question is: are we going to be rid of that? Is it the case that the implicit guarantee that the Government are giving can go to any other activity that the bank decides that it wants to undertake? That could include, although Skeoch would say it is not a problem right now, the sort of proprietary trading that brought the American banks down in 2008—of course, they had been allowed to do that because Glass-Steagall had been removed 10 years earlier. What we are talking about here is: how much of bank activity will the Government stand behind? As Mervyn King said, we must make sure that it is just the very most important things.

17:00:00

Baroness Lawlor (Con)I thank the noble Lord, but it is about where the line is drawn in law, so that businesses can be certain and have predictability, because activities change day by day.

Lord Pitt-Watson (Lab)With respect, that is what Skeoch is recommending and what is being allowed in what we are being asked to accept here—there is an extension of the ring-fence. He is saying, “Look, there are other important activities that go beyond the ring-fence that are administratively complicated for the banks. Please can you move this? Also, can you move this in a way so that it doesn’t need to go to primary legislation any time it needs to change, because all these things are moving?” What we are trying to do here is recognise that the independent commission is run by a senior financial businessperson—he used to run Standard Life—whom we are going to back. He indeed said that, in the long term, you may want to think about how ring-fencing goes together with the resolution regime, but that is not for now. He certainly did not say that we should abandon it.

Baroness Lawlor (Con)I thank the noble Lord, but he was speaking about 2022, which was light years away for the financial sector. Things have moved on and have changed. We have different regimes in place now. As my noble friend Lady Noakes has explained, the banks are now resolvable. There are other schemes that will avoid the problems for the taxpayer. That should be borne in mind. I had better finish quickly. That is my objection. It is about who decides for businesses. If you have a ring-fence, ultimately, no matter how much you relax it, the Government are never going to have the knowledge of the sector, and the detailed tactical and strategic ability, to be ahead of the game and make businesses grow. They will always play slightly safe, but maybe they are over-safe.

I will finish on why we need to repeal the ring-fence, not just why Clause 39 is not good enough. In a sense, we are seeing the inhibition of risk-taking and a structure that inhibits it. As other noble Lords have pointed out, we do not have parallels in other economies. I know that there is the Volcker rule in the US, but Switzerland has solved its “too big to fail” problem without a ring-fence and it has a very instructive banking sector. France and Germany have it individually but not the EU, which rejected it. Australia reviewed it again in 2019 and rejected it on the grounds that noble Lords have mentioned. It is well worth going back to the famous Skeoch review, which contends that, in the longer term, we will not need the ring-fence and we will have resolution schemes in place. For those reasons, I support my noble friend’s opposition to the clause standing part of the Bill and her Amendment 160A.

Baroness Altmann (Non-Afl)My Lords, I support Amendments 159 and 174 in the names of the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Altrincham. I would be concerned about abolishing the ring-fence for similar reasons and concerns as those expressed by the noble Lord, Lord Vaux. However, I believe that a review of the workings of the alternative protections, such as the higher capital cushions and the bail-in regimes, would be appropriate. I also think that consultation would be advisable rather than simply removing these clauses. We are talking about taxpayer risk; that is basically what the ring-fencing is designed to mitigate. When it comes to consumer deposits, we have done an awful lot for retail savings to make sure that there is protection.

I apologise that I have been unable to participate fully in Committee, but I would like to put on record that there is another risk to the taxpayer in the form of retail pensions. In particular, I have concerns about the lack of any underpinning for the Financial Services Compensation Scheme around annuities, which are assumed to be 100% protected. There is a risk to the taxpayer, which I hope the Minister may consider or take back to the department to ensure that some of those issues are addressed through this Bill. Currently the implicit 100% guarantee can be met only by the taxpayer, and offshore operators of bulk annuities pose a serious risk to the retail pension sector.

Baroness Kramer (LD)My Lords, I thought the Committee might like to be reminded why such a radical step as ring-fencing was taken after the 2008 financial crisis. It was in part because, in a universal bank encompassing both retail and wholesale banking, failure in the investment bank could and did destroy the viability of the retail bank. It was also in part because, as the noble Lords, Lord Tunnicliffe and Lord Pitt-Watson, said, the investment bank, able to access retail deposits at zero interest and protected by deposit interest, could now take risks that it never would have been able to take if it had had to raise that funding in the financial markets. That was a major factor behind the extraordinary and careless risk-taking that led us into the 2008 crash.

There was also a further reasoncultural contamination that led to irresponsible lending and funding in the retail banks and the abuse of customers as, under pressure from directors, they sought to catch up with the performance of their investment bank equivalents. We all, as a community, paid a very high price for that. Even at the time when the ring-fence was introduced and the Parliamentary Commission on Banking Standards recommended it as the best way to provide protection for the future, all of us knew that there would at some time in the future be a dangerous complacency. I quote from evidence to the PCBS:

“The classic problem for human institutions and for the design of our regulatory structures and our policy is how do we design against [delusion] in 25 years’ time, when … we have another: ‘This time it’s different. This time we’re cleverer than the previous generation.’”

Another quote is that

“financial crises don’t often happen immediately one after another; there tends to be a lag while those people who learnt lessons move out of the industry”.

In opting for ring-fencing, the PCBS warned of future pressures to weaken the separation:

“Those pressures will include the siren voices of those who contend that structural separation as implemented represents a barrier to financial innovation and growth”.

That was prescient indeed.

The noble Baroness, Lady Neville-Rolfe, said in a previous day of Committee that I look too much to the past. I accept that memory is inconvenient, but the amendments today from her and her colleagues come from a party that, perhaps with the exception of Nigel Lawson, never accepted its responsibility for light-touch regulation, the culture of hubris and the casino mentality that was quite heralded and led to the crisis in 2008. I still hear little sympathy, frankly, from those Benches for the ordinary people who bore the consequences. I do not want to denigrate the banking community—there are many good people in it—but most of them walked away largely untouched and with the personal rewards for the activities that led to the crisis still in their pockets. Respecting the positives of the financial sector always has to sit with a recognition that so much money can be made from a bending or an adjustment of the rules that guardrails are a necessity.

As I listened to the proposals in this group, I realised that growth has become an excuse and resolution has become a cover for eliminating the ring-fence and, essentially, the precautionary principle. Resolution for systemic banks is not just untested but—I was thankful to the noble Lord, Lord Tunnicliffe, for quoting my Second Reading speech—it has a poisonous side-effect for others in the financial sector, notably the insurance and pension funds that in this case hold most of the bail-in bonds through MREL, and for their customers.

In 2023, the Swiss financial regulator FINMA—I was reminded of this when the noble Baroness, Lady Lawlor, talked about the Swiss being so secure—saved the equity holders of Credit Suisse, a collapsing bank, in order to rescue it, but wiped out the bondholders, an issue that is still in litigation and has cost the Swiss very dearly in their bond issuances. FINMA took its decision on the grounds that any other action would have undermined financial stability, it was so conscious of the contagion that comes when you activate a resolution procedure. While the Bank of England has said it would not hesitate to activate resolution procedures and wipe out both equity and bondholders, I find very few people in the industry who actually believe it on those kinds of statements. No one should look with equanimity at the idea that we allow a bank to fail and be rescued only through the extreme activities of resolution, rather than looking at the precautionary principle.

Yesterday, the ground shifted even more. The noble Lord, Lord Tunnicliffe, referred to the financial stability report of July 2026 from the Bank of England. I have not had time to read it thoroughly. I have done only a first read but, frankly, it is schizophrenic. The first half of the report, as others have raised, is chilling in its assessment of the increased risk—the noble Lord, Lord Vaux, raised some of these questions—of private credit, the Iran war and AI, and especially of these crises crystallising at the same time. But the second half of the report explains policy decisions to weaken the regulatory capital buffers for banks—the regulatory system that several people have spoken about here as the reason why it is possible to remove the ring-fence. That was weakened in yesterday’s publication. The reasoning appears to be that regulators overseas are weakening their buffers and, for international competitiveness reasons, we should too.

Last Sunday, the Sunday Times ran a piece in anticipation of this change, saying that the Bank is set to relax capital rules for lenders again. My reaction to the report is mirrored by the quote from Sir John Vickers in that article, in which he cautions against reducing capital requirements:

“At a time when risk has plainly gone up, it would not make sense to dial down insurance”.

The Bank, I suspect encouraged by the Treasury, is weakening the resolution system. The noble Baroness, Lady Neville-Rolfe, and her party propose in addition to remove the precautionary protection of ring-fencing. All this is at a time of increased risk to financial stability. I came away from going through these amendments, frankly, in a mood of despair. We have to start once again to recognise the reality of risk.

17:15:00

The Minister of State, Department for Business and Trade and HM Treasury (Lord Stockwood) (Lab): My Lords, I have enjoyed this exchange of views today. As the noble Lord, Lord Vaux, pointed out, it is refreshing and a little unsettling to find myself in the middle ground in a debate.

Before I turn to the specific amendments and stand part notices, it may be helpful if I briefly set out the Government’s approach to ring-fencing. The Government remain committed to retaining the ring-fencing regime as an important safeguard for financial stability and depositor protection. As the Chancellor set out in her 2025 Mansion House speech, the Government will uphold the regime while delivering meaningful reforms that support growth. Following a review undertaken by the Bank of England, and consistent with the conclusions of the independent Skeoch review, we concluded that aspects of the framework have become unnecessarily rigid and duplicative over time. The measures in the Bill address those issues by making the regime more flexible and proportionate while preserving its core protections.

I turn first to the question of whether Clause 39 should stand part of the Bill. Clause 39 addresses a key conclusion of both the Government’s review of ring-fencing and the Skeoch review: too much operational detail is fixed in legislation, meaning that even relatively minor and technical updates can require legislative amendment. Clause 39 therefore allows HMT, by order, to provide for certain detailed aspects of the excluded activities and prohibitions framework to be specified in the PRA rules, rather than in legislation. This will make the framework more flexible and responsive as market practice, prudential standards and firms’ business models evolve.

Importantly, the clause does not remove parliamentary oversight. Any future delegation would require secondary legislation and be subject to parliamentary scrutiny and approval. This allows the regime to evolve alongside market developments while ensuring that Parliament retains control of the overall framework. Where functions are delegated, the PRA will be subject to the same statutory tests and considerations as currently apply to the Treasury. The clause therefore preserves the existing safeguards while allowing detailed provisions to be updated more efficiently over time.

I now turn to the Clause 40 stand part notice, which was tabled by the noble Baroness, Lady Neville-Rolfe, and the noble Lords, Lord Altrincham and Lord Tunnicliffe. Clause 40 makes the ring-fencing regime more flexible and better aligned with the wider prudential and resolution framework. Since ring-fencing was introduced, those frameworks have evolved significantly and, in some areas, they now provide protections that overlap with ring-fencing rules. The clause reduces unnecessary duplication and helps the regime operate more coherently alongside the wider framework.

Some noble Lords have suggested that developments in resolution remove the need for wider ring-fencing altogether. I am afraid that I cannot agree. Ring-fencing and resolution perform different but complementary functions. Ring-fencing seeks to reduce risks and improve resilience before a firm gets into difficulty, while resolution provides the tools to manage failure if it occurs. Ring-fencing also complements resolution by creating simpler and more self-contained banking structures, which can support resolvability and make an orderly resolution easier to execute if a firm fails.

These resolution powers have been tested in practice, demonstrating that the framework can be used effectively. For example, the Bank of England used its resolution powers in relation to Silicon Valley Bank UK in 2023, facilitating its sale to HSBC without disruption to customers or the use of public funds. The independent review led by Sir Keith Skeoch concluded that ring-fencing has contributed towards the resilience of retail banks, while recommending reforms to improve its flexibility and align it more closely with the wider prudential and resolution framework. Clause 40 gives effect to that approach.

I turn to Amendments 159 and 174, which would require a further consultation and assessment before Clauses 39 and 40 could be commenced. I agree that it is important that proper procedures are followed. When exercising the powers in Clause 39, HMT will follow the better regulation guidance on consultation, and further legislation will be subject to parliamentary debate. The PRA is required by FSMA to consult and conduct cost-benefit analysis on most rule changes. So, in my view, the best point for detailed consultation and impact assessment is when specific changes are proposed.

Amendment 160A, tabled by the noble Baroness, Lady Neville-Rolfe, and the noble Lords, Lord Altrincham and Lord Howard of Rising, would repeal the ring-fencing regime in its entirety and require the Government and regulators to make arrangements for an orderly transition to a non-ring-fenced banking system. I am afraid I cannot agree with this. The ring-fencing regime was introduced following the global financial crisis in response to the recommendations of the Independent Commission on Banking. The commission concluded that separating core retail banking services from riskier activities would help protect the continuity of essential banking services and reduce the risk that taxpayers would be exposed to the costs of a bank failure. The Government’s view is that those objectives remain as relevant today as they were after the financial crisis. Ring-fencing continues to play an important role in supporting financial stability and protecting depositors by helping ensure that essential banking services remain resilient in times of stress. The Skeoch review recommended retaining the regime for now but reforming the regime, just as we are doing.

Several noble Lords highlighted the cost of ring-fencing. It is true that the regime results in costs, but those costs must be weighed against the benefits of a safer banking system, stronger deposit protection and a reduced risk for taxpayers. As I set out when speaking to Clause 40, the Government do not accept that developments in the resolution framework remove the need for ring-fencing. Ring-fencing and resolution perform different but complementary functions, and the Government remain of the view that both continue to play an important role in supporting financial stability. Our objective is therefore reform, not abolition, retaining ring-fencing’s core protections while ensuring that the regime remains effective, proportionate and, importantly, fit for the future.

Alongside the changes in the Bill, the Government are taking forward further reforms intended to support lending, investment and growth while maintaining financial stability. This includes a new growth allowance that will unlock significant additional financing for UK businesses and infrastructure. I assure my noble friend Lord Pitt-Watson that this will be subject to careful consultation.

This has been a genuinely fascinating debate. There has been a range of views, and I hope the Committee will agree that the Bill strikes the right balance between these different positions. For those reasons, I ask that Clauses 39 and 40 stand part of the Bill and respectfully ask the noble Baroness to withdraw her opposition to Clause 39.

Baroness Neville-Rolfe (Con)I am grateful to noble Lords who have contributed to this lively debate, and to the Minister for his response. I am grateful for the support I have received, particularly for my Amendments 159 and 174 and, from some of my noble friends, for Amendments 160A. While I agree with the noble Lord, Lord Pitt-Watson, that this House is admirably expert, he tried to politicise the discussion in a way that I regret. I set out clearly why I think that ring-fencing should go. I want to be absolutely clear that our amendment is not about weakening financial stability or compromising the safety of firms. It is about looking forward, not backwards, as the noble Baroness, Lady Kramer, has done, and recognising that the financial stability framework has changed significantly since ring-fencing was first proposed and introduced. As my noble friend Lord Massey of Hampstead argued, we now have a much more developed resolution regime, stronger prudential supervision, capital and liquidity requirements, recovery and resolution planning, and operational continuity rules. They support financial services and consumers right across the country, as the noble Lord, Lord Pitt-Watson, rightly pointed out.

I am also going to quote from the Skeoch review, as I am winding:

“It was acknowledged at the outset that the regime would impose direct costs on the banks in setting up new structures and operating within the regime. Based on banks’ submissions, implementing the ring-fencing regime had a one-off cost for the industry of c. £2.9 billion, which has already been incurred, and has an annual aggregate ongoing cost of £1.5 billion”.

My noble friend Lady Noakes said that she thought that was a reasonable figure, and I think that is not something we are disagreeing on, which is good. She also said that the risk to the taxpayer is now much lower. The £450 billion figure came from UK Finance in its response to the FPC and the PRA’s capital assessment in April this year. That figure relates to the changes in capital requirements reform, which we have already debated.

I am very grateful to the Minister for his comments, including his reference to this new growth feature, which I will have a look at. But I remain concerned that the Government’s approach, while moving in the right direction, is too limited. Clauses 39 and 40 suggest that the Government accept that there is a problem with the current regime, but their answer is to adjust it rather than to ask the more fundamental question of whether it is still needed, following international practice, which has been quoted. In our view, ring-fencing has been superseded. It imposes real costs on banks, customers and the wider economy; it affects competitiveness, capital efficiency and lending; and it places the UK at a disadvantage compared with other international jurisdictions.

My noble friend Lord Massey of Hampstead rightly said that we will discuss the FOS on a later amendment, and he rightly referred to the risk-aversion problem in the sector, which I recall was a theme of the excellent report by our committee, now chaired by my noble friend Lady Noakes. We will reflect carefully on what the Minister said, but my approach is a measured one, putting any unwinding in the hands of the Treasury and other stakeholders. But the central problem remains: if we are serious about growth, competitiveness and reducing unnecessary regulatory burden, ring-fencing cannot be exempt from scrutiny. Of course we must learn from the past and look after the consumers, but their savings would continue to be protected, and resolution and prudential supervision have changed our financial services framework since the financial crisis. For now, we have had a good debate, and I beg leave to withdraw my opposition to Clause 39 standing part.

Clause 39 agreed.

Clause 40Ring-fencing rules etc

Amendment 155

Moved by

155: Clause 40, page 47, line 30, leave out from beginning to line 2 on page 48 and insert— “(1) The appropriate regulator shall consider whether there is sufficient provision to ensure the effective provision to a ring-fenced body of services and facilities that it requires in relation to the carrying on of a core activity.(1A) Subject to subsection (1B), when considering whether there is sufficient provision for the purposes of subsection (1) concerning services and facilities that are provided to a ring-fenced body by another member of its group, the appropriate regulator shall take account of all relevant circumstances, including—(a) the appropriate regulator’s ability to assess and influence the terms on which such services and facilities are made available to a ring-fenced body,(b) the availability, continuity and sufficiency of such services and facilities, including in circumstances where the Bank of England would be entitled to exercise any of the stabilisation powers under the Banking Act 2009, and(c) any assessment that the Bank of England has made of a group of which the ring-fenced body is or proposes to become a member under a statement of policy that the Bank of England has issued pursuant to section 3B (safeguards relating to directions under section 3A) subsection (9) of the Banking Act 2009 and, where applicable, the absence of any such assessment.(1B) The appropriate regulator shall not consider that there is sufficient provision for the purposes of subsection (1) where a ring-fenced body is, or proposes to become, a member of a group for all or part of which the appropriate regulator is not responsible for consolidated supervision, and such services and facilities are provided to the ring-fenced body from outside the United Kingdom by a member of the group that is not in a part of the group that is subject to consolidated supervision by the appropriate regulator, unless the appropriate regulator has made rules to ensure that—(a) there is no less uncertainty concerning the availability, continuity and sufficiency of such services and facilities than there would be where they are provided to a ring-fenced body within a group that is subject as a whole to the consolidated supervision of the appropriate regulator, and (b) the ring-fenced body is not permitted to receive such services and facilities unless the provider of those services and facilities is adequately resourced and the arrangements under which those services and facilities are provided would facilitate the orderly exercise by the Bank of England of its stabilisation powers under the Banking Act 2009 in circumstances where the Bank of England would be entitled to exercise those powers.(1C) If, having regard to all the circumstances, including the matters referred to in subsection (1A), the appropriate regulator does not consider that there is sufficient provision for the purposes of subsection (1) or may not do so under subsection (1B), the appropriate regulator must exercise its power to make rules requiring a ring-fenced body to make arrangements to ensure the effective provision referred to in subsection (1).(1D) The appropriate regulator shall consider whether there is sufficient provision to achieve the group ring-fencing purposes.(1E) The appropriate regulator shall not consider that there is sufficient provision for the purposes of subsection (1D) where a ring-fenced body is or proposes to become a member of a group for all or part of which the appropriate regulator is not responsible for consolidated supervision, unless the appropriate regulator has made rules to ensure that there is no less uncertainty concerning the achievement of the group ring-fencing purposes in those circumstances than would be the case where the ring-fenced body is a member of a group that is subject as a whole to the consolidated supervision of the appropriate regulator.(1F) If the appropriate regulator does not consider that there is sufficient provision to achieve the group ring-fencing purposes, or may not do so under subsection (1E), the regulator must exercise its power to make rules for the group ring-fencing purposes that apply—(a) to ring-fenced bodies, or(b) to authorised persons who are members of a ring-fenced body’s group.”Member’s explanatory statement This amendment, and others in the name of Baroness Kramer, seek to require the PRA to assess whether existing law and regulation makes sufficient provision in the case of regulated companies based outside the United Kingdom.

Baroness Kramer (LD)My Lords, this group originally preceded the one we just debated. I noticed the change this morning. My points in this group on ring-fencing are quite narrow. I am not particularly happy about the changes in Clauses 39 and 40, but I do not feel strongly enough that we need to change the relevant clauses wholesale.

But I have a problem with a narrow area that feels to me like a Trojan horse. In easing ring-fencing in this Bill through giving the regulator greater flexibility to adjust the ring-fence, the Government are still taking greater risk. I find it frustrating that people who remove a protection then say that there is no additional risk. Let us be honest: there is greater risk. I am cautiously relieved that ring-fencing has not been holed below the waterline by the Government. But, in Amendments 155 to 158 and 160, I am trying to address a breach that has been identified in the ring-fence and that potentially has serious unintended consequences.

In the Financial Services (Banking Reform) Act 2013 and the SIs under FSMA, which implemented much of it, the structural separation between retail and wholesale banks within the same overarching bank group left few shared operational services. The ring-fencing rules prohibited receiving services or facilities that are regularly required from any entity or company within the group that is not a permitted supplier, so that, in case of failure—for example, the failure of the wholesale bank—the retail bank could continue unaffected. This Bill relaxes the rules on intragroup services, and it argues in the Explanatory Notes that the current situation causes duplication and overlap.

As far as I can understand, the Government think that there is no risk to changing the rules because the bank resolution process now includes the operational continuity in resolution regulation, OCIR, which ensures that critical banking services are provided to customers should a bank have failed and be in resolution. There are some problems because the ring-fencing rules and the OCIR rules do not fully match, and what happens to non-critical shared services is not clear. At the very least, we need to know the intention around that.

Much more seriously, if a banking group is not headquartered in the UK, so that the PRA is not the group supervisor and the Bank of England is not the group resolution authority, how can shared services to customers be assured in a crisis? It depends completely on the voluntary support of an overseas regulator. Given the fragmentation in international co-operation that we see today, that becomes a serious potential risk.

17:30:00

My various amendments would, in effect, require the PRA to take non-UK ownership and control into account when considering the rules that it sets up on these shared services, so that it can, in a crisis, ensure the effective provision of intragroup services to a ring-fenced bank—in other words, so that the retail bank can continue to function without severe disruption. It is relatively minor and quite technical, but it is potentially rather important. I hope the Government will take it away and look at it.

Lord Altrincham (Con)My Lords, I speak briefly to Amendments 155 to 158 and 160 in the name of the noble Baroness, Lady Kramer, and hope that she will forgive me as a former banker with cultural contamination, perhaps. I notice a lot of quite warm language about banking in this debate, with references to the casino and the rest of it.

The concern behind these amendments is that a ring-fenced bank may depend on services, systems or facilities provided by other entities within its wider group. Those entities may be based outside the United Kingdom or supervised primarily by an overseas regulator. I very much hear what the noble Baroness says, but the PRA does look at intragroup services in protecting UK domestic businesses.

We of course have our own amendments on ring-fencing, which we have just discussed. However, as we have said before, our approach to this Bill is that it will regulate in the immediate term and, therefore, our wider policy ambitions can sit alongside proper scrutiny of the provisions before us. Even where we take a different long-term view of the future of ring-fencing, it is still right to test whether the regime, while it remains in place, operates properly and consistently. That said, I have some concerns about the effect of these amendments, even if they were to impose additional safeguards or burdens specifically on foreign-owned banks, as they could place those banks at a competitive disadvantage. That matters because foreign-owned banks contribute to competition in the UK market. If additional requirements make it harder or less attractive for them to operate here, the results could be less competition for deposits here and, ultimately, worse outcomes for consumers.

International supervisory co-operation has also been significantly strengthened since the financial crisis. Crisis management groups, co-operation agreements and regulator-to-regulator engagement are now central parts of the framework. Recent experience has shown that this co-operation can work in practice, including during the failures of Silicon Valley Bank, as referenced by the Minister, and perhaps also in the case of Credit Suisse, where co-ordination between overseas regulators and UK authorities helped to maintain continuity and manage risk. I just note that Credit Suisse was the fifth-largest bank by balance sheet in the UK at the time. I would therefore be grateful if the Minister could explain how the PRA currently assesses overseas group structures and whether he believes that any gap exists in its present powers. In particular, does the PRA already satisfy itself that critical services provided from outside the United Kingdom will remain available in stress or resolution?

We may differ from the noble Baroness on the broader future of ring-fencing, but the questions that she raises are important. My concern is that the proposed solution may be unnecessary and may risk reducing competition by placing foreign-owned banks at a disadvantage. I look forward to the Minister’s response.

Lord Stockwood (Lab)My Lords, Amendments 155 to 158 and 160 all relate to Clause 40. As I set out in the previous debate, Clause 40 makes the ring-fencing regime more flexible and proportionate by allowing the PRA to take account of protections already delivered elsewhere in the prudential and resolution framework, when considering whether ring-fencing rules are required. The clause is intended to reduce unnecessary duplication, while maintaining the core protections and purposes of the ring-fencing regime. We have already debated this, and it was clear that there were a wide range of views.

The noble Baroness’s amendments focus principally on shared services arrangements, operational continuity and cross-border group structures. The Government recognise the importance of these issues and we have spoken to a couple of outside parties on this topic. Ensuring the continuity of critical services and managing operational dependencies are important objectives of the ring-fencing regime.

However, I am not persuaded that these amendments are the right route forward. They would introduce detailed statutory tests governing when the PRA may rely on protections delivered elsewhere in the prudential and resolution framework, particularly for shared services arrangements involving cross-border or non-consolidated groups. Their practical effect would be to make it harder for the PRA to rely on equivalent protections elsewhere in the framework, increasing the likelihood of additional ring-fencing rules, greater complexity and additional compliance burdens, even where the PRA considered that the relevant outcomes were already being achieved.

In contrast, Clause 40 is intended to make the regime more flexible, streamlined and proportionate by reducing unnecessary duplication while maintaining core protections. It does not allow the PRA simply to assume that protections provided elsewhere in the framework are sufficient. The PRA may rely on those protections only where it considers that there is sufficient provision to achieve the relevant ring-fencing purposes and ensure the effective provision of services and facilities to ring-fenced banks.

For example, the noble Baroness, Lady Kramer, asked whether the OCIR framework can be replaced by the PRA’s rule 9.1. This is a matter for the PRA, but it has indicated that it intends to consider these issues through consultation. Where the PRA does not consider that sufficient provision exists, including in relation to shared services arrangements or cross-border groups, it must act, including through making ring-fencing rules where necessary. The clause therefore preserves key protections.

If further details are required, I am more than happy to follow up before Report, but, for those reasons, I ask the noble Baroness to withdraw her amendment.

Baroness Kramer (LD)I am happy to withdraw.

Amendment 155 withdrawn.

Amendments 156 to 158 not moved.

Clause 40 agreed.

Amendments 159 to 160A not moved.

Clause 41Scope of commercial credit data sharing scheme

Amendment 161 not moved.

Clause 41 agreed.

Clauses 42 and 43 agreed.

Clause 44Transformer vehicles

Amendment 162

Moved by

162: Clause 44, page 51, line 21, at end insert— “(5) After section 284A insert—“284AA Tax treatment of risk transformation arrangements(1) The Treasury must, after consultation with the Commissioners for His Majesty’s Revenue and Customs, publish guidance concerning the tax treatment of investments issued in connection with risk transformation arrangements within the meaning of section 284A.(2) Guidance under this section must include the circumstances in which a risk transformation arrangement is to be regarded as having been entered into for genuine insurance risk-transfer and capital markets purposes. (3) In exercising functions relating to the assessment, collection and management of taxes, the Commissioners for His Majesty’s Revenue and Customs must ensure that arrangements falling within a description specified by guidance under subsection (2) are treated in a consistent and certain manner.(4) Where—(a) a risk transformation arrangement falls within a description specified in guidance under subsection (2), and(b) the arrangement complies with applicable requirements relating to authorisation and supervision,the arrangement is to be treated for all tax purposes as a commercial arrangement entered into for bona fide insurance risk-transfer and capital markets purposes, and not as having as its main purpose, or one of its main purposes, the obtaining of a tax advantage.(5) The treatment in subsection (4) applies without any requirement to consider the purpose of the arrangement other than by reference to the conditions in that subsection.(6) Subsection (4) does not apply only where the Commissioners can demonstrate that—(a) one or more of the conditions in subsection (4) is not met, or(b) there has been fraud, deliberate misrepresentation, or material non-disclosure of relevant facts.(7) The Treasury must review guidance published under this section at intervals not exceeding three years.””Member’s explanatory statement The amendment requires HM Treasury to produce guidance in consultation with HMRC to confirm the tax status of Insurance-Linked Securities vehicles.

Baroness Bowles of Berkhamsted (LD)My Lords, this amendment is about insurance-linked securities—ILS—which are the UK’s version of fully funded risk transfer vehicles, which were legislated for in 2017. They include catastrophe bonds, collateralised reinsurance, sidecars and other fully funded mechanisms used by insurers to transfer peak and speciality risks to the capital markets. Catastrophe bonds are the most visible part of the market, but they represent only a portion of a global ILS market now estimated at over $136 billion. The catastrophe bond market alone is estimated at somewhere between $35 billion and $65 billion.

When the regime was introduced, the hope was that London, as the world’s leading commercial reinsurance marketplace, would become a major provider but, almost immediately, Singapore copied the PRA’s work and moved faster. I recall hearing evidence about this when I was on the Industry and Regulators Committee before the formation of the Financial Services Regulation Committee. At that time, the PRA was being blamed for sluggishness. However, it is not the problem now. Since then, London has not built a substantial market, and we now have only 2% of the global market that we should have led.

Clause 44 on transformer vehicles is part of the reforms to which the Government have committed under the Leeds reform package. Those reforms are welcome. They will improve flexibility and the ease of delivering transactions, including allowing the PRA to widen the scope of permissions. But even with Clause 44, one major block remains: tax uncertainty. HMRC continues to rely on a main-purpose anti-avoidance test that is inherently subjective. Investors and sponsors are forced into a costly, months-long clearance process with the Treasury for every single transaction. This destroys the speed to market that is required for catastrophe bonds, so they are out of the game. There is no hope of competing with jurisdictions that do not impose this hurdle, which rightly puts more trust in these fully funded, transparent risk transfer mechanisms. They are not tax-driven structures, yet they must prove that fact afresh every single time for every single contract.

A competitive ILS market cannot grow while this situation prevails. The window of opportunity closes before HMRC’s clearance process reaches a conclusion. When Parliament created the ILS regime in 2017, it included a deliberately broad anti-avoidance clause because the market was new. Ten years on, HMRC should be comfortable that these are not avoidance vehicles. There are no cases of mass tax avoidance via these vehicles. They are, by definition, highly regulated and fully funded, yet HMRC appears unwilling to update its existing guidance. Some recent case law on avoidance purposes has only increased uncertainty. The existing guidance is non-binding and investors cannot rely on it. Amendment 162 would require the Treasury to publish clear guidance that provides a presumption of commercial purpose for vehicles that meet all regulatory and authorisation requirements. It would shift the burden of proof away from the investor and provide the certainty that our major competitors already offer as a matter of course.

This is not the only area where the clearance culture is acting as a drag on growth and competitiveness. It also affects infrastructure investment, and it casts a long shadow over the Mansion House Accord. How can we expect a trustee to back a vital infrastructure project if they fear that the tax status of the vehicle will be held hostage by a subjective, years-long tax process? The Government have recognised the need for certainty by launching the Advanced Tax Certainty Service this July, but that service is restricted to multi-billion-pound megaprojects; they are looking after their own. This might work for the largest infrastructure schemes, but what of the hundreds of medium-sized and local infrastructure projects and the ILS transactions that form the backbone of our growth agenda?

I recognise that tax avoidance is a sensitive subject, and that none of us wants a return to the abuses of the past, but there is a world of difference between a structure designed to extract value from a company—that is cheating—and a structure designed to ring-fence risk for a power plant or a catastrophe bond. One is misuse of corporate law and the other is a structural necessity of it. HMRC’s current main-purpose test fails to distinguish between the two and treats structural necessity as a potential abuse.

17:45:00

The amendment would not exempt ILS vehicles from anti-avoidance rules; it would simply provide that where a vehicle has met all regulatory requirements, and where it is authorised and supervised under FSMA and the Risk Transformation Regulations, HMRC should adopt the presumption that the vehicle is not being used to secure a tax advantage. HMRC would retain full power to act where fraud, misrepresentation or non-compliance is demonstrated. This is not a loophole; it is a clarity mechanism. If Parliament has authorised the vehicle and the PRA has supervised the vehicle, it cannot be right that HMRC treats the same vehicle as presumptively suspect.

Without certainty, the UK will continue to lose market share to jurisdictions that provide it and our growth agenda will continue to be hampered by a clearance culture that is no longer fit for purpose. This amendment would provide a practical and proportionate way forward. It would ensure that genuine risk transfer vehicles are treated consistently and predictably and that the UK can finally compete in a market that it should have led. I beg to move.

Lord Ashcombe (Con)My Lords, I remind the House of my interest as an employee of Marsh, an FCA-regulated firm. I wish to speak in support of this amendment in the name of the noble Baroness, Lady Bowles, but before doing so, I would like to pick up briefly on something I said earlier this week about regulatory clarity. I talked about how firms need clear definitions so that they can plan investment with confidence. That principle matters across the Bill, for not just client definitions, but for how we approach emerging markets and new structures.

Amendment 162 is a good example of that. The amendment addresses tax clarity on insurance-linked securities. These are important instruments. They attract capital into insurance, help firms manage catastrophic risk and have become a serious part of global risk management practice. Since being created in the 1990s, the global market has grown to about £136 billion, making up close to 20% of the insurance/reinsurance industry. According to Swiss Re, one of the world’s leading providers of reinsurance, insurance and other forms of insurance-based risk transfer, 2025 was the busiest year in its history of this market.

The London insurance market is phenomenally well placed to lead here. We are larger than our five closest competitors combined. However, we need to be honest: our ILS regime has been somewhat underwhelming at best. That is not because we lack expertise or capital—we do not—but because the regulatory approach has been disproportionate and the legislation inflexible. Firms simply cannot transact deals here as efficiently as they can in Bermuda or other jurisdictions.

To the Government and the PRA’s credit, they have listened. This Bill moves us in the right direction: it gives the PRA flexibility on fully funded definitions, allows multiple contracts in protected cell companies and there is a consultation pipeline on further simplification. That is good. However, there is one thing that the Bill has not addressed, and, as mentioned by the noble Baroness, Lady Bowles, that is tax clarity. When the ILS regime was created in 2017, there was a broad anti-avoidance clause. That is fair enough, but a decade on, I think that HMRC and the Treasury should be comfortable that these are not tax avoidance structures, but are risk transfer vehicles.

Right now, firms have guidance from HMRC, but it is not legally binding. Therefore, every transaction requires a tax lawyer’s opinion every single time, as the noble Baroness mentioned. That cost, that time, that friction is the difference between doing a deal and doing it somewhere else. This amendment asks for something straightforward: a clear and legally underpinned directive that HMRC will presume that ILS vehicles are not being used to secure a tax advantage. That is not asking for exemption from anti-avoidance rules; it is asking for clarity so that legitimate risk transfer does not get caught up in unnecessary caution. That clarity matters because it removes the last barrier to this market. We have the regulation sorted and we have the expertise; what we really need is tax certainty.

This is about positioning London correctly in a competitive global market. It is about letting the PRA’s sensible reforms work, and it is about giving firms the clarity they need to invest with confidence in the United Kingdom.

Lord Altrincham (Con)My Lords, I will speak to Amendment 162 in the name of the noble Baroness, Lady Bowles—perhaps from the Liberal Democrat risk-transfer derivative desk. This amendment raises what seems to be a sensible and practical point about certainty in the treatment of insurance-linked securities and related risk-transformation arrangements. Insurance-linked securities can play an important role in allowing insurance risk to be transferred into capital markets. Catastrophe bonds and similar structures can help insurers and reinsurers manage exposure to major risks, including natural catastrophes, while providing investors with a different form of capital markets instrument.

The United Kingdom has quite rightly sought to develop itself as a competitive centre for these structures, but for that to happen, firms and investors need clarity, as my noble friend just explained. As I understand it, the amendment would require the Treasury, after consulting HMRC, to publish guidance clarifying the tax treatment of these arrangements. It would also provide that where an arrangement falls within that guidance and complies with the relevant regulatory authorisation and supervision requirements, it should be treated as a bona fide commercial insurance and capital markets transaction, rather than as one entered into for tax avoidance purposes. It does not appear to be an attempt to protect fraud, misrepresentation or non-disclosure. HMRC would still be able to challenge arrangements where the conditions are not met or where there has been improper conduct, but it would give legitimate market participants greater certainty where they are using properly regulated structures for genuine commercial purposes. That certainty matters: if the UK wants to attract insurance-linked securities business, investors and firms need to understand the tax position in advance. Uncertainty can deter activity, reduce confidence and make other jurisdictions more attractive.

I would therefore welcome clarity from the Minister on this point. Do the Government accept that greater tax certainty would help to support the development of the UK insurance-linked securities market? Are they aware of the concerns that uncertainty about HMRC treatment may be limiting the attractiveness of the UK regime? Will they consider whether further Treasury or HMRC guidance is needed to ensure that properly regulated ILS vehicles are treated consistently as genuine commercial arrangements. This seems to me to be a practical amendment aimed at supporting competitiveness and certainty in a specialist but important part of the financial services market. I look forward to the Minister’s response.

Lord Stockwood (Lab)My Lords, risk transformation is a key element of the UK’s insurance market, and the growth of this market is critical to the Government’s objective of making the UK the location of choice for specialist and complex insurance. The Government’s reforms in Clause 44 aim to support this market by increasing the attractiveness of the UK for establishing the legal vehicles used to undertake risk transformation. I am glad to hear the noble Baroness, Lady Bowles, and the noble Lord, Lord Ashcombe, broadly welcome these reforms.

The Government recognise the role that the bespoke tax regime for transformer vehicles plays in ensuring that the UK is competitive in this area. We also recognise, as does this amendment, the role that robust anti-avoidance measures and clear guidance have in ensuring a well-functioning regime for transformer vehicles. These anti-avoidance requirements are set out in the bespoke tax regulations for transformer vehicles, the Risk Transformation (Tax) Regulations 2017. HMRC has worked extensively with industry to produce guidance on how anti-avoidance measures apply to transformer vehicles.

I appreciate that some people consider that this guidance could be clearer, but it is important that any guidance does not constrain the Government’s ability to apply anti-avoidance rules. It must be aligned with the broader approach taken by HMRC to anti-avoidance. The current guidance allows HMRC the flexibility effectively to pursue instances where vehicles are established for the purposes of avoiding tax. It is important that we preserve that ability. I therefore ask the noble Baroness to withdraw her amendment.

Baroness Bowles of Berkhamsted (LD)My Lords, I thank all those who have spoken in the debate. I must say that I find the Minister’s response rather disappointing. He is saying that the status quo is all right, but the status quo is not all right, so we will not have the business. I think that is all there is to it. Surely, there must be a way in which you can have something that moves faster when you have to negotiate things faster: otherwise, the door is shut on these transactions. So I ask the Minister to engage with the industry on this and find out more detail, because it is being treated as if it is something dodgy. How will an investor invest in something that has a ticket on it saying, “Careful, I might be slightly dodgy”? That is in effect what is happening. How will we get these things into pension funds if the trustees are thinking, “Whoa, something might happen way down the track”?

These are very serious questions. I realise that it is very specialist, but we need to take action: otherwise, we are closing the door on opportunities for good investment and opportunities for pension funds. The fact that the ATCS solves the problem for really big infrastructure shows that the Government know what they are about when they are in the business of having to negotiate contracts, but the smaller people are being left out. That is just not the right way to proceed. So I hope that the Minister will report back to the Treasury and reread my speech and that of the noble Lord and come to a better conclusion. For now, I beg leave to withdraw my amendment, although I think that this is so important that I may wish to return to it on Report.

Amendment 162 withdrawn.

Clause 44 agreed.

Clauses 45 and 46 agreed.

Amendment 163

Moved by

163: After Clause 46, insert the following new Clause— “Review of tokenisation in UK wholesale financial markets(1) Within 12 months of the day on which this Act is passed, the Treasury must lay before Parliament a report on the development of tokenisation in UK wholesale financial markets.(2) A report under subsection (1) must consider, in particular—(a) the extent to which the existing legal and regulatory framework supports the safe adoption of tokenisation in UK wholesale financial markets;(b) the extent to which current arrangements provide sufficient legal certainty in relation to the issuance, holding, transfer and settlement of tokenised financial assets;(c) the prudential treatment of tokenised assets and the extent to which such treatment is consistent with equivalent non-tokenised assets, where the underlying risks are equivalent;(d) the availability and suitability of settlement arrangements for tokenised financial market transactions;(e) the progress of the Digital Securities Sandbox and the extent to which it is expected to support the development of any permanent regulatory framework;(f) barriers to interoperability between tokenised and non-tokenised market infrastructure, and between different tokenised market infrastructure arrangements;(g) the effect of the current framework on innovation, investment and the international competitiveness of UK financial markets;(h) any further legislative or regulatory changes which the Treasury considers may be required.(3) In preparing a report under subsection (1), the Treasury must consult—(a) the Bank of England;(b) the Prudential Regulation Authority;(c) the Financial Conduct Authority;(d) such other persons as the Treasury considers appropriate.(4) The Treasury must publish the report.”Member’s explanatory statement This probing amendment would require the Treasury to review the framework for tokenisation in UK wholesale financial markets, including legal certainty, prudential treatment, settlement arrangements and barriers to innovation and competitiveness.

Baroness Neville-Rolfe (Con)My Lords, I will speak also to Amendment 164 and thank my noble friend Lord Ranger of Northwood for his very interesting amendments. This is a really important group. It is clear that digital assets are becoming an accelerating part of our financial and economic landscape, yet the Government, for all their warm words and the work done by the FCA, still lack a clear digital asset strategy. More than one in 10 UK adults now owns a digital asset. Sovereign bonds issued on blockchains, digital settlement systems and collateral, tokenised assets and new payment technologies are all developing fast. They are part of the future of financial services. With financial services changing at extraordinary speed, we have to ask ourselves whether the regulatory framework being created is fit for the future.

We raised this point at Second Reading and we return to it today. This is an area where we see a real risk of regulatory grey zones. Firms are innovating, consumers are participating, institutions are exploring tokenisation and market infrastructure providers are looking at distributed ledger technology. Yet, too often, the answer from the UK regulatory system is uncertain, fragmented or slow. Major banks, asset managers and market infrastructure providers are now exploring tokenised bonds, tokenised funds, digital collateral, digital repo markets and blockchain-based settlement systems. These products are increasingly part of the future of wholesale finance.

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Amendment 163 would require the Treasury to publish a report on the development of tokenisation in UK wholesale financial markets. The potential benefits are considerable. Tokenisation could reduce settlement times from days to minutes and potentially to near-real time. That could reduce operational risk and free up capital. It could also reduce costs by cutting paperwork, reconciliation intermediaries and manual processing. It could improve transparency and support new forms of capital markets innovation. There may be benefits for capital formation. If tokenised securities and private market instruments can make it easier and cheaper for businesses to raise finance, that could be particularly valuable for SMEs, infrastructure projects and growth companies. However, these benefits require legal certainty around ownership and transfer. They require clarity around potential treatment, and they require workable settlement arrangements. They require interoperability between tokenised and conventional markets.

The Government have repeatedly said that tokenisation is an area in which the UK could become a global leader. I agree, but that is ambition, not strategy. Amendment 164 therefore asks the broader question: what is the UK’s digital asset strategy? At present, too much policy appears to be developing issue by issue, product by product and even regulator by regulator. We need a comprehensive approach covering crypto assets, stablecoins, tokenised securities, digital financial market infrastructure, central bank digital currencies, access to banking and payment services, international developments, future regulatory reforms and consumer protection. Our Financial Services Regulation Committee, with its experts, has made a recent contribution, but that was just on stablecoins: its Waiting for Regulation report.

We also need to deal with the problem some firms have in obtaining appropriate access to banking, banking payments and settlement services. That is the subject of Amendment 164B from my noble friend Lord Ranger. Industry needs to know where the Government are going. Firms have told us that they do not know what the operating environment will be in this country. They do not know how different regulators will approach these assets. They do not know which definitions will be used. Some have even said that there is not yet a coherent definition of a digital asset. Other jurisdictions are moving quickly. The United States, the European Union, Singapore, Switzerland and Hong Kong are all developing digital asset frameworks. If they provide greater clarity, firms will go there, capital will go there, talent will go there, and even innovation will go there. I welcome the amendments from my noble friend. He is an expert in this area, and I much look forward to hearing from him, especially on his proposal for a digital assets industry forum.

Last month, the FCA published some crypto assets regime policy statementsfinalised guidance and two further guidance consultations, to which I expect the Minister will refer. We recognise that the Government have not ignored this area, but the broader concern is that digital assets are currently caught between too many regulators, too many overlapping processes and too little strategic clarity. The FCA, the PRA, the Bank of England and the Treasury all have interests in different parts of this landscape, but the industry needs to know who is responsible for what, what rules will apply and what the Government’s overall policy objective is. The confusion works contrary to delivering the sort of clarity that industry and consumers need if this is to become an area where the UK excels.

We want to work with the Minister to ensure that the UK becomes a leader in digital assets. We have the legal system, the markets, the institutions, the expertise and the talent to do so, but at the moment the gap between ambition and delivery is too wide. Our approach would help the Government realise some of the ambitions they set out in their Wholesale Financial Markets Digital Strategy . I would be grateful if the Minister could explain whether the Government plan to publish a comprehensive strategy for digital assets and what specific steps are being taken to make the UK internationally competitive in tokenised wholesale markets.

Digital finance is developing very rapidly and there is a real opportunity for growth that could transform prospects for the City and the wider economy. The question is whether the UK will lead or follow. If we want to lead, we need a clear plan, a coherent framework, proper industry engagement and proportionate regulation. I hope the new Labour Government will look at this. I beg to move.

Lord Ranger of Northwood (Con)My Lords, I support my noble friend’s Amendment 164 and will speak to Amendments 164A, 164B and 164C in my name. I declare my interest as a non-executive director of Ecila.Group—an R&D-focused firm in digital assets and payments infrastructure. I am also a member of the UKUS Crypto Alliance and, for completion, the co-chair of the Digital Markets and Digital Money APPG.

The amendments in my name go some way towards the underlying point, which is that, if the United Kingdom wants to be a serious global centre for digital assets, tokenisation and digital financial markets, we need a regulatory framework and, as my noble friend Lady Neville-Rolfe mentioned, a strategy that is clear, coherent, proportionate and capable of supporting innovation. We do not have that at the moment. We have a lack of clear regulatory direction, too many overlapping areas of responsibility, regulators with differing priorities and, in some cases, different and changing levels of appetite towards digital assets. We also have firms that are trying to understand whether the UK is genuinely open for innovation or whether it will remain a jurisdiction where uncertainty and delay make it harder to invest, scale and launch new products.

I say this because I have heard it directly from industry, particularly over the last 18 months. During that period, I have engaged extensively with businesses in the digital asset arena. I have also travelled to other jurisdictions such as the US—I have been to Washington four times in that period—and the UAE. I have spoken to the US SEC chair, Paul Atkins, I have met with Commissioner Hester Peirce several times and I have spoken to policymakers in these jurisdictions to understand their approach, as well as what they think we should be considering.

These are issues, as my noble friend Lady Neville-Rolfe said, because we are looking for growth. Firms are developing products, consumers are engaging with digital assets, and institutions are looking at tokenisation, digital collateral, new settlement systems and digital market infrastructure. The world is changing; it is already happening. Other jurisdictions are therefore moving fast. If we do not provide clarity, firms and—as has been said—jobs, growth and investment will move and move fast. This is very much a global market change.

The problem is not simply too little regulation. In some respects, a deeper problem is that the regulatory landscape is not yet properly constituted to support the market. If we simply layer new regulation on top of old regulation, without first clarifying who is responsible, what the objectives are, what the vision is and how the different regimes fit together, we risk creating an even more complex framework, with more duplication and confusion, than the one we have already.

That is why Amendment 164A is important. It would require the FCA and the PRA to establish and maintain a defined and representative digital assets industry forum. The forum would be co-chaired by senior regulatory representatives and a senior industry figure, and would bring together regulators, digital asset firms, tokenised businesses, banks, payment firms, market infrastructure providers and relevant trade bodies. The point is simple: the Government and regulators need a proper, structured mechanism for engagement with the industry if we are to take sensible steps in this area.

This is a fast-moving and highly technical area. Regulation cannot be developed in silos by separate regulators. Regulators need to understand how these products work, where the risks are, where innovation is taking place and where proposed rules may have unintended consequences. Industry needs to understand what regulators expect and where the UK intends to go, if not lead. At the moment, that dialogue is not sufficiently structured and there is not the sort of ongoing forum that a market of this complexity requires. Without that, we risk regulating by assumption, rather than by evidence, and we risk fragmentation.

My Amendment 164B addresses a related issueaccess to banking, payment and settlement services for digital asset firms. This is a very real concern. A digital asset firm may be regulated or registered—it may have compliance systems, governance and legitimate commercial activity—but still struggle to obtain the basic banking and payment services that it needs to operate. This is a serious barrier to growth and market entry, which again I have heard many times from businesses in the sector.

There is also a debanking point here. If the regulatory environment is unclear, banks and payment providers may respond by taking the most conservative approach possible. They may decide that it is simply easier not to serve digital asset firms at all, rather than navigate regulatory uncertainty. Financial crime risk, supervisory expectations and reputational concerns all build a very strong defensive risk posture. That does not support innovation. It does not support competition. It entrenches incumbents, disadvantages new entrants and pushes activities to other jurisdictions. This is a consequence of the regulatory environment that we have right now. Yes, we must balance the risks that are out there, but we must also seek to encourage innovation and the market.

My amendment would require the Treasury to review how access to banking, payment and settlement services affects competition, innovation and market entry into the sector. It would also require consideration of whether the current and proposed framework risks conferring an advantage on incumbent firms over new entrants and firms developing new products. That is an important question. If the UK says it wants a thriving digital asset sector but firms cannot get bank accounts, access payments infrastructure or access settlement services, policy ambition will not be delivered in practice.

Amendment 164C concerns consumer redress. This is another area in which clarity is required. Digital assets do not always fit neatly into existing financial services redress frameworks. Consumers need to know what protections they have, where complaints should go, what remedies may be available and how responsibility is allocated when something goes wrong. Firms also need to know what standards apply to them and the liabilities they face. The amendment would require the Treasury to review whether the existing consumer redress framework can provide a clear, coherent, proportionate and internationally competitive basis for regulated digital asset markets. The key word is “proportionate”. We need consumer protection, but we must not create a redress environment that is so uncertain or open-ended that firms decide that the UK is not a viable place to operate. Equally, we must not leave consumers in a position where they do not understand their rights or where harmful conduct falls between regimes.

The wider concern behind all three amendments is that the UK risks falling behind because of a lack of clarity. Industry is not asking for no regulation; it is asking for clear, proportionate regulation that reflects the pace of technological change and the markets that are beginning to exist. My fear is that if we carry on regulating digital assets in a piecemeal way, we will end up with a regime that is consistently playing catch-up or that delivers unintended consequences. It will be unpredictable, overly burdensome and difficult for firms to navigate—even more so than it is already. That would be a bad outcome for innovation, for consumers and for the competitiveness of the United Kingdom.

I will therefore be listening carefully to the Minister’s response to my noble friend’s amendment that calls for a digital assets strategy, to which I have added my name. We should be trying to streamline, simplify and clarify the regime, not add more layers of uncertainty. I would be grateful if the Minister could also address the following three points. First, will the Government commit to establishing a proper representative industry forum for digital assets so that regulators and market participants can engage continuously and constructively? Secondly, what assessments have the Government made of the difficulties digital asset firms face in obtaining banking, payment and settlement services, and the effect this has on competition and market entry? Thirdly, how will the Government ensure that the consumer redress framework for digital assets is clear, coherent and proportionate without making the UK an unattractive place for responsible firms to operate?

As has been said, the UK has a real opportunity in digital assets and tokenised finance. The opportunity will not be realised unless firms know where they stand, so we need clarity, co-ordination and confidence. These amendments are designed to help the Government to provide that.

Lord Holmes of Richmond (Con)My Lords, it is a pleasure to follow my noble friend Lord Ranger of Northwood. I agree with all the amendments that he has eloquently described. I support my noble friend Lady Neville-Rolfe, and particularly her Amendment 163, to which I have added my name. The Government rightly talk about growth. The reality is that digital assets, tokenisation and market dematerialisation are sources of growth in potentially a shorter time than some other sectors that have had greater focus.

18:15:00

Almost 10 years ago, I began writing a report, Distributed Ledger Technologies for Public Good . I wrote it because I saw the opportunities then and the potential that those opportunities would not be realised by the UK for want of clarity, consistency and a coherent approach. A decade on, we have more clarity. We had some helpful announcements from the Bank and the regulator last week. I suggest, as have colleagues, that we are still lacking a real sense of white-heat mission and the arrowhead of possibilities around digital assets. That would be positive in terms of not only the regulatory framework that would flow from it but the signalling that it would give to UK-based businesses and, indeed, to the rest of the world, because this is a hyper-mobile, hyper-agile ecosystem.

We have rightly heard mention of the MAS in Singapore, HKMA in Hong Kong, ADGM in the UAE, the Swiss regulator and more. The FCA has a proud tradition when it comes to innovation, when we consider the 2016 fintech regulatory sandbox. It is doing tremendous work currently and is continuing that with the digital security sandbox and the fantastic innovation unit, which looks across all these emerging technologies. The great good fortune—it is almost miraculous that this is still the case—is that we are not yet quite behind when it comes to putting in place the right-sized regulatory framework for digital assets. Yes, the EU did MiCA, but the reality is that its prescriptive nature has done as much to constrain as to enable. The GENIUS Act in the United States is rightly much heralded, but when one looks at the timelines for implementation, it is not dramatically dissimilar to the UK.

In supporting these amendments, I ask the Minister what more, in particular, HMT is planning to do to give that sense of a clear, crisp and focused mission statement to coalesce the community—it is a community in this country—around the potential and possibilities. Get that right, then right-sized regulation can flow and the growth will come.

Baroness Kramer (LD)My Lords, we on these Benches in large part support the amendments in this group, with a few caveats. It is important to emphasise the frustration that we do not have today, and do not seem to see in the near future, that comprehensive regulatory framework that will draw together the UK approach to all these assets. It is a disservice to Parliament, because it makes it hard for us to investigate as we attempt to pull together a report from one committee or one regulator and try to mesh it with something that has come from another. The experience of even trying to do that demonstrates a lot of the fragmentation. Many of us thought that the Bill would be one of the mechanisms to create that framework, but it is not here. I very much support the amendments that begin to address that issue.

My caveats may seem minor but reflect some fundamental frustrations. For example, subsection (2)(g) proposed by Amendment 164, which is to “have regard” to various factors, puts financial stability and international competitiveness on exactly the same standing. That is an ongoing frustration that I have had through much of the Bill. We have to understand the primacy of financial stability. It is one thing to have a secondary objective but, in general conversation, and over and over again in amendments, we see the two merged as being essentially on a par. That is highly questionable.

We have a history of variations on the digital industry forum. In the early days of fintech, it was the industry that really pulled itself together into a representative body and then the Government indicated their willingness to negotiate with that body. Out of that came a coherent set of appropriate regulations, which met the needs of both sides and were developed by engagement with both sides. I would like to see that industry begin to pull itself together. I am always suspicious when Governments set up forums, because then they pick and choose who sits on them and who the voices are. When industry does it, it tends to be a far more inclusive and more effective group, but the Government need to indicate that they would wish to have such a body and to engage with it. That would move us very much forward. The issue of interoperability is absolutely key, but I take it further: it also needs to be looked at from a consumer perspective. If you get your salary in sterling stablecoin going into your virtual wallet but then you, as an individual, want to be able to go and get pounds, how on earth can you do that at a current ATM? That is simply impossible, so interoperability in all kinds of ways is fundamental to developing the whole new digital direction. However, costs are always involved when you look at interoperability. I would like the Government—or the regulators, if they are the appropriate bodies—to establish a principle that those who use the payment system and are part of it all carry a part of the burden, rather than simply falling back on the traditional banks to carry the costs. That would get us a whole lot further and make the banking community far more willing to be engaged in this process.

I hope that the Government will take these amendments seriously. They seem to move us very much in the right direction. As I say, my caveats are fairly small and I will be looking forward to the Minister’s response. I thank the noble Lord, Lord Ranger, for engaging with the industry to be able to bring forward amendments that take us in this direction.

18:22:00

Sitting suspended for a Division in the House.

18:32:00

Lord Stockwood (Lab)My Lords, I thank the noble Baroness, Lady Neville-Rolfe, and the noble Lords, Lord Altrincham, Lord Ranger of Northwood and Lord Holmes of Richmond, for these amendments and their contributions to this debate. It is an important discussion of how technology and finance will play an increasingly important role in global markets. I declare that I have been personally trading cryptocurrency since 2017; none of the gains have gone towards political donations—I think it is worth mentioning that at the moment.

Taken together, these amendments seek to support the UK’s focus on innovation, competitiveness and consumer protection in digital asset markets. The Government strongly support the digitisation of financial markets and share many of the objectives that noble Lords have set out today. However, before we turn to the detail of the amendments, it is important to recognise that the UK already has a comprehensive programme of work in train to support the development of digital assets and a tokenised market.

First, on the registry framework for crypto assets, the Government have legislated to establish a framework coming into force on 25 October 2027. This will bring a wide range of crypto asset activities within the registry perimeter, providing the legal certainty and consumer protections that noble Lords rightly identify as essential.

Secondly, I can assure noble Lords that we have a strategy on wholesale market digitisation and tokenisation and an expert to drive it forward within the sector. The Government published the Wholesale Financial Markets Digital Strategy last year, setting out an ambitious plan for government, regulators and the industry to support digitisation of the UK wholesale financial markets. As part of this work, the Government have appointed Chris Woolard CBE as the Wholesale Digital Markets Champion to provide market leadership and co-ordinate industry efforts on tokenisation. The champion has already established a cross-sectoral task force and will report to the Chancellor this year and next on progress on how the UK can further advance the adoption of distributed ledger technology in wholesale markets.

Thirdly, on payments, the National Payments Vision sets out our ambition for a world-leading payments ecosystem delivered on next-generation technology. The Government are working with regulators and industry to renew retail payments infrastructure and ensure that the regulatory framework keeps pace with innovation in digital settlement assets. There is clearly more to do in a fast-moving environment, but the Government see the opportunity and are moving to take advantage of it.

Turning specifically to Amendments 163 to 164A, these relate to the Government’s overall strategy for digital assets and engagement with industry. I agree that, as I said, the underlying objective has already been taken forward through the wholesale financial digital market strategy and the work of the Wholesale Digital Markets Champion. There are also a number of existing mechanisms via which the regulators engage with industry on the subject of digital assets and the wider strategy—whether that be joint Bank of England and FCA engagement with firms experimenting with new technologies in the digital security sandbox, or the recent Bank of England and FCA call for input on tokenisation, which is seeking views on opportunities and risks associated with the wider use of tokenisation in financial markets. I do not think that we need to push such engagement with industry on a statutory footing when it is something that regulators are already prioritising.

Amendments 164B and 164C seek reviews of banking access and consumer redress for digital asset firms. On banking access, the Government recognise the difficulties that some firms have encountered and we are engaged with the sector on those matters. While such decisions are commercial in nature, we also expect businesses to be treated fairly. Under the crypto asset regulatory regime, firms will need to be licensed by the FCA to provide relevant crypto asset services. We would not expect such licensed firms to be subject to the restrictions by banking service providers simply because of the sectors they belong to.

On consumer redress, the Government agree that consumers should have clarity about the protections available to them. However, the existing FSMA framework and the regulated activities orders are deliberately flexible. When new activities are brought within regulation, the relevant regulatory protections, including complaints handling and access to the Financial Ombudsman Service, can be considered as part of the process.

I therefore agree with the underlying objectives of these amendments but I think that the existing strategy and ongoing work provide the most effective route forward. I am a strong believer in the need to digitise financial markets, and I am confident in the actions that the Government are taking with this agenda, which is a key strategic priority for the UK. If I have missed any questions in my response, I will be happy to follow up and write. I therefore ask the noble Baroness to withdraw her amendment.

Baroness Neville-Rolfe (Con)My Lords, I am very grateful to my noble friends Lord Ranger of Northwood and Lord Holmes of Richmond for their support and the amendments that they have tabled on this important topic of digital assets.

I am very glad to hear of the Woolard review of tokenisation and the progress on crypto assets. I hope that the Minister is right about that solving the debanking issue—we will see. However, I am slightly disappointed in his response, because I know that he comes from a sector where digital progress has underlined success. I think that the industry lacks the clarity it needs. That is what it has been telling us. Firms need to know what the Government’s overall strategy is and how the different regulators will work together—I am sure there are some good examples. There is also the question of what definitions will apply to digital assets, along with how the UK intends to remain competitive internationally. There has been a lot of progress around the world.

Therefore, the points that we have raised and those put forward by my noble friend Lord Ranger need to be addressed. I was very struck by the way that he has travelled the world in his international search for success and growth in digital assets. Listening to him, I believe that we can learn from what both Rishi Sunak and the current Government have done together to get behind AI. I also agree with the noble Baroness, Lady Kramer, that we can learn from the successes on fintech—which I remember being involved with probably nearly a decade ago.

If the UK wants to be a leader on tokenisation and digital assets, we need a clear strategy. We need a joined-up and proportionate regulatory approach and a framework that supports innovation, while—most important of all—protecting consumers. I think that we will want to return to this issue on Report. Progress is being made, but we would like to see a little more ambition. However, for now, I beg leave to withdraw my amendment.

Amendment 163 withdrawn.

Amendments 164 to 164D not moved.

Amendment 164E

Moved by

164E: After Clause 46, insert the following new Clause— “Shared digital identity and compliance utilities(1) The Secretary of State must, within 18 months of the day on which this Act is passed, publish a specification for—(a) a shared digital identity utility (“the identity utility”), providing API-based identity verification services accessible to authorised persons and regulated institutions operating in both legacy and digital markets;(b) a shared anti-money laundering and know your customer compliance utility (“the compliance utility”), providing API-based access to customer due diligence data and screening services.(2) The specification must address— (a) governance arrangements, including whether the utilities are to be publicly owned, privately owned under public specification, or operated as industry utilities;(b) data standards and interoperability requirements;(c) access arrangements for legacy and digital ledger technology-based market participants;(d) privacy and data protection safeguards, including compliance with the UK GDPR;(e) the transition period during which legacy and digital know your customer processes will operate in parallel.(3) The FCA may make rules—(a) requiring regulated institutions to register with and use the identity utility or compliance utility once operational;(b) providing that compliance with compliance utility standards satisfies the customer due diligence requirements of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.(4) Use of the identity utility or compliance utility by a regulated institution does not, of itself, discharge that institution’s obligations under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 or under the FCA's financial crime rules.”Member’s explanatory statement This amendment is modelled on Singapore’s MyInfo and the EU's European Digital Identity Wallet framework.

Lord Holmes of Richmond (Con)My Lords, it is a pleasure to open this group of amendments in my name. I can only apologise to the Committee that I did not manage to get through the full alphabet and require Roman numerals to be used after some of the amendments —perhaps when we come to Report. I will take Amendment 164E first before moving to the substantive group, which all speak to tokenisation and market demat.

Amendment 164E goes to the digital opportunity that we have when it comes to many issues, not least what passes for KYC and AML. In many ways, KYC has failed to deliver for more than quite a long time in the UK. Indeed, as a jurisdiction, we are not alone in that fact. It would be a joke if it was not true that you can avail yourself of financial services and other products by demonstrating what a capital, stand-up character you are because you produce a paper gas bill. We can do better, and we need to do better not only in terms of KYC and AML, but in terms of being able to realise all the opportunities from digital assets, tokenisation and market demat. We need an effective system of digital ID, and that is what Amendment 164E is all about. It is uncontroversial and draws on systems already in place, such as the MyInfo system in Singapore and the EU digital ID wallet framework. I will be interested in the Minister’s response on Amendment 164E and, if he is not in favour of it, his thoughts on the current situation and how it is working in terms of the digital ID framework in the EU and, indeed, the MyInfo system in Singapore.

The remainder of the amendments in this group continue the discussions that we had on the previous group. My noble friend Lady Neville-Rolfe, in her Amendment 163, displayed brevity in what I have taken an entire group of amendments to do. I have sought to open up the detail: the critical factors and principles we need to consider and put into the Bill to enable tokenisation and market demat, to have the right frameworks in place, and to send the right signals across the UK and around the world that we, the UK, not only understand what is required but want to be market leaders, market shapers and market makers in this space.

Many colleagues joined me in this Room in 2021 for the Financial Services Bill, in 2023 for the Financial Services and Markets Bill and through these past six days on this latest Financial Services and Markets Bill. Is the conclusion we draw from that that we are having too many financial services Bills or do we see that given there has been a three-year gap since the last one they are becoming fewer and farther between? Whatever the right conclusion, if we have a sizeable Financial Services and Markets Bill in front of us now, why would we not take the opportunity to put in at least a clear framework for what is required: tokenisation, market demat and all the potential opportunities of digital assets for the United Kingdom? I will not try the patience of the Committee by running through every amendment in detail, so long as I can be assured that the Minister will address every amendment when he comes to respond. I definitely saw a nod from him.

However, the issues that I set out, and the underlying principles, are clear. We have to move to tokenisation. There will clearly be a period in which we have tokenised and traditional assets coexisting. They need to be able to interoperate; there need to be bridges between them, and from one to the other. They need to be clearly understood and set out. When many argue that we cannot legislate in time, I merely offer the Electronic Trade Documents Act and the Property (Digital Assets etc) Act. Both are very precise, clear and blessedly very short statutes that enabled clear opportunities in the similar area of what these emerging technologies can deliver.

18:45:00

What I seek to do is to ensure that digital and tokenised assets will not be treated in a disfavourable way compared with traditional assets; to consider all the issues for issuers and an issuer council—which will be very helpful; and to look towards standards and how we look at data and tokens, how we conceive of them and bring specificity to them. Crucially—and we will touch on this in the next group as well—we need to look at how we can bring education to all levels in this area, both in the sophisticated market itself and rippling out far beyond that. We need clear definitions. Clarity has already been referred to many times when we have discussed digital assets. Having education, common standards and clarity on the treatment of these assets will further enable the narrative that many noble friends have been talking about when it comes to these broader points.

The opportunity is clear. The Bill is in front of us. It is fabulous that the UK has Christopher Woolard as the Wholesale Digital Markets Champion; he is an excellent appointment. However, I do not believe that it would in any way cut across his work and what he has been asked to do by the Government if we were to put a framework in place to enable, assist and put some pace into his work. The Digital Markets Taskforce has been undertaking excellent work in this area for the past year, and it set out in clear detail what is required if we want to succeed in this space.

That is exactly what I have tried to do with these amendmentsto go to the specific points and set out how they could become part of this statute—if you will, tokenised assets, market demat and clauses in a box from this set of amendments. I look forward to the Minister’s response. I beg to move Amendment 164E.

Lord Ranger of Northwood (Con)My Lords, I support my noble friend Lord Holmes’s amendments across the alphabet, particularly because he is right about the detail and the need for us to look at the ambition and see whether we are really targeting changes that will help us fulfil the ambition. When it comes to the point about regulation and whether or not it has worked, in terms of KYC, AML and even PEP, we know that these fundamental versions of regulatory burdens do not succeed. We hear constantly of their failings, so how are we going to adopt and adapt as we move into the digital assets universe, as I have been calling it, rather than naming each different type?

Fundamentally, one of the elements here is the use cases. These amendments speak to specific points and changes that could be brought through, but we must look at the use cases in which these will apply. We talk about tokenisation or how stablecoins will be used. We must talk about how property and assets might be traded differently. We must look at how services will be adapted and the wholesale settlement that international markets are looking at. We must talk about and consider the use cases around retail e-commerce. With that, I support my noble friend’s amendments.

Baroness Kramer (LD)My Lords, I am going to be brief again: these are very interesting amendments. The breadth of the amendments put before us by the noble Lord, Lord Holmes, gives us a sense of the extensive work that must be done, right across the plumbing of the entire financial services sector, to move and take advantage of the opportunities of the digital world. There is no discussion here of some of the risks, namely about the levers of power shifting to different hands and whether we should be concerned about that or whether there are monetary sovereignty issues. Those are crucial issues, and we cannot walk away from them. Plumbing seems boring, but it is crucial. It seems that every aspect of that plumbing has been raised here, something that I hoped we might hear about in greater detail from the Government. I am particularly focused on the first of the amendments tabled by the noble Lord, Lord Holmes, which is Amendment 164C. I apologise, I have the wrong one.

Lord Holmes of Richmond (Con)That was good too, though.

Baroness Kramer (LD)That was very good too. I meant Amendment 164E, which is headed,

“Shared digital identity and compliance utilities”.

I come from a party that is always very concerned about identity cards, whether they are digital or traditional, old-fashioned cards, and what they do to privacy and independence, so I have those caveats constantly in the back of my mind. It seems to me, however, that a series of fundamental questions are raised by the noble Lord, Lord Holmes, in subsection (2), where he talks about the various specifications, the governance arrangements, the very straightforward things such as whether utilities are to be publicly or privately owned, under public specifications or operated as industry utilities. There are issues of data, access to digital ledgers, privacy, data protection and how to cope with the transition period, which will be very complex and very different for different individuals. Some people will transition completely almost in the blink of an eye, and others will be very late adopters. That creates a whole set of issues around financial inclusion and exclusion. I hope very much that we will get the discussion that we need, particularly around subsection (2), which then sits as a foundation to all the other issues that are raised. These are issues that engage the regulator, of course, but many of them are above the regulatory pay grade, and we need to be engaged on those issues here in this Committee.

Lord Altrincham (Con)My Lords, this group is a snapshot, in a sense, of where we are now in digital regulation for financial services in the UK, as discussed by my noble friend Lord Holmes. This group somewhat dovetails with the amendments that we discussed in the previous group, which sought to probe the Government’s strategy for digital assets, tokenisation, access to banking and payment services and consumer redress. However, I am concerned that this package rather jumps the gun. The issue is more profound than the absence of individual regulatory provisions.

As my noble friends Lady Neville-Rolfe and Lord Ranger of Northwood, and the noble Baroness, Lady Kramer, said, we do not yet have the basic architecture in place, and we do not yet have a clear digital assets strategy. We do not yet have a settled framework of engagement with the industry, and we do not have a proper industry forum through which the Government, regulators and market participants can work through these questions in a structured way. That matters because this is a fast-moving area: if we legislate too quickly, or in too much detail, without proper consultation and industry engagement, we risk creating a framework that is either obsolete before it is implemented, or misaligned with how the market is actually developing.

The point that we have been making throughout these debates is that the Government need to move from ambition, the Digital Markets Taskforce and their initiatives to strategy. It is not enough to say that the UK should be a global centre for digital assets or tokenisation: we need to know what that means in practice, who is responsible for delivering it, how the regulators are working together, what definitions will be used, and what sort of regime firms can expect. At present, the problem is not only a lack of regulation: in some respects, the problem is the way the regulatory system is operating, those overlaps between the Treasury, the FCA, the PRA, the Bank of England and other bodies. There are sometimes different emphases, different attitudes and different levels of appetite toward digital assets and tokenised finance. That creates uncertainty for firms. Industry does not need more rules; it needs clarity, a coherent regulatory perimeter, regulators that are aligned with one another and confidence that the UK is developing a framework that supports responsible innovation, rather than simply adding new layers of process and permission. This is why we need to be careful before layering further statutory requirements on top of a system which has not yet been properly clarified. That said, the principle raised by my noble friend about looking to world leaders for inspiration is a good one. This is something we should be paying attention to if we wish to remain internationally competitive.

In addition, the principle for higher regulatory neutrality between traditional and tokenised assets is a sensible one. If two instruments have the same economic substance and risk profile, there is a strong case for treating them consistently. But before that principle can operate effectively, the Government and the regulators need to define clearly what counts as an additional asset—a tokenised security, a crypto asset, a stablecoin or a form of digital market infrastructure. That is why the industry forum proposed in the previous group seems so important. We need a better mechanism for engagement before we decide the detailed architecture, and we need to hear from banks, payment firms, digital asset businesses, market infrastructure providers, asset managers, lawyers, technologists and consumer representatives. Without that, we risk legislating for a market as we imagine it, rather than for a market as it is developing.

In summary, my noble friend Lord Holmes raises important issues and many of the ideas in this group may well form part of the future architecture for digital finance. The first task is to sort out the foundations. We need strategy, clarity, co-ordination and proper industry engagement before we start building further layers of regulations. For those reasons, I welcome the debate and the questions raised by these amendments. The Government must first address the more fundamental uncertainty at the heart of the UK’s approach to digital assets and tokenised finance.

Lord Stockwood (Lab)My Lords, I am grateful to the noble Lord, Lord Holmes of Richmond, for tabling these amendments and for his contributions to this and the previous debate. I will not rehash the arguments I made previously. We believe that we have a strategy, and we believe that that has been executed. These amendments cover a wide range of issues. The noble Lord asked me to respond to all of them; I will try to do so but, if I miss any, we can follow up afterwards.

The amendments include proposals on shared digital identity, AML utilities, prudential treatment for tokenised assets, an additional digital financial markets sandbox, education and use-case libraries, issuer governance, common token and data standards, model contractual clauses, custody and bridge infrastructure, issuer pathways and payment rail neutrality. The Government agree that the development of tokenised markets depends on proportionate regulation, legal certainty and effective payment and settlement infrastructure. These are all important issues, and the Government are already taking extensive action to drive forward this agenda, which I set out in the last debate. On Amendments 164E to 164H, the Government recognise the importance of trusted digital identity, effective AML processes, proportionate prudential treatment, testing environments and education. I am happy to assure noble Lords that these matters are already being progressed through existing frameworks, including the UK digital identity and attributes trust framework, guidance on the use of digital verification services under the money laundering regulations, the digital securities sandbox and wider government and regulator work on tokenisation and market digitalisation.

The Government also recognise the importance of market understanding. However, I have concerns about requiring in legislation for the FCA to maintain a detailed use-case library or to prescribe particular commercial models for the development of digital financial markets. The role of the Government and the regulators is to establish clear and proportionate frameworks that support innovation while protecting consumers, market integrity and financial stability. The development of specific use cases and business models is a matter for industry, operating within those frameworks. The wholesale digital markets champion, whom I mentioned previously, can look at these issues if this is raised with him.

Across all these areas, the Government’s approach has been to support innovation through enabling frameworks rather than prescribing particular models in legislation. The Government believe that it is preferable to continue building on these flexible frameworks rather than putting in place detailed statutory requirements.

Amendments 164J, 164K, 164L, 164N and 164P focus on the infrastructure needed to support tokenised markets. The Government recognise the importance of legal certainty, interoperability, custody arrangements and clear issuer pathways for tokenised financial instruments. These are precisely the issues currently being considered by the Government and regulators, including through a joint call for input published by the FCA and the Bank of England earlier this year on the future of tokenisation in UK wholesale financial markets. The regulators have made clear that this work will inform a joint road map of reforms developed in partnership with industry.

The digital securities sandbox was also specifically designed to provide that flexibility, allowing government, regulators and industry to test how legislative and regulatory frameworks may need to evolve before making more permanent changes.

19:00:00

Amendments 164M and 164Q concern payment rail neutrality and digital settlement assets. Amendment 164M would establish a new regulatory framework for payments that is neutral to technology, while Amendment 164Q would require periodic reviews of this framework. I agree that regulation should support innovation and should not create unjustified asymmetries between technologies that present materially equivalent risks. That is why the Government are already modernising payment services regulation to ensure that it supports new digital payments, and taking forward wider work under the National Payments Vision to support new payment technologies. These reforms are designed to ensure that the UK’s payments framework remains safe, innovative and competitive as markets evolve.

I thank the noble Lord, Lord Holmes, for bringing these matters to our attention. I hope that I have somewhat reassured him and the rest of the Committee that the Government and the regulators have a robust set of work aimed at addressing these points, while acknowledging that this is a fast-paced, moving environment. I therefore ask the noble Lord to withdraw his amendment.

Lord Holmes of Richmond (Con)My Lords, I thank all noble Lords who have taken part in this debate. It certainly seems that I am getting more from the Liberal Democrat Front Bench than my own Front Bench at the moment—strange times, but there we are. For the time being, I beg leave to withdraw the amendment.

Amendment 164E withdrawn.

Amendments 164F to 164Q not moved.

Clause 47 agreed.

Amendment 165 not moved.

The Deputy Chairman of Committees (Lord Young of Cookham) (Con)As Amendment 165 has not been moved, I cannot call Amendment 165A for reasons of pre-emption.

Amendment 165A not moved.

Amendment 166 not moved.

Amendment 167

Moved by

167: After Clause 47, insert the following new Clause— “Duty to promote public understanding of financial services and financial capabilityThe FCA must take such steps as it considers appropriate to promote public understanding of—(a) financial services and markets,(b) personal financial management,(c) saving, borrowing and long-term financial resilience,(d) financial decision-making and financial risk, and(e) pensions.”Member’s explanatory statement This amendment would give the FCA a statutory duty to promote public understanding of financial services and financial capability, and to report annually on the steps it has taken, the groups most at risk of poor financial literacy or exclusion, and the contribution of improved financial capability to consumer resilience, competition and economic growth.

Baroness Neville-Rolfe (Con)My Lords, in moving Amendment 167, I am grateful for the support of my noble friend Lord Altrincham and the noble Baroness, Lady Altmann.

Financial education is incredibly important, but it is unusually weak in the UK compared to, for example, Finland, the Netherlands, Singapore and Australia. The Times rightly has a campaign to improve it. Rishi Sunak has spent time and effort since leaving office trying to do so, citing how much better people do in life if they understand inflation, the magic of compound interest and the importance of diversifying risk. Financial education is an issue on which I have campaigned for a very long time, notably in my 2022 review of the state pension age. I believe it is central to how people live their lives, make decisions, protect themselves and participate responsibly in the economy. It helps them to make sensible decisions about borrowing, mortgages, insurance and pensions, to avoid scams and financial harm, and to understand basic financial and economic statistics. This is a mission that I hope noble Lords of all political perspectives can support.

Amendment 167 would give the FCA a new statutory duty to promote public understanding of financial services and financial capability. For example, it could produce succinct basic explanatory material on concepts such as compound interest, basic banking, and portfolio and asset diversification. The amendment would require the FCA to report annually on the actions it has taken to improve financial capability, the groups most at risk of poor financial literacy, the groups most vulnerable to financial exclusion, and how improved financial capability contributes to consumer resilience, competition and economic growth.

The reason this matters is that the FCA’s current objectives focus on consumer protection, market integrity, competition, and growth and competitiveness. There is not currently a primary statutory duty on the FCA to improve financial capability across society. Better-informed consumers are less vulnerable to fraud and more likely to save, plan for retirement, compare products, switch providers and exercise choice. That supports not only individual resilience but competition and growth. Poor financial literacy often falls hardest on those who are already vulnerable or excluded. If people do not understand the financial system then they are less able to access it, less able to challenge poor treatment, less able to avoid expensive mistakes and less able to make decisions which improve their long-term security.

One problem is that financial education provision is scattered and variable in quality. There are many good initiatives, some even by the private sector, as I remember from the work done by Tesco Bank in Scotland, but they are not joined up. The curriculum has been improved slightly, although mainly through citizenship and maths, with some schools doing very good work but others being less effective. As recent debates on student loans have shown, this is something that we really need to grasp. We ask 17 and 18 year-olds to make significant financial decisions with long-term consequences, yet we do not ensure that they are equipped with the skills and knowledge needed to make the decisions well.

Many teachers find financial education difficult, and, like people from all walks of life, they are not aware enough of it in their own lives, let alone skilled enough to teach the basics well. They need support, resources and confidence. Financial education needs to be included in teacher training and linked to university teaching. I echo the difficulties of the noble Lord, Lord Carlile, with the scope of the Bill, since an amendment I tabled on the subject was rejected. The truth is we need a step change at every level. My amendment does not ask the FCA to replace schools, teachers, parents, charities, or the Money and Pensions Service—although that service is too divorced from most financial transactions to do a good job. Our amendment would impose a duty on the FCA to recognise that improving financial capability should be part of its mission, and would require it to report properly each year on what it is doing. That could have a catalytic effect.

I welcome Amendment 170, in the name of my noble friend Lord Holmes of Richmond, which would require the FCA to work with the Money and Pensions Service to produce a national financial education strategy. That is complementary to my amendment.

There is a strong case for a more joined-up national approach. Financial education should not be a patchwork of disconnected initiatives. We need a coherent strategy, covering budgeting, saving, investment literacy, pensions, debt, fraud prevention, digital finance and support for vulnerable groups. I was glad to have a positive response on this issue from the noble Lord, Lord Livermore, to a recent Question, and would be very grateful if the Minister could respond to our pleas. Better financial education could be a key pillar of consumer protection. This is an area where a legacy is waiting to be created. I beg to move.

Lord Holmes of Richmond (Con)My Lords, it is an absolute pleasure to follow my noble friend Lady Neville-Rolfe. I support her Amendment 167, which, as she rightly identifies, has many common themes with my Amendment 170.

I have been working on financial education and financial capability for a long time. As my noble friend rightly identifies, and as we have mentioned in other groups, the need for a coherent cross-society, cross-economy financial education and financial capability strategy, covering every stage of life, could barely be more needed than it is today.

There are two pernicious forces striding our streets, walking hand in handfinancial exclusion and digital exclusion, one often causing and compounding the other. Becky Francis’s review found that it was absolutely key to have financial education and capability within the curriculum, but it is about how that naturally touches on digital capability, media literacy and capability, and AI literacy and capability. These threads all come together, and can do so a positive, additive fashion if they are seen as positive, and are personalised and focused on the individual at every stage of her or his life, to enable all of us to make choices and to be included. With so much in society going digital—to be fair, not much in the Bill is going digital, but that is perhaps an outlier—financial exclusion for want of financial education and capability could dramatically increase and exacerbate the exclusion already felt by those at the most extreme end of our society.

Education is not just about what happens with the curriculum; it is a matter for our regulator. Through that, when it is a primary concern for the regulator, it gives it a sharpness of focus, putting it right at the centre for the regulator responsible for our financial services. It works with the Government’s stated aims in other areas. If the Government constantly state that they want to take a domain-specific approach, a financial education and capability, together with a domain-specific approach, will mean that the FCA will bring in money advice and a pension service alongside that.

I add to this to ensure that financial education and capability go beyond traditional products. When one considers how many young people are engaging with and investing in—in some senses, I put quotes around “investing in”—crypto, it is clear that the financial education and capability need to cover all the financial products, instruments and assets that are currently out there and being used and traded, not least by young people, who need to be enabled, empowered and given the capability and capacity to choose which products they want to engage with in a meaningful and capable fashion.

Amendment 171 is a different matter. It is a very specific amendment on SME right of action with the FCA—a right of action that is currently not available to SMEs. One can see at first blush why this is the case, because there is a clear distinction between a private person and an SME. The difficulty is, as currently set out in Section 138D of FSMA on the definition of a private person, that a private person and an SME are, in reality, characters that represent a principle and policy that sit underneath them. That is what the amendment is all about. The principle being set out is the assumption that a private person is always in need of a right of action because of their circumstances, which an SME is not.

This is beguilingly appealing at first blush, but entirely wrong in being a coherent strategy that includes everyone. The reason is that it inevitably tends to the mean: the average private person on the famous omnibus or the average SME with levels of understanding, support and financial wherewithal. But that does not cut it. That should never have cut it, and it does not cut it for current situations, because, on the one hand, it is clearly entirely possible and a reality that thousands of small and micro entities out there do not have these assumed resources, capabilities and capacities. On the other hand, there are millions of private persons who are far more capable and economically sophisticated than these small and micro entities.

This amendment is specific, clear and coherentit is to extend that right of action to small and micro entities. I am not suggesting that the drafting is perfect; there may need to be de minimis levels put in, or a clearer definition of what small and micro entities are. But again, if the Government want growth and to back our businesses, not least our small and micro businesses, it is a question of coherence, clarity and fairness. SMEs should have a right of action when it comes to the FCA. This should not be limited just to private persons, as currently set out. I look forward to the Minister’s response and I beg to move.

19:15:00

Lord Davies of Brixton (Lab)I cannot but support the desire for greater public understanding of financial matters. The noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Holmes of Richmond, have made a powerful case for better understanding, but I am not convinced that they have made the case for it to be focused in the way that they have set out in their amendments, so I look forward to the response from my noble friend the Minister. I want to make two points about these amendments.

The first is that better understanding is not a magic trick. We can be in favour of it but we must never overstate what it can achieve. It certainly does not weaken the case for effective regulation or remove the need for it at all. We need to be clear about that because, sometimes, when the issue is discussed there is a slight—or sometimes more than a slight, perhaps an overt—suggestion that that is what it would achieve.

It is worth my quoting a bit from the interim report from the Second Pensions Commission, which is obviously about pensions but gets to the heart of the matter. It says in its report:

“As with the principles underlying automatic enrolment, the pensions system needs to work in the interests of savers as they enter retirement and protect those who do not, or cannot, engage”.

That is the bottom linewhether people choose to take education or are capable of taking it, they are still entitled to first-class financial services. I am sure everyone here would agree with that, but sometimes it is not front and centre to the way that people think about it.

Lord Holmes of Richmond (Con)Just to be clear, is the noble Lord suggesting that in anything that I have set out—I will not speak for my colleagues—financial education and financial capability would then be used to weaken and have lesser regulation? I do not believe that that is what I said.

Lord Davies of Brixton (Lab)No, I am not for one moment suggesting that. I am saying that, in other discussions, I have heard it said explicitly or by implication. It is a danger and, given what we are trying to achieve, it is one that we should recognise and take account of.

My second point is that both amendments refer to the FCA. The first amendment, from the noble Baroness, Lady Neville-Rolfe, specifically refers to pensions. Let us be clear: the FCA knows little or nothing about pensions. It is the wrong body to undertake any form of public information about pensions. I have heard the discussion on the regulation of pensions and people asking, “Why do we have two regulators?” Well, we do have two: one is the Pensions Regulator and the other is the FCA, but the FCA’s involvement is narrow and we should understand that it is dying. It is going because personal pensions are dead, and the FCA will have little or nothing to do with pensions in the future. The life companies have not quite realised this yet—they are fighting against it—but history will remove them from this market.

Clearly, pensions do not fall within the ambit of the FCA for these purposes. It can provide information about life insurance products and annuities, but those are not pensions. The word “pensions” is wrong in Amendment 167.

Baroness Kramer (LD)My Lords, I suspect that nobody in this Room would not speak out very strongly in favour of financial education and that, in this House, we would be really grateful if there were some capacity for it, particularly in the ever-changing world that we are dealing with today, with all its complexity. I sign up totally to that underlying concept, although I think that the noble Lord, Lord Davies, alighted on an important point. I know that my noble friend Lady Tyler speaks a lot on financial inclusion and always talks about financial education as part of that, but she becomes extremely frustrated when people seem to think that, somehow, financial education is a substitute for the other actions that are needed, such as access to cash or to personal services. The noble Lord is completely right that we want financial education, and it is brilliant if we have good financial education, but that does not take away from the need to make sure that our financial services sector delivers proper, safe, first-class services, appropriately regulated.

Of all the bodies to choose to provide financial education, the FCA would be right at the bottom of my list. This is a body that has so many responsibilities already, and to take on another absolutely massive task—communicating with the ordinary person on the street, among other things—would be way beyond its capacity. It has plenty to do without this. Also, has anybody read letters from the FCA? It does not write human in its general communication. I think this is probably a government responsibility, and to me it makes a whole lot more sense to fund someone—I am picking this out of the blue—such as Citizens Advice, with people who speak with normal people and understand the issues they face and how they face them, if we are going to look for a financial education champion. I am sure people will come up with others.

I want to address Amendment 171 in the name of the noble Lord, Lord Holmes, because it is very important. It would provide a right of action to SMEs for breaches of the FCA handbook. I have from time to time, in this House and even in this series of debates, expressed my very deep frustration with the regulatory perimeter: the consumer protections that the FCA provides are limited to individuals—consumers. It now includes very small micro-businesses, but it does not include small businesses. Bad actors in the industry completely exploit that. We have seen that in example after example of mis-selling, whether back in the days of asset stripping or the mis-selling of derivatives or a play with mini-bonds. That perimeter has been used as a mechanism, because, on the far side of the perimeter, from the FCA perspective, there is not protection: it is entirely caveat emptor. In the complex world of today, where small businesses have to deal with so much and compete on a scale that they never had to if you go back a generation or so, I think it is wrong not to recognise that they will not have the capacity to be able to deal with some of that financial complexity.

I have always been keen on a right of private action; it is a very old and core tradition in British common law. One of my frustrations with the FCA has been that, in a sense, it went down the path of adopting the consumer duty to avoid doing what this House had intended it to do: look for a duty of care—because embedded in a duty of care is a right of private action. The FCA opted for a tick-box approach, rather than the principled approach that lies with a duty of care and the right of an individual citizen to get redress through the court system if they feel they have been damaged. For small businesses to now have a right of private action when they deal with the regulator seems to be an important step forward and a recognition of the reality of the challenges that small businesses face today.

Lord Stockwood (Lab)My Lords, I am grateful to noble Peers for raising the important issues of financial education and the right of action for SMEs. On financial education, Amendment 167 would place a statutory duty on the FCA to promote financial capability, and Amendment 170 would require the FCA to publish a national financial education strategy. I am clearly supportive of the motivation, but I do not believe that new statutory duties on the FCA are the right way to achieve it.

The noble Baroness has already mentioned some of the good work that is being done by the Government on financial capability as part of their financial inclusion strategy, such as the work the Department for Education is doing in schools. The Government are also taking steps to improve financial education for adults. For example, we have announced the expansion of the Money Guiders programme, which is run by the Money and Pensions Service. This helps front-line workers, such as nurses and social workers, to have conversations about money with those they support. Fair4All Finance is also deploying £50 million funded by dormant assets in England to support financial capability initiatives. I assure the noble Baroness that the Money and Pensions Service already has a statutory function to develop and co-ordinate a national strategy to improve financial capability and education, as set out in the Financial Guidance and Claims Act 2018, and the FCA also carries out substantial work in this space. Helping consumers navigate their financial lives is already one of the FCA’s four priorities for 2025 to 2030.

Amendment 171 relates to SMEs and would significantly extend private rights of action. The Financial Services and Markets Act 2000 already draws a clear and deliberate distinction between general private law claims available to all parties, including SMEs, and the specific statutory right of action under Section 138D, which is limited to “private persons”—generally individuals and persons not acting in the course of a business. That reflects Parliament’s long-standing judgment that FCA rules are primarily regulatory and supervisory standards, rather than offering a comprehensive basis for civil liability for all market participants. SMEs can and do bring claims under contract, misrepresentation, negligence and other established causes of action.

I understand why the noble Lord is motivated to extend the right of action to SMEs for regulatory breaches. Historically, SMEs were often left with little option outside litigation, and I agree that those firms have fewer resources to seek redress. This was deliberately addressed in 2019 with the significant expansion of the Financial Ombudsman, which is now accessible to 99% of the UK’s small businesses.

I hope I have gone some way to reassuring noble Lords on the action the Government are taking on these important issues, and I therefore ask the noble Baroness to withdraw her amendment.

Baroness Neville-Rolfe (Con)My Lords, I am grateful to all noble Lords who have contributed to this important debate, and to the Minister for his response. I commend the remarks of my noble friend Lord Holmes of Richmond and the work that he has done on financial education, and I support his complementary amendment on that subject. This has been a useful discussion, because it is an area that deserves a great deal of attention. There is clearly broad agreement that financial education is too important to be left to a patchwork of uneven provision.

The Minister cited the Money and Pensions Service, which I think is based in the DWP. To date, I have not been terribly impressed by the speed or breadth of the education that it provides. It is not only individual groups that I am worried about. We could get an enormous improvement in growth and performance if financial education were spread much more widely, but I should be happy, if it could be arranged, to talk to the service to understand what it is doing before we get to Report. It may be that some of the plans it has are dealing with this wider problem.

19:30:00

I remain concerned that the FCA does not have a sufficiently clear statutory role because, given its understanding of consumer harm, financial exclusion and market behaviour, its reach and its involvement in consumer-facing finance and digital evolution, it has a lot to bring to this subject. I should like to respond to the noble Lord, Lord Davies of Brixton. This is certainly not an alternative to appropriate regulation; I do not think that anyone is saying that. However, picking up on what he said about pensions, the FCA should be able to refer to pensions as a good investment, which they can be. The asset managers who designed and operated the LDI funds were, of course, engaged with pensions.

That is a long way of saying that this is an important subject. It is wide-ranging and we need to find a way of joining it up, so I hope the Government will reflect further before Report. If we want to have more resilient consumers, stronger competition and better long-term financial outcomes for everyone, improving financial capability needs to be central to our approach. We need to try to find a way to achieve that during the passage of the Bill but, for now, I beg leave to withdraw my amendment.

Amendment 167 withdrawn.

Amendments 168 to 172 not moved.

Amendment 172A

Moved by

172A: After Clause 47, insert the following new Clause— “Reform of financial services dispute resolution(1) The Treasury must, within the period of 12 months beginning with the day on which this Act is passed, publish draft legislation containing provision—(a) replacing the ombudsman scheme established under Part XVI of the Financial Services and Markets Act 2000 with a scheme to be known as the Financial Adjudication Service;(b) removing the requirement in section 228(2) of that Act that complaints be determined by reference to what is fair and reasonable in all the circumstances of the case; (c) requiring complaints within the compulsory jurisdiction of the Financial Adjudication Service to be determined by reference to such statutory requirements as may be specified.(d) providing free access to the Financial Adjudication Service for complainants;(e) providing that the expenses of the Financial Adjudication Service are met by levies or fees imposed on regulated persons;(f) providing that determinations of the Financial Adjudication Service are binding on both parties unless appealed as described in subsection (2);(g) making such amendments to Part XVI and Schedule 17 of the Financial Services and Markets Act 2000, and any other enactment, as the Treasury considers necessary for the purposes of that provision.(2) Draft legislation published under subsection (1) must propose the establishment of a chamber of the First-tier Tribunal to be known as the Financial Services Chamber to hear appeals against determinations by the Financial Adjudication Service and make decisions which are binding on the Financial Adjudication Service unless and until overturned on appeal.”Member's explanatory statement This amendment would require the Treasury to publish draft legislation to replace the Financial Ombudsman Service with a Financial Adjudication Service and to establish a Financial Services Chamber of the First-tier Tribunal to determine appeals according to law, to provide speed, expertise and high settlement rates.

Baroness Neville-Rolfe (Con)My Lords, Amendment 172A is in my name and that of my noble friend Lord Altrincham. It would require the Treasury to publish draft legislation to replace the Financial Ombudsman Service with a new financial adjudication service, and to create a dedicated financial services chamber within the First-tier Tribunal. This is a significant amendment but also a serious and necessary one. As noted earlier, it follows the policy announcement made by the leader of my party, Kemi Badenoch, at TheCityUK’s conference last month.

The amendment reflects a wider concern about the way in which the Financial Ombudsman has evolved, and about the need for a consumer redress system that is fast, expert, accessible and legally certain. A little bit of history: the Financial Ombudsman Service was created to provide a low-cost and informal alternative to the courts. That purpose remains important. Consumers and SMEs need an effective way of resolving disputes with financial firms. Going directly to court can be expensive, intimidating and slow. There must, of course, be a route to redress that is accessible and free to use.

However, the FOS has moved far beyond a simple dispute-resolution function. It now operates in many respects as a quasi-regulator. Its decisions can set expectations for firms, shape market behaviour and influence the way in which FCA rules are understood. Yet it does not receive the same scrutiny as regulators such as the FCA, nor does it produce binding legal precedent in the way that a court or tribunal would. That creates a serious problem of legal uncertainty.

At the heart of this issue is the “fair and reasonable” test. The ombudsman is required to decide complaints, not simply according to law, but according to what it considers fair and reasonable in all the circumstances. That gives the FOS a broad discretion. It means that firms can comply with the law, the FCA rulebook and their contractual obligations but still be found against on the basis that the ombudsman takes a different view of what is fair and reasonable. That is not a stable foundation for a predictable regulatory system and that has been recognised, I am glad to say, by the Government but they are not going far enough.

Courts have confirmed that the FOS must take account of the relevant law but is free to depart from it. Firms do not know whether compliance with the FCA’s rules will be enough. They do not know whether the FOS will go further than those rules or whether an individual determination will be treated as an indication of wider expectations. That uncertainly drives gold-plating and overcompliance.

One example that has been raised with us concerns packaged bank accounts and the consumer duty. The concern is that the FOS may take the view that providers should look at whether a customer has used any of the benefits of a packaged bank account in the previous year and, if not, prompt them that this might not be the right account for them. That goes far beyond current FCA guidance.

The wider point is that if the FCA believes that its rules need to change, it should amend them prospectively. If Parliament believes that the statutory framework needs to change, it should legislate. We should not have a system in which major changes in practical standards emerge through a redress body applying a broad fairness jurisdiction.

There is also a serious performance issue, which we have touched on before. The FOS is under significant strain. The backlog has become very large and timeliness targets have been missed. The FOS is now being used as an instrument of mass redress when it was not designed to operate as a quasi-court, a quasi-regulator and a quasi-mass claims mechanism.

Our proposal is to reform the architecture. The financial adjudication service would retain the benefits of a specialist and accessible adjudication system. It would be designed to provide speed, expertise and high settlement rates. Consumers and SMEs would continue to have a route to redress without the cost and complexity of ordinary litigation. The key difference is that decisions would be made according to law. The “fair and reasonable” test would be removed. The new service would apply statute, FCA rules, contractual obligations and legal principles. Where the law is unclear, that uncertainty should be resolved through proper legal determination, not discretionary case-by-case judgment.

Where a dispute required appeal or authoritative determination, it would go to a dedicated financial services chamber of the First-tier Tribunal. That would create binding precedent. It would fill the gap that currently exists between the FOS and the courts, where the only meaningful challenge to an FOS decision is judicial review. Judicial review is not a proper merits appeal. It requires firms to show that the decision was not merely wrong but unlawful or irrational. In practice, this means that FOS decisions are rarely challenged.

A tribunal system would be different. It would allow principles to be determined clearly, openly and according to law. Over time, that would create a body of precedent that would help firms, consumers, advisers and regulators to understand what the rules mean in practice. That is the point of our amendment. It is not about removing redress but about making redress clearer, faster, more expert and more legally certain. Nor is it about weakening consumer protection. Consumers benefit from certainty too. They benefit when firms understand their obligations, when decisions are consistent, when disputes are resolved quickly and when similar cases are treated in similar ways. This amendment therefore asks the Government to publish draft legislation for a new model. It would not require every operational detail to be settled in the Bill today. It asks the Treasury to come forward with the legislative architecture needed to move from an ombudsman model based on broad discretion to an adjudication and tribunal model based on law.

The purpose of the amendment is to begin a serious conversation about the future architecture of financial redress. We need a system that is accessible for consumers, fair to SMEs, predictable for firms and capable of generating clarity over time. The current model sadly no longer does that. It is too uncertain and discretionary. A financial adjudication service, backed by a dedicated financial services chamber of the First-tier Tribunal, would preserve access to redress while restoring legal certainty. That is the balance that we should seek to strike. I beg to move.

Baroness Kramer (LD)I have one question for the noble Baroness, as my noble friend Lord Sharkey will speak for us on this. What will the cost be to the individual of going to the tribunal system? I am conscious that an individual needs to raise between £40,000 and £50,000 to get to preliminary hearing at the employment tribunal. Is that the kind of number that she has in mind?

Lord Massey of Hampstead (Con)I support this amendment and just raise the point of the First-tier Tribunal. I have experience of dealing with the FOS as a firm. At the moment, if you want to appeal the decision of the FOS, you have to go to judicial review. Therefore, whatever the cost of this First-tier Tribunal, it would be very substantially less than going through a process of judicial review, which firms are reluctant to go through, as noble Lords can imagine, because of its cumbersome nature.

Baroness Lawlor (Con)Can I ask the noble Lord to clarify? Judicial review can determine a matter only if there is a matter of law involved, not a matter of adjudication; is that right?

Lord Massey of Hampstead (Con)That is right.

Lord Sharkey (LD)My Lords, as the noble Baroness, Lady Neville-Rolfe, remarked earlier in our Committee discussions, we often agree about things, but not, I am afraid, about this amendment. There are three reasons for that: first, the amendment is not necessary; secondly, it probably would not work, although its lack of any real detail makes it quite hard to tell; and, thirdly, it would significantly bypass parliamentary scrutiny mechanisms. For example, proposed new subsection (1)(c) says that the determination of complaints will

“be determined by reference to such statutory requirements as may be specified”,

without actually specifying them. This does not make for proper scrutiny. How complaints are determined is absolutely critical in how redress is obtained. The amendment tells us nothing about how that would be done, or on what criteria judgments would be made. Proposed new subsection (1)(g) contains what looks suspiciously like a Henry VIII power. None of these provisions is really necessary, and nor is the amendment as a whole. That is because there does not appear to be a convincing evidence base for the radical root-and-branch reform that abolishing the FOS would bring about. The nearest we have to evidence is in the assertion by the Minister that:

“The Government’s review found that, in a small but significant minority of cases, the FOS has acted as a quasi-regulator ”.—[ Official Report , 22/6/26; col. GC 260.] That is all the government explanation there is for the proposed radical reform and, by extension, for the amendment before us.

I have repeatedly asked the Minister for more detail; I asked at Second Reading, and I asked again on the first day in Committee. I have had no response to what are essentially simple questions. How many cases are small? How was their significance assessed? How is the FOS, in this small number of cases, acting as a quasi-regulator? What we have currently is an assertion, but it certainly is not evidence. When he speaks, can the Minister tell the Committee what “small” means in this context? How many and what kind of cases were involved and how did they come to be characterised as significant? As for HMT’s rather bland consultation report, the frequent use of the phrase “broadly speaking” does not inspire a lot of confidence about the strength of its case.

The amendment before us is essentially skeletal and removes the complaints procedure to a wholly different legal arena. Given the grossly overstressed nature of our justice system, it is very hard to see any improvements being located there. The FOS is meant to be, and is, a quick, simple alternative to costly court processes for consumers. There is no hard evidence to support the proposals made in this amendment and, indeed, no clear sense of what kind of redress system and what criteria for determination are envisaged.

Last July, the FCA and the FOS signed a memorandum of understanding. Article 21(b) of the memorandum says that the two parties will

“seek to achieve a complementary and consistent approach, so far as that is consistent with their independent roles by consulting each other at an early stage (including on the interpretation of regulatory requirements where they are relevant to the resolution of disputes)”.

Article 24(c) says:

“For the Financial Ombudsman Service: seek a view from the FCA on the interpretation of its rules and how redress could potentially be assessed, as early as possible in advance of issuing a final determination, and provide the FCA with any relevant information and draft determinations it can share, to assist the FCA in formulating a view.”

The following article says that the FCA should try to respond to the FOS’ submission within 30 days.

19:45:00

In his letter of 1 July, the Minister said:

“The FCA and the FOS are operating a trial version of the mechanism currently through their joint Memorandum of Understanding, allowing lessons to be learned during the passage of the Bill and ahead of legislation taking effect.”

The trial is a very good idea. In fact, if the MoU mechanism works properly, this amendment and the Government’s amendments would be unnecessary, or at least the draconian parts of Clause 8—subsections (2) and (3)—would be unnecessary.

We would be grateful if the Minister could say when we will get a chance to discuss the interim findings of this trial which is now nearly a year old. It is important that we see something before Report begins on 7 September, and certainly not after the Bill has left this House, as his letter seems to indicate.

Lord Stockwood (Lab)My Lords, I am grateful to the noble Baroness for tabling this amendment and giving the Committee a further opportunity to discuss the FOS.

An effective ombudsman service ensures that consumers have quick and easy redress when things go wrong, improving customer confidence in, and engagement with, our financial services system. The FOS largely fulfils that vital role, and the reforms in the Bill will improve that further, ensuring that it provides a quick and informal route for resolving disputes in financial services.

The amendment would undermine this vital role entirely. We believe that replacing the FOS with a financial adjudication service alongside the new tribunal appeal structure would create a more formal, legalistic and adversarial system. That approach would move away from Parliament’s intention of providing consumers and firms with an accessible alternative to resolving disputes through the tribunal and courts system. The Government’s view is that this would not be the right outcome for consumers and firms. The Government’s reforms have been developed in response to issues identified through the review and consultation last year to stop the FOS acting like a quasi-regulator, to stop it taking the lead on mass redress events and to deliver a clearer, more consistent and predictable framework.

I thank the noble Lord for raising that issue and I apologise for not writing in answer to his question. I promise that I will get back to him as soon as we have that information to hand again.

Lord Sharkey (LD)Perhaps the Minister could answer it now.

Lord StockwoodI do not have it to hand. My apologies, I will bring it to the noble Lord. We are confident that the changes will improve trust and confidence that the FOS acts fairly and impartially, while ensuring that decisions are closely aligned with the high standards of conduct and consumer protection set by the FCA where relevant.

The right approach is this careful, targeted reform that preserves the core strengths and benefits of the FOS model—quick, informal and accessible dispute resolution—while delivering the necessary changes to improve the overall operation of the framework. I therefore ask the noble Baroness to withdraw her amendment.

Baroness Neville-Rolfe (Con)My Lords, I thank all noble Lords who have contributed to this debate. I also thank the Minister for his response. I recognise the concern that replacing the Financial Ombudsman Service with a financial adjudication service could make redress more formal, more logistic or less accessible. I understand that concern, but it is not the intention of our amendment. I say this also in response to the noble Baroness, Lady Kramer. The purpose of our amendment is to retain a specialist, accessible and free-to-use route for consumers and SMEs while ensuring that decisions are made clearly, consistently and according to the law.

Clearly there will be set-up costs. However, the Treasury could advise on that because part of our proposal is to require the Treasury to look at the issue and publish draft legislation for a new model. I agree with the noble Lord, Lord Sharkey, that parliamentary scrutiny would be important. There are also other questions that he addressed that the Treasury could answer. Indeed, some of the points that he made also apply to the proposal from the Government for the FOS. Like the noble Lord, Lord Sharkey, I would very much appreciate replies on those points before we get to Report, so that we can make sure that we understand what the Government are proposing properly.

I remain concerned that the Government’s approach does not go far enough. Recalibrating the existing model may improve some aspects of the system but it does not solve the fundamental problem, as I tried to explain at length. Firms and consumers still lack a body of binding precedent that explains what the rules mean and how they will be applied. Consumers would gain from extra certainty. They benefit when firms know what is required of them, when similar cases are treated consistently, and, above all, when disputes are resolved promptly and predictably; I know that from other parts of the consumer market. A system that is unclear and overstretched does not serve consumers well.

We will consider carefully what the Minister has said and look at any follow-up material but, for now, I beg leave to withdraw my amendment.

Amendment 172A withdrawn.

Amendment 172B not moved.

Amendment 172C

Moved by

172C: After Clause 47, insert the following new Clause— “Review of the City of London Corporation(1) The Secretary of State must, within 12 months of the day on which this Act is passed, appoint an independent person or panel to undertake a review of the functions of the City of London Corporation in relation to regulation of financial services and markets.(2) The review must consider—(a) the arrangements relating to engagement between the City of London Corporation and the FCA and PRA, and(b) the extent to which the City of London Corporation contributes to the regulation of financial services and markets.(3) The reviewer must publish a report setting out their findings and recommendations no later than 18 months after appointment.(4) The Secretary of State must lay the report before Parliament and, within six months of receiving it, publish a response setting out what steps the Government intends to take in response to the recommendations.”

Baroness Bennett of Manor Castle (GP)My Lords, this amendment would provide for a review of the City of London Corporation with regard to the regulation of financial services and markets. At Second Reading, I referenced my intention to address this issue—here it is.

In the interests of transparency, I note that my interest in the City of London Corporation extends beyond that. Noble Lords who read the Politico email newsletter may have noted that it has reported that I am working with the All-Party Parliamentary Group on Investment Fraud and Fairer Financial Services on a survey of people’s views of the City of London Corporation, including whether it should be retained as it is, reformed or abolished. That extends beyond the regulation of financial services and markets as covered by the Bill.

I also note that the survey’s existence has led to me being contacted by a significant number of both city residents who are unhappy with the way in which the corporation fulfils its local government-type functions and organisations that receive funding from it and are concerned about the way in which things are done. Those organisations are most keen that what I say does not identify them in any way, for fear of reprisals—I suggest that that is disturbing and telling in itself—but significant elements of the corporation’s operation not being covered by the freedom of information legislation makes it difficult to uncover exactly what is going on.

The survey and my expression of my personal views on the subject have sometimes been confused, as in a letter sent on 1 July by the corporation’s policy chairman, town clerk and chief executive to members of the APPG, including me. The letter seemed to be unable to distinguish between the questions in the survey and comments that I have personally made about the corporation. As the letter from the corporation notes, my views on its existence are well known. Indeed, when I was elected as leader of the Green Party of England and Wales in 2012, the city diary in the Evening Standard noted my calls for its abolition; that was the only record of the election result in that newspaper.

However, the letter of 1 July from the corporation contains powerful arguments for my amendment, which calls for an independent person or panel to be appointed by the Secretary of State to undertake a review of the functions of the City of London Corporation in relation to regulation of financial services and markets. The letter refers to the corporation’s place

“in the delivery of strategic, financial and professional services initiatives”.

It says:

“Mayors have helped to catalyse major initiatives such as the Mansion House Compact and Accord”.

As one industry commentator has noted, in seeking to channel pension fund capital into growth assets,

“private equity, infrastructure, private credit and venture capital are now firmly on the radar”

of pension funds. These are all sectors where we know that benefits are more likely to flow into the financial sector than to investors. The corporation’s letter also points to its role in the Office for Investment: Financial Services, which describes itself on its website as providing

“international fintech firms with a single front door for regulatory assistance and wider business support”.

I direct noble Lords who want to explore the issues around this so-called foreign direct investment further to an excellent book by Angus Hanton, Vassal State: How America Runs Britain . It quotes a late Member of your Lordships’ House, Lord Myners, who said in 2021:

“Britain is open for business in the same way that a car boot sale is open for business”.

It is now even more open for business, with the Financial Times recently reporting that the value of acquisition by foreign buyers is now up to £128 billion this year—more than triple the level in the same period in 2025, and that was before the apparently pending sale of easyJet to yet another US private equity firm. That the last rotten borough in the country—finally otherwise removed by the Reform Act 1867, with non-residential votes removed from other council areas in 1969—operating under rules that would be unacceptable anywhere else in public life and that shield it from scrutiny, skewing democratic representation in favour of business, overwhelmingly financial businesses, can exercise privileged influence over our laws and their administration over regulation is surely something that should be examined, particularly over financial laws that, as we discovered in 2007-08, are so essential to our security.

That is all that this amendment asks forto conduct an independent review of the corporation’s impact on financial regulations and markets. Surely, if the corporation is so confident about the claimed positive impacts that it likes to trumpet, it and the Government could have no objection to a review. Given the problem we have with trust in our politics and financial system, more transparency and consideration would surely be a good thing. I note a recent Public First survey that found that 40% of people think that financial markets have too much influence over decisions made by elected Governments. I also note—the Minister might like to consider this—that the same survey found that 52% agreed that the UK should prioritise financial stability and consumer protections, even if this limits investment and economic growth. When asked about the potential changes to the UK’s post-2008 bank ring-fencing regime, 64% agreed that financial stability should be the priority.

Questioning the City’s place is not, after all, new. The Royal Commission on the Amalgamation of the City and County of London recommended its abolition in 1894. It was Labour Party policy to abolish today’s City of London Corporation until Tony Blair took over the party, and he instead chose to give even greater weighting to the business votes against those of residents.

Defenders of the City of London Corporation tend to reach for the language of heritage, as does the letter of 1 July: the corporation is ancient. It is part of the fabric of London’s history. Reform would be complicated. These are not effective arguments against examination. Age alone does not confer legitimacy—just look at the UK constitution. The corporation’s structures were not designed for a modern democracy. They pre-date it and have been carefully preserved by those who benefit from them.

The corporation is not the financial sector, but it is its lobbyist, its defender and a power base enjoyed by no other part of our society. Its existence cannot be separated from the fact that the financial industry is in a privileged position in our society. Giant financial corporations do not need any further boost to their power; they have more than enough already. No other major financial centre has anything resembling the City of London Corporation—not New York, Tokyo, Frankfurt or Singapore. Surely we should be examining the impact of this singular entity on the state of the UK. I beg to move.

Baroness Bi (Lab)My Lords, I remind the Committee of my interest as the chair of Norton Rose Fulbright. Although my firm was located in the City of London for more than 200 years, from its founding in 1794, we are no longer within the jurisdiction of the corporation, having ventured south of the river a few years ago. My current office at More London gives me what is probably the best view of the Tower of London, which, notwithstanding the imminent arrival of the Bayeux tapestry, has been a daily reminder that not even the conqueror had the poor sense to interfere with the freedoms of the City, which worked extremely well, and we should be careful before we consider doing so. I oppose this amendment, which contemplates a two and a half year process after Royal Assent, with the attendant costs and distraction for the Treasury that such a review would entail. We should therefore ask what the review is actually meant to uncover.

20:00:00

The proposed new clause sits oddly in a Bill focused on creating significant new accountability mechanisms for regulators and is perhaps intended purely for the noble Baroness to continue her campaign against the corporation. I suggest that she does so through other means. The corporation is not a regulator but instead provides a transparent and constructive convening role that brings together industry, regulators and policymakers to ensure that the United Kingdom’s financial and professional services sector remains world-leading. Its engagement with the FCA and the PRA happens through the same channels open to any other stakeholder body, with consultation responses, industry forums and ministerial round tables. There is no secret arrangement or shadow regulatory role here to be exposed.

The corporation is, however, unlike any other local authority in the UK, not least because the 8,500 residents of the City of London are dwarfed by the over 600,000 people who work there and whose interests also needs to be considered. There is no other municipality that contributes over £100 billion annually to the UK economy and is the centre of our world-leading financial and professional services sector. It is therefore right that the corporation should use its convening power to promote this sector, which is at the heart of its success, including through engaging with the FCA and the PRA. If noble Lords have specific concerns about a particular interaction between the corporation and the regulators, the right response is a specific question to the Treasury or to the regulators, or even to the corporation itself, rather than the statutory review panel with a long process that is being considered in this amendment. We do not legislate for a review every time a body engages constructively with a regulator, and we should not seek to do so here.

Lord Pitt-Watson (Lab)My Lords, the noble Baroness, Lady Bennett, has suggested that we inquire into the City of London’s role with the regulators and regulation. My noble friend Lady Bi summed it up well: there is no direct role there. But I wonder whether we could send a message to the City of London, perhaps a little more collegiate and, as a result, more effective. We all recognise that the role and constitution of the City corporation is quite difficult to defend from 21st-century principles. Why does one square mile of the country have these unique privileges? It has billions of pounds worth of property and investment, and the Lord Mayor of London has the status of a Cabinet Minister, apparently, when he or she goes on trips abroad. Why is it charged with the powers of a local authority but also with promoting Britain’s financial services industry? I point out that your Lordships’ House bears witness to the fact that historic institutions can—and often do—do good and important work. I wonder whether, harking back to the traditions of the City of London, there is one that we could help revive, in the spirit of what the noble Baroness, Lady Bennett, may want to happen.

Historically, the City of London was responsible for the good conduct of the trades in the city, ensuring that the goods produced could be trusted to be of high quality. Indeed, I believe that Elizabeth I even had the goldsmiths of London check that the coinage that the Mint was producing was of a high enough standard, because the goldsmiths were more professional than the people at the Royal Mint.

Over time, that role of policing good conduct has passed to professional bodies and then to regulators, but we often forget that it is the professionalism that we need. Regulators cannot replace professionalism, for which so many people from Britain and around the world come to use Britain’s financial services industry. Professionals, whether individuals or institutions, are a disciplined group possessing special knowledge and skills in a widely recognised body of learning. They are prepared to apply this knowledge and exercise these skills in the interests of others. That professionalism, both for individuals and for institutions, harks back to that old role of the City of London: not regulation but professionalism. It is and should be the core and unique selling point of the UK financial services industry. I sense that that is what we in this Room would like to achieve.

The City of London promotes financial services, but surely, if it does that, it must be sure that the services it promotes—maybe not every financial service—serve a purpose in the world. There is still enormous room for the City to identify and help to encourage good practice, not just to promote financial services generally but to ensure that all the services it promotes deliver benefit to the customer and the world. That may, from time to time, involve talking to a regulator—I do not see that as a problem—but it should seek much more to ensure that professional good practice becomes a norm. The City already does some of this, but it could be so much clearer about its focus and role. There would be no better way to promote the success of financial services in Britain.

I have one last coda on this and a more immediate thought. Spokespeople from the City of London Corporation like to explain—correctly—that they represent the whole financial services industry of Britain, two-thirds of which works outside London. But those who work to promote the industry are exclusively employed in the square mile, and it is difficult to express the level of frustration that I have felt among some that the City talks the talk about employment around the country but maybe needs to walk the walk in its own practices on where people are employed. I hope that might be a constructive suggestion about how this venerable institution might serve its country better.

Baroness Dacres of Lewisham (Lab)My Lords, I fear that Amendment 172C strays beyond the purpose of the Bill, which is concerned with improving the regulation of financial services and markets. It is not, in my view, the appropriate vehicle for reopening broader questions about the role and governance of the City of London Corporation. This amendment takes us into a rather different debate—it asks us to examine the role and function of the City of London Corporation—whereas the purpose of the Bill is to strengthen the UK’s financial regulatory framework, ensuring that it is effective, proportionate and capable of supporting growth, investment and innovation, while maintaining high standards. Our focus should remain on achieving those objectives.

It is important to be clear about the respective roles of the organisations involved. The City of London Corporation is not a financial regulator. It does not authorise firms, supervise markets or enforce regulatory rules. Those responsibilities rest with the Financial Conduct Authority, the Prudential Regulation Authority and the Bank of England, all of which are independently accountable to Parliament.

The City corporation performs a different, but none the less valuable, function. It acts as a convenor of expertise, an advocate for one of the United Kingdom’s most important industries and a champion of the UK as a global financial centre. Through its international engagement, it promotes inward investment, supports exports of financial and professional services, and works with industry to help maintain the UK’s reputation for high standards and innovation.

I question whether the amendment has demonstrated that there is a genuine accountability gap requiring statutory review. Before Parliament creates a new review mechanism, we should be satisfied that there is evidence of a problem that the existing arrangements have failed to address. I have not yet heard that case made. The City corporation is already subject to established governance and oversight arrangements, while the regulators are independently accountable to Parliament.

At a time when the Government are rightly seeking to promote economic growth and strengthen the United Kingdom’s competitiveness as a leading international financial centre, I am concerned that this amendment risks creating uncertainty without identifying a clear public benefit. Our efforts should be directed towards ensuring that regulators can carry out their duties effectively, while organisations such as the City of London Corporation continue to play their distinct role in supporting the wider success of the UK’s financial and professional services. For those reasons, I believe our attention should remain firmly on the purpose of the Bill: strengthening the United Kingdom’s financial regulatory framework. I cannot support Amendment 172C.

Lord Altrincham (Con)My Lords, I shall speak briefly to Amendment 172C in the name of the noble Baroness, Lady Bennett of Manor Castle, on the promotional role of the corporation and the survey views of local residents. Let me also say how interesting the speeches of the noble Baronesses, Lady Bi and Lady Dacres of Lewisham, and the noble Lord, Lord Pitt-Watson, were on this.

I have some concerns about whether this amendment is necessary, proportionate or properly directed at the issues before us in this Bill. If the concern is about the regulation of financial services and markets, Parliament should scrutinise the regulators and the Government. Indeed, much of our debate on this Bill has been precisely about that: how we ensure that the regulators are accountable, transparent, proportionate and properly focused on growth and competitiveness.

The City of London Corporation, however, is not a financial services regulator and does not set prudential rules. I am therefore not persuaded that a statutory review of the City of London Corporation’s role is the right mechanism in this Bill. At a time when we are trying to strengthen the competitiveness of the United Kingdom, attract global capital, support innovation and ensure that financial services remain one of our national strengths, we should be cautious before creating unnecessary uncertainty around one of the institutions that help to promote that sector internationally. I think the noble Baroness would recognise that as one of its roles.

There is also a question of evidence. Has there been a regulatory failure caused by the City corporation? Has there been a financial stability concern arising from its role? Has there been evidence that its activities have distorted the regulatory process in a way that existing scrutiny mechanisms cannot address? Without that evidence, I am cautious about launching a statutory review through the Bill.

Nor do I think that the Bill is the right vehicle for a wider constitutional debate about the governance of the City of London Corporation. This Bill is about financial services regulation, market infrastructure, consumer protection, competitiveness and the regulatory framework. The governance of the corporation is a broader issue, and one that would need to be considered separately if Parliament wished to do so. That is not to say that scrutiny is unimportant, but we should focus scrutiny where regulatory power actually sits. In this Bill, that means the FCA, the PRA, the Bank of England and the Treasury. Those are the bodies whose powers are being expanded or adjusted, and those are the bodies that Parliament should be most concerned to hold to account. For those reasons, I do not support this amendment.

Lord Stockwood (Lab)My Lords, I thank the noble Baroness, Lady Bennett of Manor Castle, for her amendment. I have listened carefully to the arguments presented both in support and in opposition. I want to put on record my respect for the expertise of the City of London Corporation. I have worked positively with the corporation over the last year while I have been in office. It is an institution that represents the interests of the financial and professional services sector and, in that role, it contributes hugely to our mission of strengthening our financial services sector and ensuring that it delivers for people across the country.

It participates in initiatives designed to promote the UK as a place to do business and attract vital investment into the UK that will provide good jobs and pay for vital public services. I am aware that the noble Baroness is keen to revisit the structure of the corporation. However, I can assure her that, as my noble friends Lady Bi and Lady Dacres have said, the corporation has no unique role or special access in designing or influencing the development of financial regulation. The Government engage with a wide range of interested stakeholders in the development of financial services legislation. This includes the regulators, firms, trade associations and consumer groups. The City of London Corporation can and does participate in that engagement on the same basis as other interested parties.

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To reassure the noble Baroness, there are arrangements in place to ensure transparency in relation to the Government’s activities; for example, I and other Ministers regularly publish details of our engagement with all external stakeholders. Similarly, I can assure her that the corporation holds no unique or privileged position in relation to the operation of the financial services regulators. The FCA and PRA engage with a wide number of stakeholders across the market as they exercise their functions, including with the corporation. Where information is held by public authorities, such as the Treasury, the FCA and the PRA, it is subject to the usual transparency frameworks, including freedom of information legislation.

Taken together, I do not see the need for action, as the corporation does not have a unique or privileged position in the development of financial services regulation, at which the Bill is particularly targeted. As such, I ask the noble Baroness to withdraw her amendment.

Baroness Bennett of Manor Castle (GP)My Lords, I thank the Minister for his response and everyone who has taken part in this interesting and informative debate. We have engaged with some interesting and broad issues. I particularly commend the noble Lord, Lord Pitt-Watson, who gave us some interesting suggestions and proposals that I am certainly going to go away and think about. I do not think that continuing with the history is necessarily the right thing to do, but that does not mean we cannot learn from history. The idea of the City of London having responsibility for its tradespeople has an interesting comparison, which makes me wonder: had we held the City responsible for the financial crash of 2007-08, and if the City had paid some of the large expenses that were instead, by austerity, put on the shoulders of the poor, the disabled and the young around the country, how different things might have been.

I note that the noble Lord also said that the City should be responsible for seeing that these services should deliver benefit to the world. That is an interesting proposal that I will take away. In responding to what the Minister and the noble Baroness, Lady Dacres, said, questioning what influence the City has over the FCA and the PRA, I will refer to the contribution from the noble Baroness, Lady Bi—

Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)The noble Baroness was not here at the start of this sitting, which started earlier this afternoon, almost five hours ago. I point out that, as far as the Companion is concerned, when noble Lords are withdrawing amendments, they must be short and not rehash the whole argument or make responses to all the points made during the debate. If the noble Baroness would move towards withdrawing the amendment, that would be good.

Baroness Bennett of Manor Castle (GP)I thank the noble Lord, the Whip. I am not rehashing; I am engaging with the contributions.

Lord Wilson of Sedgefield (Lab)No. Paragraph 8.82 of the Companion says that when withdrawing amendments, noble Lords should be short in doing so and should not engage, because they will have done that during the debate.

Baroness Bennett of Manor Castle (GP)I was speaking for about a minute and a half before the noble Lord interrupted me. I think three minutes might count as short, and I have two short points to make. The first, as I was saying before I was interrupted, is that the noble Baroness, Lady Bi, said that the City—

Lord True (Con)My Lords, I apologise to the noble Baroness, but I support what was said from the Government Front Bench. This matter was discussed again in our Procedure Committee this morning: arguments that have been put are understood by a committee or by the House, and there is often merit in moving on relatively quickly, so, from the Opposition Front Bench, I support what was said.

Baroness Bennett of Manor Castle (GP)I note the noble Lord’s contribution. As I said, I would have finished by now had I not been interrupted multiple times. The simple point I want to make is that the noble Baroness, Lady Bi, said that the City engages constructively with regulators. She also said that it uses its convening power to promote the sector. I would argue that, put together, those two things make the case for this amendment.

However, I was going to be brief; I would otherwise have finished a minute ago. We have had an interesting discussion. I will think about where this might go on Report but, in the meantime, I beg leave to withdraw the amendment.

Amendment 172C withdrawn.

Amendment 172D

Moved by

172D: After Clause 47, insert the following new Clause— “Review of regulatory causes of debanking(1) Within 12 months of the day on which this Act is passed, the Treasury must lay before Parliament a report reviewing the extent to which individuals, businesses, charities and other organisations have been refused access to banking services, had banking services terminated, or had the use of banking services materially restricted as a result of regulatory requirements, regulatory uncertainty or risk aversion arising from the operation of the regulatory framework.(2) A report under subsection (1) must consider, in particular—(a) the scale and nature of debanking in the United Kingdom;(b) the categories of individuals, businesses, charities and other organisations most affected by debanking;(c) the sectors, industries or lawful activities most affected by debanking;(d) the extent to which debanking decisions are attributable, wholly or partly, to—(i) anti-money laundering requirements,(ii) counter-terrorist financing requirements,(iii) sanctions compliance,(iv) financial crime prevention requirements,(v) regulatory reporting, monitoring or due diligence obligations,(vi) regulatory guidance or supervisory expectations,(vii) fear of regulatory enforcement or supervisory criticism,(viii) uncertainty or confusion as to the proper interpretation of regulatory requirements, or(ix) the cumulative cost or burden of regulatory compliance.(3) In preparing the report under subsection (1), the Treasury must seek evidence from, and consult—(a) the Financial Conduct Authority;(b) the Prudential Regulation Authority;(c) the Financial Ombudsman;(d) relevant financial institutions;(e) persons who have been refused banking services, had banking services terminated, or had such services materially restricted;(f) politically exposed persons, their family members and known close associates;(g) persons appearing to the Treasury to represent the interests of politically exposed persons, their family members and known close associates;(h) persons representing firms operating in the defence sector or sectors connected with national security;(i) persons representing charities, voluntary organisations and civil society organisations;(j) persons representing small and medium-sized enterprises, start-ups and new market entrants;(k) persons with expertise in anti-money laundering, counter-terrorist financing, sanctions compliance and financial crime regulation;(l) such other persons as the Treasury considers appropriate.(4) The Treasury must publish the report.”Member’s explanatory statement This new clause would require the Treasury to review whether debanking has occurred as a result of excessive regulation, regulatory uncertainty, confusion, supervisory expectations, enforcement risk or risk aversion arising from the operation of the regulatory framework. The review would identify the sectors and customer groups most affected, including politically exposed persons and their families, defence firms, charities, SMEs and other affected persons.

Baroness Neville-Rolfe (Con)My Lords, in moving this amendment in my name and that of my noble friend Lord Altrincham, I shall speak also to Amendments 172E and 172F.

Amendment 172D probes on debanking. It would require the Treasury to carry out a review into whether individuals, businesses and organisations are being denied, having restricted access or losing access to banking services as a result of the way in which the UK’s financial regulatory framework operates. The core issue is this: the regulatory environment we have at the moment, and the way in which it is constituted, can mean that people, firms and organisations are denied access to banking services. Without access to a bank account, payment services or basic financial infrastructure, people and businesses are severely constrained in their ability to trade, to invest, to employ, to grow and to participate fully in the economy. The amendment asks the Treasury to examine whether debanking is taking place because of excessive regulation, uncertainty, regulatory confusion, supervisory expectations, enforcement risk or general risk aversion.

We have heard concerns from a number of sectors that they are, in effect, playing it safe. They are not necessarily closing accounts because there is a clear requirement to do so; they are doing so because the regulatory environment has become so complex and uncertain that the safest option is to avoid certain customers and sectors altogether. This matters for SMEs. A small business that cannot obtain or retain banking services may be unable to trade properly, receive payments, manage cash flow or invest. It matters for charities, particularly those operating internationally or in complex environments. It matters for defence firms, which may face additional scrutiny because of export controls, sanction concerns or reputational sensitivity, even where their activities are lawful and important to national security. It matters for politically exposed persons and their families; I am sure that many noble Lords will have experienced this. As we have discussed in relation to digital assets, it also matters for innovative firms that are trying to build new products and services but cannot access the banking or payment infrastructure they need.

My amendment therefore underpins our broader calls throughout the Bill for simplification, streamlining and clarity. I appreciate that the regulators have done some work on this, such as a new requirement to provide notice before closing an account and the recent FCA reviews of account closures. The amendment therefore asks the Government to look at how the regulatory landscape interacts with this work, as well as what other steps can be taken to address this problem more effectively.

I turn to Amendments 172E and 172F, which are probing amendments on the protection of sensitive commercial information and the ending of the compensation cap for senior managers under the Employment Rights Act. They were born of a conversation with my noble friend Lord Howard of Rising; I thank him for his insight. The financial services sector depends heavily on confidential and proprietary information. Firms hold business plans, client data, pricing information, trading strategies, algorithms, models, methodologies, internal systems and processes. Such information, as I know well from my business career, represents a major part of a firm’s competitive advantage. These amendments are designed to probe the Government’s position on the protection of that information, including the continued ability of employers in the financial services sector to use non-compete clauses, which can be an important mechanism for protecting commercially sensitive information.

I know that the Government have issued a working paper on options for the reform of these clauses in employment contracts. However, I want today to explain that their use in financial institutions and firms is crucial. I would welcome clarification from the Minister that no provision in the Employment Rights Act will prevent employers in the financial services sector using appropriate and proportionate non-compete clauses. It is important not only for individual firms but for the integrity and competitiveness of the UK financial services market. We have heard that the change could lead some firms to close up in London.

Finally, I turn to Amendment 172F, which is designed to probe the Government on the impact of changes to the rules for senior managers and, in particular, the wider implications of the removal of the compensation cap. The Bill reforms the statutory regime governing the recruitment, approval, mobility and accountability of people working at authorised firms. The Government have, in their Explanatory Notes, identified slow senior hiring and internal mobility as barriers to operational agility.

In the Government’s own analysis of the Employment Rights Act, they accept that high-paying sectors may be affected by the removal of the compensation cap. However, some in the financial services sector have told us that the removal could affect decisions on the future of UK operations because of the risk of enormous million-pound or million-dollar payouts to those who have highly paid roles. Indeed, an article in the Financial Times last month reported that firms were seeking urgent legal advice on how to prepare for the changes. This amendment therefore raises a financial services competitiveness and regulatory agility issue that is properly connected to the Bill; we believe that it is vital that the Government consider this issue as a part of financial services policy.

I would be grateful if the Minister could address three points. First, what assessment have the Government made of the sectors and groups most affected by the loss of access to banking services? Would a review not be useful? This amendment looks backwards. Secondly, can the Minister clarify the Government’s position on the continued use of proportionate non-compete clauses in financial services, where they are necessary to protect commercially sensitive information? Thirdly, will the Government assess the effect of changes to the rules on the employment of highly paid senior managers, and consider changing the rules in the interests of growth and competitiveness? Those are the rules that relate to compensation. Both amendments look forward, and the Minister should be concerned. I beg to move.

Lord Howard of Rising (Con)My Lords, I support Amendment 172E in the name of my noble friend Lady Neville-Rolfe. She expressed her support for it far more ably than I ever could, but I want to say that it would be unrealistic to think that sophisticated financial businesses with complex computer systems and programmes can continue to operate in this country if they cannot protect the secrecy of systems oh whose development they may have spent millions of pounds or dollars.

Whether this is carried out by non-compete clauses, which I imagine will be the easiest way to do it, or some other method, what must be achieved is the ability of financial companies to preserve the security of their systems—that is, if we wish these businesses to remain in this country and not go somewhere else where they will get security for what, as I say, may have cost them many millions to develop. In that context, they just do things that we do not know about. For example, the method of communication in the United States now is to bounce radio waves off the ionosphere. They do not want to come here and show everybody how to do it. So I urge the Minister to pay good attention to what my noble friend has said.

Baroness Lawlor (Con)My Lords, I support my noble friend Lady Neville-Rolfe’s Amendment 172D. The problem of debanking has reached a serious level in the UK, with roughly half a million people reported to be affected last year alone. I welcome and recognise that the Government have moved on this and that the new rules require banks to give 90 days’ notice and provide a clear explanation. I also welcome the fact that there is a right to challenge unresolved disputes via the ombudsman.

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However, there are still certain exceptions in respect of financial crime, anti-money laundering, counterterrorism finance and so on. It is here that I think my noble friend’s amendment is particularly valuable. It asks for a specific report and data for Parliament to know the scale and how far these exceptions may contribute to the problem of debanking. Not only those anti-crime requirements in our laws, but the fear of regulatory enforcement and the operation of regulatory matters affect how people approach their job in banking with implications for debanking. I think that everyone on all sides of the Committee would find such a review very useful because we know how difficult debanking is for not only individuals but small businesses and the whole economy with the uncertainty it can create and the problems and obstructions. For these reasons, I would welcome a review and support my noble friend’s Amendment 172D.

Lord Stockwood (Lab)My Lords, this is the final group before Committee stage is completed. I am grateful for the discussions so far, not just on this group of amendments but on each of the more than 220 amendments we have discussed over the past three weeks. I appreciate the insights and wisdom shared by everyone in the six sessions. As someone relatively new to the House, I come away from this stage of the Bill’s journey with renewed faith and belief in the importance of scrutiny in the House of Lords. I thank noble Lords. These amendments propose that the Treasury conducts reviews into a range of important issues in financial services. I will first speak to Amendment 172D, which would require HM Treasury to undertake a review into the scale and nature of debanking in the UK. The Government recognise the serious impact the loss of access to those services can have, but there is already a significant amount of work under way. Parliament has legislated to ensure that domestic politically exposed persons and their family members and close associates are treated in a more proportionate manner under the anti-money laundering framework. The FCA has also undertaken significant work on account access, account closures and debanking as required by Parliament. The FCA has collected evidence to understand where account closures and refusals are occurring and why, and has undertaken further work better to understand the reasons behind account closures and refusals.

I am not sure that regulation is a principal driver of debanking. Decisions to refuse, restrict or terminate banking services may arise for a range of reasons, including commercial decisions, firms’ assessments of risk, legal obligations and financial crime concerns. The FCA has emphasised that when accounts are closed or denied, providers must adhere to their consumer duty obligations. They include ensuring that all communication with customers is clear and easy to understand. The Government have also legislated to address concerns around account closures. This includes ensuring that providers give customers at least 90 days’ instead of two months’ notice before terminating payment services and provide a sufficiently detailed explanation of their decision and signpost appropriate complaints routes.

The Government have also taken steps to reduce the impact of anti-money laundering rules on legitimate customers through recent changes to the money laundering regulations. This included measures to make customer due diligence requirements more proportionate and effective while maintaining robust protections against economic crime.

Amendment 172E would require the Treasury to conduct a review into whether financial services firms have adequate means to protect commercially sensitive information. Confidentiality and the protection of commercially sensitive information is vital to the strength of the UK’s financial sector, and the Government take the importance of this matter very seriously. Without robust protection of commercially sensitive information, investors lose confidence, consumers are at risk and the reputation of the sector is degraded.

The FCA and the PRA have rules and expectations that address the protection of commercially sensitive information by firms. However, I am afraid that I am not an expert in the Employment Rights Act and the contracts that were mentioned are not within the scope of the Bill. While I am aware that I am giving Charles Dickens a run for his money in the number of letters I have suggested I will write, I will write to the noble Baroness on the Government’s position on this as well.

Amendment 172F concerns the effectiveness and operation of the senior managers regime. The Bill already introduces reforms intended to make the regime operate more proportionately, while preserving the accountability standards which are central to it. As I mentioned on Monday, the changes will help deliver the ambition of the Government and the regulators to reduce burdens from this regime by 50%; the reforms to this regime alone are expected to reduce administrative burdens on the sector by almost £600 million over the next 10 years. The detailed operation of the reformed framework will be taken forward by the regulators through their rules, subject to their statutory consultation requirements.

In those circumstances, the Government’s view is that the right course is to allow those reforms to be developed, implemented and monitored through the existing framework. The Government will also continue to engage closely with the regulators as they implement these changes, to ensure that the regime is more proportionate in its approach.

I will write on the compensation cap for senior managers, which the noble Baroness also mentioned, as this is a matter of employment law. I thank her for raising that issue. For those reasons, I ask the noble Baroness to withdraw her amendment.

Baroness Neville-Rolfe (Con)My Lords, I thank my noble friends Lord Howard of Rising and Lady Lawlor for their support, and the Minister for his response. These amendments have raised three distinct but connected issues: problems with access to banking services, protection of commercially sensitive information, and the ability of financial services firms to recruit, retain and deploy talent in the UK under the new Employment Rights Act. I hope the Government will reflect further on these issues before Report and provide more concrete evidence on what has been happening on debanking to those who have been involved in Committee. The Minister made some encouraging remarks, but some data would be useful. I very much look forward to his letter on the points that I have raised about the impact of the Employment Rights Act.

As the last speaker, I also thank all those who have been involved in the Committee. We have completed it on time and with great good humour, in general. I look forward to Report and, for now, beg leave to withdraw my amendment.

Amendment 172D withdrawn.

Amendments 172E and 172F not moved.

Clauses 48 to 51 agreed.

Clause 52Commencement

Amendments 173 and 174 not moved.

Clause 52 agreed.

Clause 53 agreed.

Bill reported without amendment.

Committee adjourned at 8.38 pm.