Financial Services and Markets Bill [HL]

Report (2nd Day)

16:34:00

Northern Ireland and Scottish l egislative c onsent sought . Relevant documents : 2nd and 8th Reports from the Delegated Powers Committee

Clause 17Requirements to have regard to the regulatory principles

Amendment 34

Moved by

34: Clause 17, page 21, line 34, leave out subsections (2) to (11) and insert— “(2) In section 3B (regulatory principles to be applied to both regulators), after subsection (1)(h) insert—“(i) the need to consider financial stability risks associated with climate change.””

The Senior Deputy Speaker (Lord Ponsonby of Shulbrede) (Non-Afl)My Lords, by reason of pre-emption, if Amendment 34 is agreed to I will not be able to call Amendments 35, 36, 37, 38, 39, 40, 43, 44, 45, 46, 48, 49 and 50.

Baroness Northover (LD)My Lords, in moving Amendment 34 I will speak to Amendments 55, 65 and 91. I will speak briefly. I thank noble Lords for their support and that of Peers for the Planet. There can be no doubt of the climate challenges we face after another summer of drought, wildfires and loss of life. Underlying all these amendments is concern about the vulnerability of the financial system and the huge consequences of that. We saw the results of ignoring weaknesses in the financial crash of 2008 and its aftermath. The adaptation committee of the Climate Change Committee emphasises the risks in the UK of intensifying heat, floods and wildfires. We need to ensure that these risks are addressed in the financial system.

Clause 17 removes whole swathes of protection, to be replaced by as yet undefined strategies. The FCA is to be given huge new responsibilities, when we know that regulators have a poor track record in monitoring areas under their responsibility, let alone in horizon scanning for new risks. The deletion in the Bill takes out regard for climate change as well as the need to focus on sustainable growth and to be compliant with the Climate Change Act.

Amendment 34 addresses climate risk. It would replace Clause 17’s amendments to the regulators’ general duties with a single new duty requiring both regulators to consider the financial stability risks associated with climate change. I am grateful to the noble Baroness, Lady Hayman, and the right reverend Prelate the Bishop of Manchester for their support. There have been extensive discussions about the sweeping away of the duties in this clause, and this amendment seeks at the very least to ensure that climate risk must be addressed.

Amendment 55 would require annual reports by the FCA and the PRA to include consideration of climate-related financial stability risks. This way, we can see exactly how climate risk is being factored in.

Amendment 65, which is led by the noble Baroness, Lady Hayman, seeks to enable the Government to set out how and when they intend to implement their manifesto commitment to mandate UK-regulated financial institutions to develop and implement credible transition plans.

Amendment 91 is relevant to climate risk in the housing sector. It would require the Treasury to report on the case for clearer standards for mortgage products that are described as green. We need to develop measures that will drive higher environmental standards in the housing market, including ensuring that measures are taken to improve a property’s resilience to climate risk.

I am encouraged by what I have heard informally about the Minister’s sympathy in relation to this group. I am led to believe that he fully gets the potential risk to the financial sector and thence to the whole of the economy and society. What is always best in this House is if people come together and find a positive way forward, where the Government see the case and help to draft suitable changes to legislation to move things forward. I hope that is what we will see here. I therefore look forward to hearing how the Minister proposes to address these risks.

Baroness Hayman (CB)My Lords, I am pleased to follow the noble Baroness, Lady Northover, and will speak to her amendments and my own on this subject in a moment. But first I express my gratitude for the time and effort that the Minister, his colleagues and all the Bill team have put into addressing these issues and attempting to reach exactly the sort of conclusion the noble Baroness referred to.

Perhaps I could first say a few words about the other amendments in this group. I have a great deal of sympathy for Amendments 90 and 97A on forest risk commodities as, over the last five years, we have not made progress in this area. I hope very much that the Minister will be able to give at least a glimmer of hope that this kicking of the can down the road will not continue. I also make clear my support for Amendment 91 from the noble Baroness, Lady Northover, which seeks further clarity from the Government on the issue of green mortgages, which will become even more important as the effects of climate change on the housing market become even more apparent than they are now.

I have Amendment 65, on the timetable for transition plans. We discussed this at length in Committee, but I think that this summer made us all think about our future plans, whether it was to plant more hibiscus and fewer hydrangeas in our gardens, or how to make our homes more habitable with shutters or air conditioning. This summer’s extreme weather has had some very serious impacts, with 2,877 heat-related deaths estimated in May and June alone, 1,000 wildfires raging and disruption and dangers to our transport system causing knock-on impacts to productivity and daily lives. I recognise that transition plans need to be part of a wider programme of action, but if we wait until we have every duck in a row and every avenue explored, we will be leaving a very dangerous gap in progress in this area. I hope that the Government, who recognised in their manifesto the importance of these plans, can give us some sense today of the timetable they see for implementation.

I turn to the amendments dealing with the major and, for many of us, the most concerning issue: the downgrading of the regulatory principles that the FCA and PRA should have with regard to the exercise of their functions contained in Clause 17. The noble Baroness, Lady Northover, has made very clear the arguments—I will not rehearse them—about the risk to financial stability that we already see in the housing and insurance markets, which could go far wider. That is precisely why we fought for and gained, in 2023, the climate and nature provisions that are contained in FSMA 2023. They ensured that these considerations would be taken into account across the regulators’ work and day-to-day functioning, not simply something to be looked at every five years with a retrospective assessment of what had happened and a strategic statement about what might happen next, as is proposed in the current Bill.

The Government have recognised the concern about Clause 17 and have changed their approach to proportionality by putting forward amendments to ensure that it is reflected in the regulators’ annual reporting and day-to-day operations. The issues of climate and nature risk to our financial systems and their viability for the future are just as important, hence my amendment seeking similar treatment for climate and nature risks as for the proportionality regulatory principle and my support for Amendment 34 from the noble Baroness, Lady Northover. The Minister and his officials have, I know, thought very carefully about these issues when we have discussed them since Committee. I hope that today he will be able to recognise their centrality to the future stability of our financial systems and the role that the FCA and the PRA need to play.

Baroness Sheehan (LD)My Lord, I speak in favour of this group of amendments on re-embedding climate and nature considerations into UK financial institutions’ investment decision-making. I speak in particular in favour of Amendments 90 and 97A. I start by thanking the Minister for his constructive conversation with me earlier this week. I am reassured that he shares the ambition to see this through and has the steel to deliver it. The Minister understands the urgency of the risk that climate change presents to the financial stability of the City and he is the right messenger, not least because he used to work for Hermes. Hermes, the messenger of the Greek gods, was known for his great cleverness and speed. He wears winged sandals and carries a staff. I can vouch for that staff.

Amendment 90 in my name was tabled with the support of the noble Baronesses, Lady Young of Old Scone and Lady Coffey, and the right reverend Prelate the Bishop of Manchester. All co-signatories have been long-standing passionate advocates of getting this legislation on to the statute book: it would be patronising of me to thank them when they have already done so much. I am delighted to see the noble Baroness, Lady Boycott, in her place, because she too has been a passionate, outspoken advocate of legislation against deforestation. Amendment 90 would simply require regulations under Schedule 17 to the Environment Act 2021, which refers to the

“use of forest risk commodities in commercial activity”,

to be made within six months of this Act receiving Royal Assent and would commence the Treasury review into deforestation-linked finance.

16:45:00

My Amendment 97A was submitted to come after Clause 22 and was in fact accepted by the Public Bill Office. It was only very late in the day yesterday that I learned that it had been moved to after Clause 47, so my attempt to move it to a possible vote earlier in the day was scuppered, which I admit leaves me a little disappointed. Amendment 97A is exactly the same as Amendment 90, with the small addition of specifying the FCA as the verification and enforcement agency. In his response to this amendment, if the Minister feels that the FCA is not the right regulator, where does he think that responsibility lies? That is a question to which I would welcome an answer.

These measures are five long years overdue, as the noble Baroness, Lady Hayman, has said, and the prevarication must end, especially now that the EU has agreed its deforestation regulations. They will be implemented on 30 December 2026—this year—and will apply to Northern Ireland. We on the mainland will be operating under different rules. That is an untenable position. The Government’s announcement in June this year that they will consult and deliver legislation to align next year is not really good enough. We do not know when and we do not know what it will say. Businesses such as the UK Cocoa Coalition, whose members include Sainsbury’s, Waitrose, Ferrero, Hershey and other very big organisations, are calling for certainty to plan investment and growth: a clearer timetable for the UK’s forest risk commodities regime would avoid further uncertainty for both businesses and investors. Companies are already making decisions about supply chain management, traceability systems and compliance processes in response to the EUDR and other international requirements. Clarity on the UK’s timelines and next steps would support investment, facilitate preparation and provide confidence that the UK is moving towards a coherent and predictable regulatory framework.

We have been around this particular block a number of times and, as Einstein said, it is a sign of madness to do the same thing time and again and expect a different result. It will not surprise the Minister if I say that, had circumstances been different today, I would have pushed my Amendment 90 to a vote. Instead, I hope he will give an assurance from the Dispatch Box that he gets it; that climate and destruction of carbon sinks—i.e. deforestation—are two sides of the same coin. If climate is a financial risk, then so too is deforestation, and investment decisions will be poorer if these considerations are not taken into account.

The Lord Bishop of ManchesterMy Lords, financial stability is crucial for sustainable growth. It is what allows people and families to plan for the future, to reliably hold savings, pensions and mortgages, and of course it supports businesses to create the jobs on which we depend. In the same way, financial growth and environmental stewardship are interdependent. Growth provides us with resources that allow us to invest in new sustainable fuels, clean infrastructure and new ways to tackle the climate crisis.

It goes both ways. The climate crisis, which many of us now call the climate emergency, also threatens financial stability. Increasing extreme weather events may well reduce access to insurance for both households and businesses, as the noble Baroness, Lady Hayman, has already reminded us. As we face the prospect that the heatwaves of this summer become the new normal, agricultural assets are already projected to be affected by drought, impacting on our farmers. Yet these risks have a disproportionate impact on the most vulnerable. Financial shocks hit hardest for those who have no savings to fall back on. Food shortages load further pressure on to those who are already going hungry.

The amendments in this group seek to recognise that interdependence between a stable environment and stable financial markets and services. A little bit later, we will hear about amendments from the noble Baroness, Lady Hayman, that would require financial institutions to develop credible transition plans consistent with the Paris Agreement’s 1.5-degree target—if it is not already too late for that. Prevention is of the utmost importance if we are to stop the worst impacts of global warming before opportunity lapses.

Prevention must go hand in hand with preparedness. We are already feeling the impact of climate change at home, and we must do all that we can to supplement preventive work with measures that allow us to adapt for this changing reality. As the then chair of the Church of England’s ethical investment advisory group and deputy chair of the Church Commissioners for England, it was my privilege to be present at the opening of the London Stock Exchange when we launched, with support from FTSE, the first index that was weighted towards environmental issues. These voluntary measures enable investors who need to track indices to take environmental factors into account.

I doubt that many of us here in your Lordships’ House today believe that voluntary action alone is going to solve the climate crisis. Amendment 34, to which I have added my name, would, as the noble Baroness has already said, create a responsibility for regulators to consider the effects of climate change in their decision-making, in the same way as they would any other significant financial risk. That is an important step towards ensuring that our financial institutions are resilient in the face of the growing risks posed by global warming, and that financial services continue to serve the needs of consumers as we pursue prevention on a wider scale.

If we are not to place the amendments in this group in the Bill, will the Minister please explain—as I know others have already asked—how the Government intend to ensure financial services and markets do not develop without regard to their environmental impact?

Baroness Young of Old Scone (Lab)My Lords, I declare my interest as chair of the Forestry Commission and my other environmental interests in the register. I have put my name to both Amendments 65 and 90, which I will speak to, and Amendment 97A tabled by the noble Baroness, Lady Sheehan. I also add my thanks to the Minister for the time and care he has taken to engage with noble Lords over our concerns.

All these amendments arise from the same issuethe inordinate length of time it is taking government to come forward and fulfil its commitments, which have already been agreed some time before. Others have laid out the reasons for the importance of these amendments in detail, and I will not repeat them. I want simply to say that Amendment 65 is already a manifesto commitment: that UK financial institutions should be mandated to develop and implement credible transition plans that align with the Paris Agreement. The amendment that has been laid today is very gentle. It simply asks for a road map within six months of Royal Assent of the Bill and allows the Government plenty of wiggle room to decide how, when and in what manner it would prevent the drifting along that is so at odds with the urgency of the climate change threat.

Business and investors need clarity to be able to have confidence and to deliver growth and competitiveness. As I said, it is a manifesto commitment, and this summer’s heat has underlined its importance. The public want action and it has electoral salience. This is a “just do” moment. I call on my noble friend the Minister to restate the Government’s commitment to the principle and clarify the pace by accepting the amendment or giving some assurance about the timescale to which the Government will deliver these transition plan commitments.

I had a lovely speech written about Amendment 90, to which I have added my name, and Amendment 97A in the name of the noble Baroness, Lady Sheehan. They are about an even more delayed issue and would bring in a requirement for government to make regulations, which were already provided for in the Environment Act 2021 —and I stress 2021, five years ago—but are still not implemented, to prohibit the importation and use of illegal forestry goods.

We are now in the position where the European Union is bringing forward its deforestation regulations. They will come into effect at the end of this year for large and medium companies and in 2027 for micro and small enterprises. Northern Ireland will have to follow these EU regs. The Government say that they want to align the rules across GB. At the time of laying the amendment, I felt that it was reasonable to ask for this to be done and completed within seven months, after a five-year delay period and with some consultation already having taken place. All the while, UK financial systems, including public equity and corporate bonds, are funding and fuelling climate and biodiversity declines directly.

In Committee, I lost the will to live, because the previous Minister described all the stages that had to happen. If they did not stretch into infinity, they at least stretched, I thought, for a couple of years. It is a major international embarrassment for the new Government. We led the change internationally for the forest risk commodities action at COP, and we persuaded umpteen other countries to sign up, yet here we are, five years later, still claiming that we want to demonstrate our leading role in green finance while not delivering this legal commitment that we were a prime actor in.

However, this afternoon, I had a little ray of light. I will read to noble Lords some excerpts from a letter that I received from Defra Ministers about pressing the issue of forest risk commodities forward:

“We are progressing the policy and legal work needed at pace to deliver the approach in GB. Defra is developing the consultation material … There is a statutory duty to consult on these regulations … our plan is to consult during Autumn”—

autumn is almost here. It continues:

“We are planning to deliver the legislation required to implement this regime in Great Britain in 2027 … At the centre of my considerations is the pressing need for us to make rapid progress to address the role that deforestation plays in the climate and nature crises. This summer’s extreme heatwaves have brought home the urgency of tackling climate change, where halting and reversing forest loss is a vital part of that effort”.

I absolutely welcome this statement from Defra that it is moving forward at pace. I hope that we can hear today from the Minister that the Treasury is as one with Defra and that we can confidently expect the regulations to be implemented in 2027.

Of course, once the regulations are in place, there is a commitment in the legislation that the Treasury will review legal deforestation challenges and the extent of the deforestation issues for the UK, including the range of products included. I hope that we can get assurances from the Minister on this issue.

Baroness Boycott (CB)My Lords, I support Amendment 97A in the name of the noble Baroness, Lady Sheehan, and Amendments 55, 65 and 91 in the group. As others have said, we are grateful for the Government’s support. What the noble Baroness, Lady Young, just said will put a spring in everybody’s step. This is very overdue; as many people have said, this has been going on for five years. Why we have not done it is a puzzle, but it sounds as if some doors are opening.

Sometimes, people get a bit confused about what forest risk commodities arethey are beef, palm oil, soy, cocoa and rubber. On the whole, they are ingredients that run right through the ultra-processed food system, which is already, I am pleased to say, on behalf of the Government, getting a lot of action in terms of trying to slow it down.

The facts are nonsensical. For instance, beef is the largest driver of tropical deforestation. Beef production is responsible for 25% of global land use emissions, but it is estimated that 60% of agricultural land is used for beef production. That includes all the food that is grown for it: soy, palm oil and so on. However, it constitutes only 2% of global calorie consumption. That is just one example of why this is not only terrible for forests, nature and the infrastructure of life, on which we depend and which at the moment is in a very fragile condition, but nonsensical on many other levels.

17:00:00

I therefore feel very encouraged that the Government will set out legislation as well as ways to enforce it, because it is extremely difficult to enforce this. There are many companies that put proudly on their products that they contain “legal soy”. That was something, for instance, that Unilever always used to trumpet. I am not entirely sure how you do this, and I am very much in favour of what the Europeans are now looking at, which is to say that legal and illegal deforestation should count. We cannot afford to cut down any more forests. There are many things we cannot afford to keep doing, but this is one of them, and the El Niño that is brewing up in the Pacific will come bursting across the Amazon rainforest, producing heaven knows what in terms of damage to that incredibly precious environmental resource that affects the weather of the entire world. So this legislation cannot come too soon and I welcome the Government’s progress.

Baroness Bennett of Manor Castle (GP)My Lords, I rise with great pleasure to follow all the speakers thus far in this group and to support all these amendments. I have not attached my name specifically to any of them—some of the most prominent are fully subscribed and I wanted to leave space for the breadth of that subscription, noting in particular Amendment 90, which has also been signed by the noble Baroness, Lady Coffey, who is not currently in her place.

I want to take a second to reflect on the point where we are at now with the Bill overall. What we have before us is essentially the same Bill that was introduced under a different Prime Minister and a different Chancellor. I remain astonished that the approach to competitiveness and deregulation that was directed by Rachel Reeves is now being continued, although after hearing the new Chancellor’s speech two days ago, I am somewhat less surprised.

I will particularly reflect on all the environmental measures here, and we still have before us essentially the same Bill as under the previous Government. I note that our current Prime Minister supported the fossil fuel treaty in June 2025, when he was Mayor of Manchester, and that, when running for the Labour leadership in 2015, he said:

“Labour under my leadership will never turn our back on … our duty to tackle climate change”.

All these amendments are therefore putting the Bill back on the track that it should be on—a track that the Government are apparently signed up to.

I will focus very briefly on Amendment 90 and the forest risk commodities. As with pretty well everyone who has already spoken, I think we remember the long wrestle to get not the strong thing we were looking for but at least the promise of Schedule 17 into the Environment Act 2021. There is a real problem here in terms of members of the public. They heard and saw that fight and saw the law put down by the Government, and they expect it to be delivered. Yet, five years later, we still do not have that provision.

After listening very carefully to the noble Baroness, Lady Young of Old Scone, I have a constructive suggestion. The timetable coming from Defra suggested that, within 12 to 18 months, we will finally see the delivery of what was promised in 2021. I am sure the Minister will say that he cannot accept Amendment 90. However, it would be very positive if, perhaps at Third Reading, the Government could table an amendment committing to these regulations in, say, 18 months’ time, which would be a minor adaptation to the amendment put down by the noble Baroness, Lady Sheehan, and others. The noble Baroness, Lady Young, has that promise and pledge in a letter; let us go a little further and put it in the Bill.

Baroness Neville-Rolfe (Con)My Lords, we have a lot to cover today, so I will be brief.

We do not believe that imposing additional reporting duties, transition plan requirements and regulatory processes on financial services firms is the right way to address the concerns that have been addressed in these amendments this evening. One of the merits of the Bill is the way it cuts out needless and repetitive operational requirements on financial services firms and regulators and instead introduces a more effective approach based on five-year strategies. As we heard on Monday, stakeholders’ views will be sought in the course of establishing those strategies. Of course, climate change and environmental objectives already remain an important statutory regulatory principle, intended to contribute to the UK’s net-zero target under the Climate Change Act and to the environmental targets established under the Environment Act.

However, requiring banks, other financial institutions and the regulators themselves to fill in forms, tick boxes and produce more and more reports about climate change will not have a meaningful effect on global temperatures; it will simply add costs. We need a regulatory environment which supports growth, enterprise and investment. That means cutting down on the red tape and extra requirements that are putting our international competitiveness at risk. These amendments would add a further layer of process and obligation without a sufficiently clear demonstration that the burdens would advance the environmental objectives being pursued.

This is a time when we should be seeking to streamline regulations and be careful about new requirements, however well-intentioned, because of the need to get the economic growth that we lack. These amendments risk taking us a step backwards, so we cannot support them and will be voting against them if noble Lords press them to a vote.

The Parliamentary Secretary, HM Treasury (Lord Pitt-Watson) (Lab)My Lords, I am grateful to the noble Baronesses for these amendments and for the wider debate on sustainable finance and adapting to climate change. These amendments address a number of important issues: climate transition planning, tackling deforestation, how the regulators consider climate risk and the products commonly known as green mortgages. As several noble Lords have argued today, both climate-related and nature-related risks can have significant implications for the economy, for financial markets and their ability to deliver for customers, and for long-term prosperity.

As many noble Lords may know, it is a topic close to my heart, including through my past chairing of the United Nations Environment Programme’s Finance Initiative at the Paris climate talks. UNEPFI is a voluntary organisation of more than 500 financial organisations from the North and the South, with funds of more than £100 trillion under management. It has established some of the world’s foremost sustainability frameworks for finance, including involvement with the REDD+ project, reducing emissions from deforestation in degradation, which I believe is now preserving many millions of square miles of forest.

I share the underlying objectives behind these amendments. The question before us is, therefore, not whether action is needed but how best to deliver that action in a way that is effective, proportionate and aligned with the wider framework we are putting in place.

Let me come to Amendments 34 and 55, which raise important points regarding how the regulators consider and report on climate and environment-related issues. I have spoken to the noble Baroness, Lady Hayman, and members of Peers for the Planet throughout the week on this important issue. I also hosted a drop-in session for Peers with the FCA. During that session, I heard a number of concerns about the absence of climate and environmental targets have-regard operating at a day-to-day level, and I have, of course, heard the issues raised in this debate today.

While I still believe that there is significant value in streamlining the regulators’ have-regards, I appreciate that it is important that the regulators continue to focus on the vital issue of the sector’s contribution to climate change at a day-to-day level, and I appreciate the importance of regular reporting on this issue to aid parliamentary scrutiny. While I cannot do anything today, I am prepared to return to this issue at Third Reading and would be prepared and undertake to table amendments to Clause 17 that would require the PRA and FCA to continue to consider their existing climate change and environmental targets have-regard at a day-to-day level and to maintain appropriate notification and reporting requirements.

Amendments 34 and 55 introduce a new have-regard and reporting requirement on climate-related financial stability issues. I therefore ask the noble Baronesses, Lady Northover and Lady Hayman, not to press Amendments 34 and 55 on that basis, and I will return at Third Reading with the amendments I have described.

Amendment 65 concerns transition plan requirements. The Government remain committed to this area. We consulted in 2025 on options for implementing transition plan requirements and are considering responses alongside wider work on sustainability and corporate reporting reform. In February, we finalised the UK sustainability reporting standards for voluntary use. The FCA has also consulted on aligning listed company disclosure requirements with these standards. The FCA aims to publish final rules this autumn with requirements expected to take effect from January 2027. This amendment would place a statutory timetable on an area where policy development remains under active consideration across government. We believe in the importance of finalising this work before imposing an arbitrary road map.

On Amendments 90 and 97A, I recognise the strength of feeling on deforestation and agree that urgent action is needed. I am therefore pleased to report that this work is moving forward. As the noble Baroness, Lady Young, said, Defra has confirmed that they will consult later this year on Great Britain’s approach to tackling deforestation in domestic supply chains and the next steps for the forest risk commodities regime. My officials have spoken to Defra, which has confirmed that it plans to consult during the autumn and that legislation will be delivered in 2027. The responsibility for enforcing the regime will be determined by Defra when it designs the regulations.

We share the objective of progress being made as quickly as possible. However, a six-month statutory deadline risks prioritising speed over effectiveness. The Government believe the better approach is to ensure that any resulting regime is robust, proportionate and capable of decoupling supply chains from global deforestation. The Government have already committed, through the Financial Services and Markets Act 2023, to review the regulatory framework for tackling deforestation-linked finance within nine months of Defra’s legislation on domestic supply chains. Furthermore, the principle that I committed to reapply today to day-to-day activities also explicitly covers consideration of environmental targets in the Environment Act 2021, so this will remain part of the regulators’ day-to-day work.

On Amendment 91, the Government support high-quality green mortgage products that can help households to finance energy efficiency improvements and improve resilience to climate-related risks. However, the amendment risks duplicating efforts by regulators, departments and existing frameworks. FCA rules already require clear disclosure and the FCA is considering disclosure further through its mortgage rule review. The Green Home Finance Strategic Partnership also has a dedicated working group focused on consumer protection and standards. With over 90 green mortgage products now available compared with fewer than 10 in 2019, the Government consider that imposing a statutory timetable would be premature while policy and the market continue to develop. The current approach provides the flexibility to develop clear, proportionate standards while maintaining consumer protections.

In conclusion, the Government support the objectives that sit behind these amendments. We have listened to the House and will, at Third Reading, table amendments to Clause 17 requiring the PRA and FCA to continue to consider that their existing climate change and environmental targets have regard at a day-to-day level and to maintain appropriate notification and reporting requirements. More broadly, we support credible transition planning. We support action to address deforestation and forest risk commodities, and we support the development of high-quality green mortgages. The Government are already taking forward substantial work in these areas and will continue to do so in a co-ordinated and proportionate way. I therefore ask the noble Baroness to withdraw the amendment.

17:15:00

Baroness Northover (LD)My Lords, I thank the Minister for his very encouraging reply. I think that we are in agreement that there could not be a more important area. No one paid attention to the subprime market, then we had the 2008 crash. The economic and social costs are still with us a generation later, with incomes stalled and politics driven left and right, causing further economic and social damage. We know the risks of not paying attention to the risk to financial stability. I am afraid I do not accept what the noble Baroness, Lady Neville-Rolfe, says, and I regret the loss of cross-party agreement in this area.

But of course, beyond those risks, what is even more important is to address climate change and nature loss, and the Minister acknowledged that. It is an existential crisis, and we increasingly see the reality of that. I noted with interest his history, and I remember the commitment that Mark Carney made—how he said that he thought others were doing this and addressing this, then realised that that was not the case and that he needed to address this. He led the move, particularly at Glasgow and in the financial sector, in the way that the Minister has just described.

I am encouraged by what the Minister has said that he will bring forward at Third Reading, and I trust what the noble Baroness, Lady Hayman, said in relation to the conversations that she has had with the Minister and about his commitment. He has made this commitment for Third Reading, and I look forward to seeing how that is to be delivered. He is clearly very much involved in this. Therefore, I take what he says at face value and look forward to seeing that. On that basis, I withdraw my amendment.

Amendment 34 withdrawn.

Amendment 35

Moved by

35: Clause 17, page 21, line 34, after “duties)” insert— “(a) in subsection (1), at end insert—“(c) ensures that any burden or restriction which is imposed on a person, or on the carrying on of an activity, is proportionate to the benefits, considered in general terms, which are expected to result from the imposition of that burden or restriction;(d) recognises the differences in the size, nature and objectives of businesses carried on by different persons (including different kinds of person such as mutual societies and other kinds of business organisation);(e) is as transparent as possible.”;”Member's explanatory statement This amendment places proportionality and transparency (currently regulatory principles) into the general duties of the FCA and restores protections for the differences in size, nature and objectives of businesses from the original FSMA regulatory principles.

Baroness Bowles of Berkhamsted (LD)My Lords, as discussed on Monday, we have received constructive letters from the chief executives of the FCA and the PRA. They show genuine willingness to engage, and they elaborate on transparency of activity—consultations, responses, reports, strategies and evaluations. I do not dispute any of that. The government amendments that are proposed restore proportionality as an operational day-to-day have regard, thus they cover my proportionality requests during Committee and those parts of my amendments that I speak to today.

Unfortunately, the Bill still relegates the transparency have regard to the long-term strategy report, which provokes me to articulate something that has not been said clearly before: Parliament cannot check proportionality unless it can see it. Indeed, the Select Committee tried to do exactly that during our inquiry into competitiveness and growth. That is why transparency of reasoning is an integral part of cost-benefit analysis and proportionality. Today I ask the Minister to confirm that this is understood and that it applies at the operational level under the proportionality requirements. To be clear, what I am talking about here is the transparency of the cost-benefit analyses.

Internationally, this is well understood. In the United States, the SEC publishes an economic analysis with major SEC rule-making, setting out costs, benefits, distributional impacts and alternatives, all considered. That allows Congress and the courts to scrutinise it. They show their working in detail.

In the European system, the ESAs publish impact assessments showing how burdens fall on small firms versus large firms and how rules were adjusted to reflect proportionality concerns—a lot more specificity than we get. Again, they show their working. We simply do not get that level of working shown, so our regulators are not top of the class by international standards.

While I note the letter on cost-benefit analysis from Nikhil Rathi, CEO of the FCA, which the Minister recirculated to Members today, the frequency and working detail is just not as much as elsewhere. The FCA has denied a statutory requirement to do that and has been criticised for insufficient workings by its own cost-benefit analysis panel.

For example, in CP 24/30, which was on changes to the safeguarding regime for payments and e-money firms, in September 2024, the panel said:

“The CBA does not include analysis of how sensitive its results are to variations in its main assumptions and estimates”.

That is not very helpful if you are trying to understand them. The panel went on to say that this was important in

“identifying which assumptions are … critical to the expected costs and benefits”.

The FCA accepted the criticism and went back and added sensitivity analysis covering different compliance levels and insolvency rates. But the fact is that the FCA resisted it, including by objecting to the fact that it had to do it by statute and that it was not its first instinct. That is a very good example of the need for a lot more transparency in cost-benefit analysis, which is hindered by this demotion of transparency to being examined at just the strategic level.

As the Minister has already recognised in showing willing to make changes to Clause 17, I ask that he think about this one seriously and about whether he has to do something about transparency. In any event, going forward, I challenge the regulators to deliver on the detail of proportionality with full reasoning, working and concrete examples, showing how burdens were weighed, alternatives considered and adjustments made. After all, it is what government departments are required to do for significant regulatory proposals, but which our regulators do not follow.

I hope that the regulators will step up and do this. I hope that the Minister will step up and put this measure in its rightful place, back in Clause 17. I expect the Select Committee will also want to pursue this but, quite frankly, this legislation is leaving an awful lot of heavy lifting to the Select Committee. I beg to move.

Baroness Noakes (Con)My Lords, I have Amendments 36, 39 and 42 in this group. I thank my noble friend Lady Neville-Rolfe for adding her name to them. They seek to achieve, through slightly different drafting, what the noble Baroness, Lady Bowles of Berkhamsted, sought with her Amendments 35 and 41. In my view, proportionality is the most important of the regulatory principles, and we try to elevate it above the other regulatory principles.

I regret the downgrading of regulatory principles in general under Clause 17, but I am glad that the Government have recognised that they went too far on proportionality and have amendments in this group effectively preserving the status quo for proportionality. We have not achieved an upgrading of proportionality in the regulatory hierarchy, but we have at least protected it from being downgraded.

As the noble Baroness, Lady Bowles of Berkhamsted, said a moment ago, the Financial Services Regulation Committee will now have to bear some of the burden. We will need to make sure that the regulators do not ignore the other important regulatory principles. The noble Baroness mentioned transparency, and I agree with her on that. I also single out the principle that consumers need to take responsibility for their own decisions. The committee will certainly call out the regulator if necessary.

Baroness Bennett of Manor Castle (GP)In the interests of time, I shall focus on my Amendment 38, which appears in this group. It would retain the need to have regard to regulatory principles, which has already been broadly discussed. I will focus on the way in which it specifies the need to have regard to financial crime related to organised environmental crime. However, I must take a second to welcome the comments and commitments from the Government Front Bench to bring some climate components back into the Bill at Third Reading. It is always good to celebrate when campaigning works, and I think we can all hope to reach a time when we do not have to campaign on such environmental basics.

I spoke extensively in Committee about the issues around financial crime related to organised environmental crimes. I shall not repeat what I said then, but I and other careful observers were not satisfied with the Minister’s response. The response from the then Minister was extremely general:

“financial crime and money laundering, whether related to environmental crimes or not, is illegal and something that financial regulators, and this Government, already take extremely seriously. The FCA has a broad remit to tackle financial crime ”.—[ Official Report , 29/6/26; col. Grand Committee 371.] That was a very general response that did not address the specific concern about environmental crime and the way in which many other jurisdictions are taking action in this area.

I acknowledge the support I have received from WWF in preparing this response, and I refer to a WWF Themis survey of 644 financial services professionals from 17 countries. It found that almost half the financial institutions sampled operated in high-risk sectors or areas involving environmental-financial crimes, yet more than one-quarter said they did not undertake specific related due diligence. Additionally, 60% of financial institutions surveyed had no land conversion risk policy in place. A 2025 survey of financial investigations units by the Egmont Group identified a lack of alignment of environmental laws with anti-money laundering and anti-terrorist financing standards, and a limitation on their ability to share data or conduct specific activities related to environmental crimes as regulatory constraints. Without explicit recognition of this through the regulatory principles of the FCA and the PRA, relevant actors are not required or equipped to respond with the necessary action. Indeed, in the above-mentioned survey, respondents said that self-regulation is not

“a sufficient driver of change when it comes to land conversion”,

and called it “optimistic” to think that financial institutions would commit to affirmative action with just voluntary frameworks in place.

I note that around the world, FATF recognises environmental crimes as predicate offences for money laundering. The European Union has strengthened its criminal law framework through the environmental crime directive, requiring member states to publish a national strategy on combating environmental crime offences by 2027. As an example from the global south, Zambia’s Economic and Financial Crimes Court, a division of the High Court, recently forfeited to the state a vast array of assets associated with a major illegal lobbying operation. Diplomatic momentum for the fourth protocol of the UN Convention Against Transnational Organized Crime to address crimes against the environment is also advancing, with support from the UK. That is what we are saying internationally, but what are we doing domestically? As a global financial centre, the UK has a specific responsibility to ensure that it is taking effective action against environmental crimes globally and any involvement of our financial sector in those crimes, and can play an important role in achieving a stronger global approach.

17:30:00

Lord Stockwood (Lab)My Lords, it is a privilege to make my first contribution as a Back-Bench Member of this House in a slightly more relaxed environment than the last time I spoke on Clause 17 in the Moses Room. Indeed, I am told that some of the colour has started to return to my face, which is entirely due to the Recess rather than having to face-off against the rather formidable experience across the House.

Having spent a considerable amount of time before the summer defending Clause 17, I want to say a few words about this group, in particular Amendment 37. I argued then, and continue to believe, that the basic architecture of Clause 17 is right. We need regulators capable of exercising expert judgment, and we should be cautious about responding to every legitimate concern by adding another statutory duty or layer of prescription. However, I also heard clearly the arguments made across Committee that greater regulatory discretion must be accompanied by proportionality and meaningful parliamentary accountability. That is why I welcome the direction of these amendments. They reflect the concerns that were raised repeatedly before the summer, while preserving the regulators’ ability to exercise judgment. Amendment 37 is particularly important because there is a practical problem underneath the question of accountability. Parliament is scrutinising institutions such as the FCA, PRA and Bank of England with enormous analytical, policy and research resources. By comparison, even the Financial Services Regulation Committee operates with a very small team across an extraordinarily broad agenda. That imbalance matters, and we heard that.

Better accountability cannot simply mean regulators producing more information. Parliament must be able to interrogate that information, track what regulators have previously said and promised, and challenge them when the evidence does not match the rhetoric. I have written to the noble Baroness, Lady Noakes, offering some practical help, including exploring whether new analytical tools and AI, using publicly available information, could help to narrow that resource gap and do some of the analytical heavy lifting for the committee. To be clear, technology will not replace the judgment of those members or the expertise of committee staff, but it can potentially make that judgment better informed.

There is also a broader lesson in this group. One thing I learned during those six sittings in Committee is that scrutiny works best when government is prepared to listen. There may have been moments when I appeared rather attached to the drafting in front of me, which may be putting it mildly, but the purpose of this House is not simply to test the Minister’s powers of endurance, although sometimes it felt like that. It is to improve legislation. The group demonstrates that process working well. The Government have listened without abandoning the principles of the Bill and the House has helped strengthen the framework around proportionality and accountability. I particularly welcome Amendment 37 and support the approach represented by this group.

Lord Vaux of Harrowden (CB)My Lords, while they do not go quite as far as I would have preferred, I welcome the Government’s amendments that will bring the essential regulatory principle of proportionality back into the discharge of the regulators’ general functions. I think it is a reasonable compromise to have met.

I have added my name to Amendment 62, tabled by the noble Baroness, Lady Neville-Rolfe, which emphasises the particular importance of proportionality to small and medium-sized enterprises, on which the regulatory burden can have a much greater impact than on large companies with dedicated compliance departments. I raised this on Monday in relation to the concern that the transfer of AML supervision to the FCA might disproportionately impact smaller firms.

I very much hope that the Minister can say something that will give us comfort that the regulators will take size, as well as other factors, into consideration when deciding what is proportionate regulation and supervision.

Baroness Young of Old Scone (Lab)My Lords, I welcome the Minister’s statement that he was committed to bringing forward amendments at Third Reading. I think it is relevant to this group of amendments. I simply want to draw the House’s attention to two sessions we have had in the last three or four days with the FCA. The Minister very kindly organised a session with the FCA about its role in climate and environment. To be honest, the kindest thing I can say is that I was underwhelmed. I think that it is doing a lot more than it displayed that day. The defensiveness that it demonstrated in front of a bunch of really friendly, helpful and not at all terrifying Baronesses, was a bit of worry to me, to be honest, because I felt there was real defensiveness and push-back against a responsibility. I thought perhaps we had just given it a hard time and it was having a bad day—but we had another session with it yesterday, organised by Peers for the Planet, and I was horrified.

I have the quote here because I wrote it down and then went home and wept. A fairly senior representative of the FCA said, in terms: “The FCA does not have a mandate to tell businesses what they should do on climate and the environment”. I would like the House to know that and the Minister to bear that in mind when he comes forward with his Third Reading amendments, because there is a real need for a stronger line in guidance than we might otherwise imagine.

Baroness Kramer (LD)My Lords, fairly early on in Committee I said to the noble Lord, Lord Stockwood, who was then in charge of bringing the Bill through, that, when a common opinion was held by the noble Baroness, Lady Noakes, the noble Lord, Lord Vaux, and my noble friend Lady Bowles, he ought to listen. Those are the three real experts that we have in the House on markets, regulation and the financial services industry, and all of them set aside political ideology when they come forward with recommendations. They look to the common good and to good functioning, both for markets and for consumers. So I am very glad that on proportionality—which of all the issues was the most serious in the downgrading of principles, quite frankly—that the Minister is now amending that.

I am also appreciative that there is going to be movement on climate change because, as colleagues have said, this is a crisis that is on our doorstep. We have no choice but to act, and it means we need to focus all our strengths on dealing with that crisis. I am very conscious of the impact of financial stability and how it crept up on us, because we only looked at it through a very narrow lens instead of looking across the piece and recognising how holistic and interconnected so many issues are.

I have Amendment 67 in this group. I have to confess that it is an odd place for this amendment, and I shall deal with it briefly. Amendment 67 arose because a number of banks have been refusing to take small businesses and SMEs generally in the defence industry as their customers, usually because they are concerned about reputational risk. That has made it very difficult for those SMEs to raise credit, and it is seriously undermining the UK’s plans to build up its defence forces, which I think we all agree is not acceptable. Some Members may not be aware that the most innovative defence firms are SMEs. It is not just about the big players—the SMEs are critical, particularly at a time when so much is changing in the strategic and defence sector. These small SMEs already face high regulatory hurdles, and they often face slow procurement processes when they work with the Ministry of Defence. The absolutely killer blow is then not to be able to finance the projects, no matter the quality of the contract that they have. The FCA has said its rules present no obstacle to lending to SMEs and considers that to be a green light, but that is not having very much impact. My amendment essentially attempts to put some welly behind the FCA in dealing with these issues. It would require it to conduct and publish a review at least once every three years, including identifying any barriers. I would have thought that a report like that might get the Government going as well. I know that the Government are aware of the problem, but I emphasise that knowing about it is not enough; they actually need to act and change minds.

Baroness Neville-Rolfe (Con)My Lords, we welcome the Government’s decision to retain proportionality as an express statutory consideration for both the FCA and the PRA when they exercise their general functions. This responds to productive discussions in and outside Committee, for which I thank the Minister and indeed the noble Lord, Lord Stockwood, who I am delighted to welcome back to the discussion of the Bill, and I thank him for his efforts to improve it. I also thank my noble friend Lady Noakes, the noble Baroness, Lady Bowles, and the noble Lord, Lord Vaux, for their constructive and flexible approach to the substantial problems on these clauses.

Time and again, one of the concerns we hear from business is that regulation can be disproportionate to the risk it is intended to address. That is particularly true for the small and medium-sized firms that we rely on so heavily for competition, innovation and economic growth, right across this country. The proportionality changes help to address this and we will not therefore be pressing our Amendment 62 on SMEs to a vote—even though it is my favourite amendment and I have the support of the noble Lord, Lord Vaux. The noble Baroness, Lady Kramer, is right to focus on lending to small defence companies as well.

The requirement for the FCA and PRA to explain in their annual reports how they have taken these proportionality principles into account, alongside the requirements relating to consultation and parliamentary committees, creates an important mechanism through which Parliament can examine whether the principle is actually being applied in practice, with concrete examples, as the noble Baroness, Lady Bowles, suggested. This is important because the ultimate test of these amendments will not simply be whether “proportionality” appears in statute. It will be whether firms see a genuine difference in the way regulation is developed and applied, particularly by the regulators. We hope that the Government’s amendments will prove to be a meaningful mechanism through which regulation can become easier to comply with, less costly and ultimately more successful in achieving the objectives that Parliament has set for the regulators—of course, the proof will be in their implementation.

The Government have listened to concerns raised during the passage of the Bill and we support the amendments that the Minister has tabled in response. This is good House of Lords practice. Like my noble friend Lady Noakes, I do not intend to pursue the other amendments today.

Lord Pitt-Watson (Lab)My Lords, I thank noble Lords for this debate. I hope it demonstrates that the Government have listened carefully to the arguments made by noble Lords during Committee and recognise the strength of feeling and the logic around addressing Clause 17. In Committee, noble Lords made it clear that they had concerns with that clause, which removes the requirement to consider regulatory principles each time they exercise a general function in favour of considering them just at a strategic level. These points were made particularly strongly with regard to proportionality; in response, we have tabled Amendments 37 and 43 in my name. These amendments will ensure that the two proportionality regulatory principles will continue to apply to the regulators’ day-to-day actions.

There was also a rich debate in Committee about the different facets of proportionality and the factors that regulators should consider. Here, again, the Government have listened. Amendment 44 makes changes to the existing principles to explicitly include that the regulators should recognise the differing abilities of firms to engage and comply with regulation owing to their size—a point raised by both the noble Baroness, Lady Neville-Rolfe, and the noble Lord, Lord Vaux. This means that regulators will need to consider the specific impact of their proposals on SMEs.

It was also clear that a number of noble Lords had concerns about the possible effects of Clause 17 on Parliament’s ability to effectively scrutinise the regulators. In response, Amendments 40 and 46 to 50 will ensure that existing reporting requirements on the proportionality regulatory principles will remain in place, including as part of the consultation on annual reports. The Government are therefore retaining the majority of existing transparency and reporting requirements, including through panel reports, consultation requirements and annual reports.

17:45:00

In their letters to me, which have been shared with interested Members and laid in the Library, both the regulators set out details of their approach to delivering proportionality. They also commit to ongoing engagement with the parliamentary committees on their approach, and I am deeply grateful to the noble Baroness, Lady Noakes, for saying that, as chair of the committee, she will take up this challenge. I also particularly recognise the generous offer made by my noble friend Lord Stockwood to use his expertise in artificial intelligence to support the noble Baroness, Lady Noakes, and the Financial Services Regulation Committee and the Treasury Select Committee in their work to scrutinise the work of the regulators. It feels to me like an offer made in the spirit of consensus and team working about what it is that we would like to do here. The Government are grateful to noble Lords for the careful attention they paid to this matter and are confident that these amendments will support effective scrutiny and target regulator reporting more meaningfully at the issues Parliament cares most about.

I turn to non-government Amendments 35, 36, 39, 41, 42, 45, 62, 67 and 69. I hope I have demonstrated that the Government are taking action to ensure that proportionality remains a central consideration in the framework and that the framework supports SMEs of all types and that these amendments are therefore not required. With regard to Amendment 38 concerning financial crime related to organised environmental crimes, the FCA already has a broad remit and the powers it needs to tackle all financial crime.

I hope I have demonstrated that the Government have listened carefully to the strong feeling from across the House about the need to ensure that the regulators exercise their power in a way that is responsive to the differences between firms and business models. I am grateful to all those present for the focus that they have brought to this issue.

Baroness Bowles of Berkhamsted (LD)My Lords, I thank the Minister for his reply to the debate. I recognise the movement that he has indicated, but I did ask him to say something about transparency, which was, I am afraid, absent from what he said just then. He talked about proportionality, but I was talking about the linkage between transparency and proportionality and that, with transparency still languishing at strategy level, I was not sure whether we were going to get adequate transparency over things such as cost-benefit, which are part of proportionality. I know that is a little convoluted and I will not pursue it any further here, but I would be very grateful to have a meeting with the Minister before we get to Third Reading because, if he is going to be addressing points about Clause 17, then we should at least cross-check whether there is anything relevant in that to do. For now, I beg leave to withdraw my amendment.

Amendment 35 withdrawn.

Amendment 36 not moved.

Amendment 37

Moved by

37: Clause 17, page 21, line 34, leave out “omit subsection (5)(a)” and insert “in subsection (5) for paragraph (a) substitute— “(a) the proportionality regulatory principles (see section 3B(1A)), and””Member's explanatory statement This amendment would require the FCA to have regard to the proportionality regulatory principles (as defined in the amendment in the name of Lord Pitt-Watson to clause 17 at page 22, line 3) when discharging its general functions.

Amendment 37 agreed.

Amendments 38 and 39 not moved.

Amendment 40

Moved by

40: Clause 17, page 21, line 35, leave out subsection (3) Member's explanatory statement This amendment would require the publication of draft FCA rules to be accompanied by an explanation of the FCA's reasons for believing that making the proposed rules would be compatible with its duty to have regard to the proportionality regulatory principles when discharging its general functions (which would be inserted by the amendment in the name of Lord Pitt-Watson to clause 17 at page 22, line 3).

Amendment 40 agreed.

Amendments 41 and 42 not moved.

Amendments 43 and 44

Moved by

43: Clause 17, page 21, line 40, leave out paragraphs (a) and (b) and insert— “(a) in the heading, after “regard to” insert “proportionality”;(b) in subsection (2), for “the regulatory principles in section 3B” substitute “the proportionality regulatory principles (see section 3B(1A))”.”Member's explanatory statement This amendment would require the PRA to have regard to the proportionality regulatory principles (as defined in the amendment in the name of Lord Pitt-Watson to clause 17 at page 22, line 3) when discharging its general functions.

44: Clause 17, page 22, line 3, at end insert “; (ii) in paragraph (f), the words from “differences in the nature” to the end of the paragraph become sub-paragraph (i), and after that sub-paragraph insert “, and(ii) differences in the abilities of such persons to engage or comply with things done or made by a regulator in the discharge of its general functions within the meaning of section 1B(6) or 2J(1) (owing, for example, to their size);”;(b) after subsection (1) insert—“(1A) For the purposes of sections 1B(5)(a) and 2H(2), the proportionality regulatory principles are the regulatory principles in subsection (1)(b) and (f).””Member's explanatory statement This amendment would amend the regulatory principle in section 3B(1)(f) of FSMA 2000 and define the “proportionality regulatory principles” for the purposes of sections 1B(5)(a) and 2H(2).

Amendments 43 and 44 agreed.

Amendment 45 not moved.

Amendments 46 to 50

Moved by

46: Clause 17, page 22, line 6, leave out subsection (7) Member's explanatory statement This amendment is consequential on the amendment in the name of Lord Pitt-Watson to clause 17 at page 21, line 35.

47: Clause 17, page 22, line 9, leave out subsection (9) and insert— “(9) In Schedule 1ZA (the FCA)—(a) in paragraph 11 (FCA annual reports), in sub-paragraph (1), after paragraph (db) (inserted by section 16(6)) insert—“(dc) its consideration of the proportionality regulatory principles (see section 3B(1A)),”;(b) in paragraph 28 (FCA engagement with Parliamentary committees), in sub-paragraph (4)(c), for “the regulatory principles in section 3B” substitute “the proportionality regulatory principles (see section 3B(1A))”.”Member's explanatory statement This amendment would: (a) require FCA annual reports to include consideration of the proportionality regulatory principles (as defined in the amendment in the name of Lord Pitt-Watson to clause 17 at page 22, line 3); and (b) require notifications by the FCA to chairs of relevant Parliamentary Committees to specify the parts of the consultation that address the ways in which the FCA has had regard to the proportionality regulatory principles when preparing the proposals.

48: Clause 17, page 22, line 13, at end insert— “(za) in paragraph 19 (PRA annual reports), in sub-paragraph (1), after paragraph (bza) (inserted by section 16(7)) insert—“(bzb) its consideration of the proportionality regulatory principles (see section 3B(1A)),”;”Member's explanatory statement This amendment would require PRA annual reports to include its consideration of the proportionality regulatory principles (as defined in the amendment in the name of Lord Pitt-Watson to clause 17 at page 22, line 3).

49: Clause 17, page 22, line 18, leave out from “sub-paragraph” to the end of line 20 and insert “(4)(b), for “the regulatory principles in section 3B” substitute “the proportionality regulatory principles (see section 3B(1A))”.” Member's explanatory statement This amendment would require notifications by the PRA to chairs of relevant Parliamentary Committees to specify the parts of the consultation that demonstrate that the PRA has had regard to the proportionality regulatory principles (as defined in the amendment in the name of Lord Pitt-Watson to clause 17 at page 22, line 3) when preparing the proposals.

50: Clause 17, page 22, line 23, leave out from “sub-paragraph” to the end of line 29 and insert “(1)(e)— (a) for “section 3B” substitute “the proportionality regulatory principles”;(b) after “reference to” (in the second place it appears) insert “the regulatory principles in”.”Member's explanatory statement This amendment is consequential on the amendment in the name of Lord Pitt-Watson to clause 17 at page 22, line 18.

Amendments 46 to 50 agreed.

Clause 18FCA and PRA reporting and consultation requirements

Amendments 51 to 56 not moved.

Amendment 57 not moved.

Amendments 58 and 59

Moved by

58: After Clause 22, insert the following new Clause— “Bank of England functions: payment systems and service providers(1) In the Bank of England Act 1998, after Part 3B insert—“Part 3CPayment systems and service providers30J Exercise of functions relating to payment systems and service providers(1) In exercising its relevant payment systems functions in a way that advances the Financial Stability Objective the Bank must, so far as reasonably possible, act in a way which, as a secondary objective, facilitates innovation in—(a) the operation of recognised payment systems,(b) the provision of services by recognised DSA service providers, and(c) the provision of services by service providers in relation to such systems or such DSA service providers,with a view to improving the quality, functionality and economy of the systems and services. (2) For the purposes of this Part the Bank’s “relevant payment systems functions” are—(a) its function of publishing principles under section 188 of the Banking Act 2009,(b) its function of publishing codes of practice under section 189 of that Act, and(c) its function of determining the general policy and principles by reference to which it performs particular functions under Part 5 of that Act (payment systems and service providers).(3) In this Part—“operation” , in relation to a recognised payment system, is to be construed in accordance with Part 5 of the Banking Act 2009 (see section 183 of that Act);“recognised DSA service provider” is to be construed in accordance with Part 5 of that Act (see section 184A of that Act);“recognised payment system” is to be construed in accordance with Part 5 of that Act (see section 184 of that Act).(4) In subsection (1)(c)—(a) the reference to service providers in relation to recognised payment systems is to be construed in accordance with Part 5 of the Banking Act 2009 (see section 206A(2) of that Act);(b) the reference to service providers in relation to recognised DSA service providers is to be construed in accordance with Part 5 of that Act (see section 206A(2A) and (2B) of that Act);(c) the reference to the provision of services by service providers in relation to recognised payment systems or recognised DSA service providers includes a reference to the services and arrangements mentioned in section 183(k)(i) and (ii) of that Act (interpretation).30K Recommendations by Treasury(1) The Treasury may at any time by notice in writing to the Bank make recommendations about aspects of the economic policy of His Majesty’s Government to which the Bank should have regard when considering how to advance the Financial Stability Objective and the secondary objective under section 30J(1) (payment systems etc: innovation).(2) The Treasury must make recommendations under subsection (1) at least once in each Parliament.(3) The Treasury must—(a) publish in such manner as they think fit any notice given under subsection (1), and(b) lay a copy of it before Parliament.(4) The Bank must respond to each recommendation made under subsection (1) by notifying the Treasury in writing of—(a) action that the Bank has taken or intends to take in accordance with the recommendation, or(b) the reasons why the Bank has not acted or does not intend to act in accordance with the recommendation.(5) The notice under subsection (4) must be given before the end of 12 months beginning with the date the notice containing the recommendation was given under subsection (1).(6) Where the Bank has given notice under subsection (4) in relation to a recommendation, it must by notice in writing update the Treasury on the matters mentioned in subsection (4)(a) and (b) before the end of each subsequent period of 12 months.(7) Subsection (6) does not apply if the Treasury have notified the Bank in writing that no update (or further update) is required. (8) The Bank is not required under subsection (4) or (6) to provide any information whose publication would in the opinion of the Bank be against the public interest.”(2) In section 203B of the Banking Act 2009 (payment systems and service providers: annual report)—(a) in subsection (1)—(i) in paragraph (b), for “met” substitute “advanced”;(ii) omit the “and” after paragraph (b);(iii) after that paragraph insert—“(ba) the extent to which, in its opinion, in discharging its relevant payment systems functions, its innovation objective, in its application as a secondary objective, has been advanced,(bb) the efforts it has made to engage with persons, other than persons within subsection (4), appearing to the Bank to have an interest in the discharge of its functions under this Part,(bc) the results of that engagement, and”;(b) after subsection (3) insert—“(4) The following persons are within this subsection—(a) operators of recognised payment systems;(b) recognised DSA service providers;(c) service providers in relation to recognised payment systems or recognised DSA service providers.(5) In this section—“innovation objective” means the objective set out in section 30J(1) of the Bank of England Act 1998 (payment systems etc: innovation);“relevant payment systems functions” has the same meaning as in Part 3C of the Bank of England Act 1998 (see section 30J(2) of that Act).”(3) In section 204(1A) of the Banking Act 2009 (information)—(a) the words “its financial stability objective” become paragraph (a);(b) after that paragraph insert“, or(b) in its application as a secondary objective, its objective set out in section 30J(1) of the Bank of England Act 1998 (payment systems etc: innovation).””Member’s explanatory statement This amendment would insert provisions relating to the exercise of the Bank’s payment systems functions under the Banking Act 2009; including a secondary objective to exercise functions in a way that facilitates innovation in payment systems and related services with a view to improving their quality, functionality and economy.

59: After Clause 22, insert the following new Clause— “Bank of England annual report: innovation secondary objectivesIn the Bank of England Act 1998, after section 4 insert—“4A Annual report to the Treasury on innovation secondary objectives(1) At least once a year, the Bank must make a report to the Treasury on how it has complied with sections 30D(2) and 30J(1) (innovation secondary objectives: FMI functions and relevant payment systems functions).(2) A report under subsection (1) must in particular explain—(a) the action taken by the Bank to ensure that its innovation objectives, in their application as secondary objectives, are embedded in its operations, processes and decision-making, and(b) how the exercise by the Bank of its FMI functions and relevant payment systems functions has advanced its innovation objectives in their application as secondary objectives. (3) The Bank must publish a report prepared under this section in such manner as it thinks fit.(4) In this section—“FMI functions” has the same meaning as in Part 3B (see section 30D(3));“innovation objectives” means the objectives set out in sections 30D(2) and 30J(1) (innovation secondary objectives: FMI functions and relevant payment systems functions);“relevant payment systems functions” has the same meaning as in Part 3C (see section 30J(2)).(5) A report under this section may not be combined in a single document with any other report.””Member’s explanatory statement This amendment would require the Bank to prepare an additional annual report setting out how it has advanced its secondary innovation objectives in relation to its FMI functions and payment systems functions.

Amendments 58 and 59 agreed.

Amendment 60

Moved by

60: After Clause 22, insert the following new Clause— “FCA rules: access to certain savings accounts for persons lacking capacity(1) The FCA must make rules requiring a relevant provider, where the conditions in subsection (3) are met, to enter into an agreement under which payments from a relevant account held by a person who lacks capacity to manage their own financial affairs (“the account holder”) are made to a person acting on the account holder’s behalf (“the recipient”) instead of to the account holder.(2) A “relevant account” means—(a) a Child Trust Fund within the meaning of the Child Trust Funds Act 2004;(b) a junior individual savings account within the meaning of regulations made under Chapter 3 (income from individual investment plans) of Part 6 (exempt income) of the Income Tax (Trading and Other Income) Act 2005;(c) an account of any other description specified by the FCA in rules made under this section.(3) The conditions are that—(a) there has been provided to the relevant provider either—(i) a document signed by a registered medical practitioner stating that the account holder lacks capacity to manage their own financial affairs, or(ii) a statement in writing by the recipient that they understand their duty to apply any money received in the best interests of the account holder, that they are aware that they may incur civil or criminal liability if they misapply the money, and that, so far as they are aware, no other person has authority to receive the money by virtue of a power of attorney or an order or appointment made by a court, and(b) the account holder has not informed the relevant provider that they do not wish such an agreement to be made.(4) Rules made under this section must—(a) secure that a relevant provider which makes a payment in accordance with such an agreement does not, by making it, incur any liability to the account holder, unless the provider has reasonable cause to believe that the recipient is likely to apply the money otherwise than in the account holder’s best interests, (b) require the recipient to apply any money received under the agreement in the best interests of the account holder, and(c) provide that the aggregate of the payments made under an agreement may not exceed £5,000 in any period of 12 months.(5) The purpose of rules made under this section is to enable access to be obtained to money held in a relevant account on behalf of an account holder who lacks capacity without the need for an order or appointment of the Court of Protection or any equivalent order of a court.(6) In this section “relevant provider” means an authorised person (within the meaning of the Financial Services and Markets Act 2000) who provides a relevant account.”Member’s explanatory statement This new clause seeks to require the FCA to make rules enabling money in a Child Trust Fund or Junior ISA belonging to a person who lacks capacity to be paid to someone acting in that person’s best interests, subject to safeguards, without an application to the Court of Protection.

Baroness Kramer (LD)I wish to test the opinion of the House.

1|17:52|248|163|Division on Amendment 60|Amendment 60 agreed.||0|0

18:03:00

Amendments 61 and 62 not moved.

Amendment 63

Moved by

63: After Clause 22, insert the following new Clause— “PRA rules: specialised risk weighting for employee ownership, co-operative and mutual transitionsAfter section 137G of the Financial Services and Markets Act 2000 (the PRA’s general rules) insert—“137GZA PRA rules: specialised risk weighting for employee ownership, co-operative and mutual transitions(1) In making rules relating to credit risk, capital requirements or the calculation of risk-weighted assets, the Prudential Regulation Authority must have regard to the desirability of recognising lending to small and medium-sized undertakings for the purpose of facilitating or supporting an employee ownership, cooperative or mutual transition as a prudentially distinct exposure class.(2) Rules made under this section may provide for specialised risk weights, risk-weighting factors, or exposure sub-categories for such lending where the PRA considers that the underlying risk characteristics justify differentiated treatment.(3) For the purposes of this section, lending that facilitates or supports an employee ownership, cooperative or mutual transition includes—(a) finance for the acquisition of shares by an Employee Ownership Trust, cooperative or mutual structure,(b) refinancing or restructuring of existing debt in connection with such a transition,(c) working capital or growth finance provided during or following such a transition, and(d) any other lending the PRA considers materially connected to the transition.(4) Nothing in this section shall be construed as requiring the PRA to set specific risk weights that are inconsistent with its primary statutory objectives.””Member’s explanatory statement This new clause enables the Prudential Regulation Authority to establish a specialised risk-weighting framework for lending that supports employee-ownership, cooperative, and mutual transitions, ensuring capital requirements appropriately reflect the lower risk profile and long-term stability of these ownership structures.

Baroness Bowles of Berkhamsted (LD)My Lords, I declare my interests as chair of the ownership dividend inquiry into employee ownership and as director of Valloop Holdings Ltd.

Amendments 63 and 66 address a structural flaw in financing employee ownership, co-operative and mutual transitions—a problem sharpened by recent tax changes and incoming Basel prudential rules. Amendment 64 concerns the systemic misuse of Section 166 investigations. In the interests of time, I have not split this rather diverse group. Amendments 63 and 66 would not mandate outcomes; they would simply require regulators to consider a distinct exposure class and review lending to these entities. The PRA already possesses the power to do this, just as it does for infrastructure, but this asset class is too niche to attract regular focus without a push, so this is my push.

The Government’s manifesto commits to doubling the co-operative and mutual sector. Yet reducing capital gains tax relief for employee ownership trusts has already drastically reduced conversions. Basel 3.1 compounds the damage. Removing the SME supporting factor increases risk weights under the standardised approach used by challenger banks—the very lenders willing to finance these transactions. The large IRB banks could theoretically model lower charges but generally will not incur the cost for such a small market.

The result is clearfunding these transitions will become harder, if not impossible. Yet these business models carry lower default rates, higher survival rates and greater economic resilience. These are prudentially relevant characteristics that justify differentiated treatment, just like infrastructure, green mortgage or project finance do. Recognising this profile is cost-neutral, Basel-compatible and entirely within existing regulatory powers. Without it, I suspect that the Government’s own policy commitments will fail.

I turn to Amendment 64. Section 166 powers were designed for serious exceptional concerns, allowing regulators to appoint a skilled person—typically an expensive consulting firm—to investigate a business. As the noble Lord, Lord Altrincham, and I set out in Committee, Section 166 has suffered severe mission creep. It now seems to be used routinely, disproportionately and beyond its intended scope. These reviews impose high costs, disruption and management distraction on firms, often for issues that supervision could and should handle.

My amendment would restore the original statutory boundary. It would ensure that Section 166 is deployed only where there is material risk of detriment to regulatory outcomes and where its use is strictly proportionate, having regard to the burden on the firm and whether normal supervisory tools would suffice. The House must signal that regulators cannot delegate routine supervision to high-price firms at the expense of regulated businesses. I intend to seek the opinion of the House. I beg to move.

Lord Altrincham (Con)I thank the Minister for hosting this second day of Report with such grace. I will focus my remarks on Amendment 64, to which I added my name. I am very grateful to the noble Baroness, Lady Bowles of Berkhamsted, for bringing this important issue before the House again. “Section 166 review” is the name given to FCA investigations. These investigations were originally quite rare, but dozens are now launched every year and they are paid for by the target firms. These investigations are expensive and time-consuming. They can have a rather arbitrary regulatory purpose and are somewhat unconstrained. This regulatory power can be exercised without a statutory threshold requiring the regulator first to demonstrate that the matter is sufficiently serious and that using this particular tool is proportionate.

We hear consistently from firms that Section 166 reviews are increasingly becoming the norm rather than the exception. Without a degree of restraint or oversight, these powers may create regulatory uncertainty. Our amendment would not prevent the regulators acting where there is a serious problem, nor would it remove Section 166 from their toolkit. It would simply mean that such a costly and burdensome power is used proportionately where it is genuinely warranted. I very much hope that the Minister will accept the amendment, but if the noble Baroness, Lady Bowles, decides to test the opinion of the House as she has indicated, we will support her.

Lord Pitt-Watson (Lab)My Lords, this group raises two important but distinct questions: how the prudential framework should treat lending that supports employee ownership, co-operatives and mutuals; and when regulators should use skilled person reviews under Section 166 of FSMA. The Government have carefully considered the case made for each amendment, but do not believe that these changes should be made through legislation.

Amendments 63 and 66 seek to create a bespoke prudential framework for lending to co-operatives and mutuals, including through lower risk weights. The Government recognise the valuable contribution that co-operatives and mutuals make to the UK economy and are undertaking a multiyear programme of work to support the growth of the sector. This includes making amendments to the Building Societies Act 1986, which we debated last week, to align it with company law and give societies greater funding flexibility.

However, prudential capital requirements should reflect the underlying risk of a lending activity rather than the ownership structure of the lender. Prudential requirements are generally set by the Prudential Regulation Authority through its rules, rather than being prescribed in legislation. This allows the framework to respond to evolving risks and market developments, while operating within a statutory framework established by Parliament. The Prudential Regulation Authority has clear statutory objectives and is accountable to Parliament for the exercise of its functions. It is therefore the appropriate body to assess risk characteristics and determine the appropriate prudential treatment of different exposures. The Government therefore do not consider it appropriate to prescribe preferential prudential treatment for particular business models through legislation. Such decisions should remain matters for the independent Prudential Regulation Authority. For these reasons, I am unable to support these amendments.

Turning to Amendment 64 concerning Section 166 skilled person reviews, I agree that these reviews should be commissioned only where appropriate and proportionate. However, the Government are not persuaded that a further statutory threshold is necessary. As we discussed in Committee, regulators already consider the circumstances of the firm, the costs involved and the availability of alternative supervisory tools before commissioning a skilled person review. The FCA and the PRA have established supervisory processes for doing so. Requiring the regulators to satisfy an additional statutory test could delay supervisory action and make it harder to intervene before problems occur that could damage the interests of consumers or affect the functioning of markets.

I know that a concern has been raised about there being more and more Section 166 reviews. I reassure noble Lords that the FCA’s use of skilled person reviews has been broadly consistent over the past 10 years. In 2025-26, only 31 were commissioned, which is the second-lowest usage since 2016. I am happy to send the figures to Members if they are interested.

In their letters to me, which have been shared with interested Members and laid in the Library, both regulators set out details of their approach to delivering proportionality, with the FCA explaining how its approach to supervision is proportionate, risk based and targeted. They also commit to ongoing engagement with parliamentary committees on their approach. I hope that this reassures the noble Baroness about the process and proportionality of Section 166 reviews and therefore ask her not to press her amendments.

Baroness Bowles of Berkhamsted (LD)My Lords, I thank the noble Lord, Lord Altrincham, for supporting my Section 166 amendment. With regard to my Amendments 63 and 66, the Government have interpreted this exactly as I said it was not: I said that it is not telling the PRA what to do, but to consider a prudential distinction. I did not tell it what to do with it. Of course, it has that power anyway, and the purpose of the amendment was to draw attention to a very important sector. I will take the measure up with the PRA directly. For now, I beg leave to withdraw my amendment.

Amendment 63 withdrawn.

Amendment 64

Moved by

64: After Clause 22, insert the following new Clause— “Section 166 reviews: threshold and proportionality requirements(1) Section 166 of the Financial Services and Markets Act 2000 (reports by skilled persons) is amended as follows.(2) After subsection (1) insert—“(1A) The regulator may not require a person to provide a report under this section unless it is satisfied that—(a) there is a material risk of serious detriment to regulatory outcomes, and(b) the use of a skilled person is a proportionate response, having regard to—(i) the scale and nature of the suspected issue,(ii) the expected burden on the firm, and(iii) whether the matter could reasonably be addressed through the regulator’s existing supervisory tools.””Member’s explanatory statement This new clause would introduce a statutory threshold for the use of section 166 skilled persons reviews, requiring the regulator to demonstrate a material risk of serious detriment and to consider proportionality.

Baroness Bowles of Berkhamsted (LD)I wish to test the opinion of the House.

2|18:15|226|162|Division on Amendment 64|Amendment 64 agreed.||0|0

18:26:00

Amendments 65 to 70 not moved.

Amendment 71

Moved by

71: After Clause 22, insert the following new Clause— “Open finance framework(1) The FCA must establish and maintain a framework for open finance. (2) The framework must provide for—(a) secure and standardised data sharing interfaces,(b) rights of customers to direct the sharing of their financial data, and(c) interoperability between different categories of financial services providers, including digital asset providers.(3) The FCA may make rules to give effect to this section.”Member’s explanatory statement This amendment gives the FCA the power to make rules in relation to open finance.

Lord Holmes of Richmond (Con)My Lords, I shall speak also to the other amendments in this group, which I support. There are two critical threads running through the Bill. I say “running through the Bill”—in reality, they do not appear at all in the Bill. Those are all things digital finance and artificial intelligence, be it embedded finance, open finance, digital assets, stablecoins, CBDCs or the whole subject of AI and how it is currently transforming all things across consumer, retail, wholesale and financial markets right around the world. You could be forgiven for not appreciating this if you just looked at the contents of the Bill to see the impact these forces are already having.

When it comes to digital assets or indeed AI, there are many clear and present elements requiring primary legislation. We have this Bill in front of us, yet it is silent on all these issues. We have the excellent report of the Digital Markets Taskforce, the great work so far of Chris Woolard and indeed the report of Mark Austin. All have elements within them requiring primary legislation, yet the Bill has nothing to say on those subjects.

The UK has an extraordinary, unique opportunity when it comes to digital assets, stablecoins, tokenisation, market DEMAT and artificial intelligence. But we require the primary legislation and the attendant regulatory framework not just to give effect to that and to enable the innovation and economic growth that would come, but to give a signal from the Government as to the direction they want the UK to go in with all these extraordinary, transformational, growth-creating economic opportunities. I look forward to the Minister’s response. I beg to move.

Lord Ranger of Northwood (Con)My Lords, I support this group of amendments, particularly Amendment 88. I welcome and echo my noble friend’s comments about the challenges faced in financial services from the forces of technology and technological evolution, and I welcome the direction of travel from the Government, the FCA and the Bank of England. There has been real progress on crypto assets, stablecoins and tokenisation and I am particularly encouraged by the work of the Government’s Wholesale Digital Markets Champion, Chris Woolard—his published report and the work towards his forthcoming reports. I thank the Government, the Minister, the Economic Secretary and the champion for their engagement so far.

18:30:00

However, Amendment 88 asks a bigger question. Are we simply regulating digital assets or are we building a digital assets economy? That distinction matters. Chris Woolard’s work on tokenising wholesale financial markets is extremely important, but digital assets are bigger than financial services regulation: they are becoming part of an infrastructure of money, payments, settlement, capital markets and the wider economy. That is why I strongly support the work of the Bank of England and the governor on a multi-money system, or even a “multi-moneyverse”, whereby traditional bank money, tokenised deposits, stablecoins and central bank money play complementary roles. We should be thinking about the whole ecosystem, not simply individual technologies.

That is what this amendment seeks to do. It would require the Treasury to develop a proper digital asset strategy informed by regulators and, crucially, by industry. It specifically asks the Government to look at the practical conditions in which firms operate, including access to banking, payments and settlement. That matters, because a firm can be authorised and compliant but cannot access the financial infrastructure it needs. That authorisation is largely theoretical. Industry is telling us that this is a real barrier. We should listen.

There is also an international dimension. In my regular discussions with senior policymakers in Washington, including the US SEC and the CFTC, it is clear that the United States is moving rapidly to shape the digital assets market through the GENIUS and CLARITY Acts. We do not need to copy the US, but we do need to recognise the competition and recognise a particular opportunity for the United Kingdom. Of course, the UK is a global financial centre, with extraordinary strengths in financial markets, legal services, fintech and professional services. That gives us an opportunity not simply to follow international developments but to lead international standard-setting. Indeed, the Bank of England is already showing what that leadership can look like through its work on interoperability and multi-asset, multi-currency tokenised financial systems.

I welcome the increased engagement with industry from the Government, but we now need a consistent drumbeat, stronger leadership and a clear plan of targets and delivery so that industry can plan alongside government and regulators. That is why this amendment is important, and I press the Minister and the Government to give it further consideration. It asks for a strategy that sets out where we want to go, what barriers we need to remove, what infrastructure and standards we need, how we remain internationally competitive and what success looks like. Woolard’s work is an important part of that, but we need to be more ambitious than a single workstream. Other countries are moving quickly. The UK should not simply seek to regulate the digital assets economy of tomorrow; we should build it and help write the international rules for it here in the United Kingdom.

Baroness Neville-Rolfe (Con)My Lords, this is an important and forward-looking group of amendments, covering open finance, digital market infrastructure and the future of digital assets. I am very grateful to my noble friend Lord Holmes of Richmond for his amendments, and for explaining the scale of the digital tide and the AI wave and the lack of specific signals in the Bill on these opportunities. I will focus my remarks on Amendment 88, standing in my name and those of my noble friend Lord Altrincham and the noble Baroness, Lady Kramer, who I thank for her support. We debated these issues in Committee, but the central concern remains. Digital assets are becoming an accelerating part of our financial and economic landscape, yet policy is still developing too often issue by issue, product by product and regulator by regulator.

What is missing is a comprehensive strategy. This matters. Industry is telling us that the most basic building blocks of a comprehensive regulatory regime, such as legal definitions, do not exist. This uncertainty is translating into a lack of confidence, which is driving wealth creators away.

Amendment 88 asks the Treasury to step back and set out a coherent strategy for the regulation and development of digital assets and related financial market infrastructure in the UK. It asks the Treasury to establish its objectives, consult properly with industry and other interested parties, and explain how the different strands of policy fit together. This can build on the work of the Bank of England and of Chris Woolard, the new Wholesale Digital Markets Champion at the Treasury. We are most grateful for yesterday’s briefing, at which Chris set out his forthcoming plans for another report due to be published next year.

The opportunity for the UK is considerable. We have the legal system, deep capital markets and an extensive professional services ecosystem, but firms need to know which regulator is responsible for which part of the system, what rules will apply, how different regimes will interact, and how quickly decisions will be made. We are seeing the effects of current ambiguity in reports of firms wishing to offer digital asset products being debanked, a point to which my amendment refers.

Other financial centres are moving rapidly to establish their own frameworks for digital assets and tokenised markets, as my noble friend Lord Ranger explained from his position of great expertise. If businesses conclude that another jurisdiction offers greater regulatory certainty or a clearer strategic direction, they can quickly go elsewhere.

Amendment 88 therefore offers the Government an opportunity to bring those different strands together. The work of Chris Woolard is welcome, but our amendment encompasses a wider range of concerns raised with us. I hope the Government will engage with the amendment, but if I am not satisfied with the Minister’s response I will seek to test the opinion of the House.

Lord Pitt-Watson (Lab)My Lords, I thank the noble Baronesses, Lady Neville-Rolfe and Lady Kramer, and the noble Lords, Lord Altrincham and Lord Holmes, for their amendments relating to the adoption of technology in the financial services sector and for their contributions to this debate. Technological change is already having a significant impact on the sector and there are huge opportunities for the UK alongside risks to be managed.

Amendment 71 seeks to require the FCA to create and maintain a framework for open finance. However, the Government already have powers to create a framework for open finance under the Data (Use and Access) Act 2025. Parliament has therefore already legislated here, and that legislation includes the power to require the FCA to regulate for open finance and includes appropriate safeguards and scrutiny. The Treasury also confirmed at Mansion House in July 2026 its commitment to open finance and said it will consult on open finance next year.

Amendments 88 and 89 are both focused on digitalisation. Amendment 88 seeks to support the UK’s approach to digital assets by requiring the Government to publish a digital assets strategy. It sets out a number of important issues that such a strategy should consider. Amendment 89 similarly seeks to support digitalisation by requiring the Government to make regulations establishing an issuer digitalisation council, composed of representatives from issuers, intermediaries, the FCA, the PRA, the Bank of England and the Treasury.

As noted in the debate in Committee, the Government strongly support digital assets and see them as a key strategic priority. As such, the Government have been very active on this agenda and have a comprehensive strategy to drive forward the digitalisation of wholesale markets through the wholesale financial markets digital strategy published in July 2025. The Government have been taking forward the actions of the strategy at speed. There has been progress even since this issue was debated in Committee.

Chris Woolard CBE published his first report as the Government’s Wholesale Digital Markets Champion in July, setting out a comprehensive cross-sector approach to digital assets. The Economic Secretary to the Treasury and I hosted a drop-in session with Mr Woolard here in Parliament just yesterday so that Members of your Lordships’ House could hear more about his agenda. I think those noble Lords who were there would agree that we should be impressed by the scope and comprehensiveness of the work he is doing.

Mr Woolard outlined not one workstream but nine taskforce action groups that are taking forward the industry road map, including an action group focused on the primary issuance of digital securities, and with an initial focus on delivering an end-to-end use case. These groups and the overarching orchestration group represent a huge amount of work, expertise and industry input that Chris is leading. They include the industry, a strategy and 50 companies, to be joined by the head of Europe from BlackRock and the London Stock Exchange. It is absolutely great work, as the noble Lord, Lord Holmes, said.

At that meeting, Chris Woolard was asked whether there was any need for further primary legislation. I think that the noble Lord, Lord Ranger, was at the meeting and can confirm that he said that right now, he did not think there was. He could also confirm that I said that, should there be that need, I and the Economic Secretary to the Treasury would be listening to that. There will be a real threat to UK competitiveness if we fail to act in this area, and a considerable opportunity if we get it right. I hope that the opportunity to engage Mr Woolard prior to this debate gave insight into the vast amount of constructive work that is already taking place to make sure that this happens. There are many other actions being taken to support this work, such as the Bank of England and the Financial Conduct Authority’s call for input on tokenisation, which closed in July. They intend to publish a further road map in the autumn. In noble Lords’ speeches, I heard that they want momentum and a strategy involving industry. That is what is happening right now. The Government also highlighted progress on the digital securities sandbox, the digital gilt instrument, in Committee.

The Government strongly believe in the need to digitalise financial markets, and I hope that the measures the Government are taking forward and the further updates that noble Lords received from Chris Woolard, as wholesale digital markets champion, show that the Government are working with the sector and the regulators to deliver a strategic approach to digitalisation—

Lord Ranger of Northwood (Con)My Lords, forgive me for interjecting, but the Minister is quite right. We had a very progressive session with Mr Woolard yesterday. The question I raised with him was about the future strategy and where we were heading, because his focus is clearly on tokenisation. We noticed that there was a further discussion on standard-setting internationally, agentic finance and various other elements that are in development and need strategic thought. I think that the champion took on board that there was a broader vision that needed to be identified, which is what we would be looking for in a strategy.

Lord Pitt-Watson (Lab)He did indeed take that on board, and I thank the noble Lord, Lord Ranger, for making that point. He was also asked whether at this point further primary legislation was needed. He said that it was not but was invited, should that situation change, to talk to the Ministers in the Treasury. Therefore, I ask the noble Lord, Lord Holmes, to withdraw his amendment.

Lord Holmes of Richmond (Con)My Lords, I thank everyone who has taken part in this debate. I thank the Minister for his answer, and I echo every word he said about the fantastic work that Chris Woolard and, indeed, Mark Austin have done in this area. For the time being, I will withdraw the amendment, but it remains to be seen whether we are building a faster horse or regulating existing products in a digital form. I suggest that there is still more thinking to be done on composability and the extraordinary opportunities that exist, but it is fantastic that we have such champions in Chris Woolard and others working in this area. I look forward to seeing how it develops. For the moment, I withdraw the amendment.

Amendment 71 withdrawn.

Amendments 72 and 72A not moved.

Clause 27Conduct of employees, directors, etc: appointed representatives

Amendments 73 and 74

Moved by

73: Clause 27, page 32, leave out lines 38 and 39 Member’s explanatory statement This amendment, and the amendment in the name of Lord Pitt-Watson to clause 27 at page 33, line 1, would ensure that both clauses 27 and 36 can be commenced to amend one list in section 66A of the Financial Services and Markets Act 2000 while preserving the final “or”.

74: Clause 27, page 33, line 1, after “sub-paragraph (iii)” insert “(but before any “or” already inserted by section 36(3)(b) of this Act)” Member’s explanatory statement See the explanatory statement to the amendment in the name of Lord Pitt-Watson to clause 27 at page 32, line 38.

Amendments 73 and 74 agreed.

Clause 29Temporary Part 4A permission

Amendment 75

Moved by

75: Clause 29, page 34, line 32, leave out “is in force” and insert “has effect” Member’s explanatory statement This amendment would make section 55AA(4) of the Financial Services and Markets Act 2000 consistent with section 55A(3) of that Act (as amended by clause 29).

Amendment 75 agreed.

Clause 33Requests for conditions or time-limited approvals

Amendments 76 to 79

Moved by

76: Clause 33, page 38, line 28, at end insert— “(2A) In section 61 (determination of applications), in subsection (3ZA)—(a) the words from “granting it” to the end become paragraph (a);(b) after that paragraph insert“, or(b) in the case of a permitted conditional application (as defined in section 60A(5)), granting it subject only to conditions, or for a limited period, requested in the application (or both).””Member’s explanatory statement This amendment would keep section 61 of the Financial Services and Markets Act 2000 in step with other amendments to Part 5 of that Act, which treat a decision to grant an application on the terms requested like an approval of the application.

77: Clause 33, page 38, line 32, at end insert— “(aa) after subsection (1) insert—“(1A) If the regulator to which a permitted conditional application is made under section 60 decides to grant the application subject only to conditions, or for a limited period, requested in the application (or both), it must give written notice of its decision to each of the interested parties.”;”Member’s explanatory statement This amendment would require the regulator to give written notice of a decision to grant a permitted conditional application to interested parties.

78: Clause 33, page 39, line 17, at end insert— “(5A) In section 309L (determining applications: period for approval), in subsection (1), in paragraph (a)—(a) the words from“without imposing”to the end become sub-paragraph (i); (b) after that sub-paragraph insert—“(ii) in the case of a permitted conditional application (as defined in section 309J(2B)), subject only to conditions, or for a limited period, requested in the application (or both), or”.”Member’s explanatory statement This amendment would keep section 309L of the Financial Services and Markets Act 2000 in step with other amendments to Part 18 of that Act, which treat a decision to grant an application on the terms requested like an approval of the application.

79: Clause 33, page 39, line 18, after “recognised bodies)” insert— “(a) after subsection (1) insert—“(1A) If the appropriate regulator decides to grant a permitted conditional application under section 309I subject only to conditions, or for a limited period, requested in the application (or both), it must give written notice of its decision to each of the interested parties.”;”Member’s explanatory statement This amendment would require the regulator to give written notice of a decision to grant a permitted conditional application to interested parties.

Amendments 76 to 79 agreed.

Amendment 80 not moved.

Clause 37Overseas recognition regimes

Amendment 81

Moved by

81: Clause 37, page 45, line 2, at end insert— “(7) If the Treasury are satisfied that regulations under section 408A or 408B of the Financial Services and Markets Act 2000 (as inserted by subsection (3)) would, if made, have substantially the same effect as existing overseas recognition provision—(a) sections 408A to 408C of that Act (as inserted by subsection (3)) apply in relation to the regulations as if—(i) section 408A(2) were omitted,(ii) in section 408B(1), the words from “if the Treasury” to the end were omitted,(iii) section 408B(2), (4) and (5) were omitted, and(iv) section 408C(1) to (4) were omitted, and(b) section 429 of that Act applies in relation to the regulations as if, in subsection (2), “408A” (as inserted by subsection (5)) were omitted.(8) In considering whether regulations would have substantially the same effect as existing overseas recognition provision, the Treasury must—(a) treat the power in section 408B to designate a country or territory for the purposes of the regulations as forming part of the regulations, and(b) disregard any difference between that power and any power to make designations under the existing overseas recognition provision.(9) In subsections (7) and (8), “existing overseas recognition provision” means—(a) provision contained in an instrument containing provision listed in the Schedule to the Financial Services (Overseas Recognition Regime Designations) Regulations 2025 (as it has effect from time to time), or(b) a designation made under such an instrument.”Member’s explanatory statement This amendment would allow the Treasury to consolidate existing provision relating to overseas recognition under the umbrella of the new overseas recognition regime, so long as their doing so would not substantially change the effect of the existing law.

Amendment 81 agreed.

Clause 40Ring-fencing rules etc

Amendments 82 to 85 not moved.

Amendment 86 not moved.

18:45:00

Amendment 87

Moved by

87: After Clause 44, insert the following new Clause— “Tax treatment of risk transformation arrangements After section 248A of the Financial Services and Markets Act 2000 (transformer vehicles), insert the following new clause—“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, I will speak briefly to Amendment 87, and I support the amendment in the name of the noble Baroness, Lady Altmann, on superfunds. These are two issues that need attention. My amendment is about one thing: tax certainty for insurance-linked securities. It would not weaken anti-avoidance rules and does not seek any advantage that Parliament never intended; it simply asks for clarity in a regime that Parliament created to attract ILS business to the UK.

The problem is commercial. Rival jurisdictions give clear outcomes, but the UK does not. HMRC’s guidance leaves too much ambiguity and advisers reach conflicting conclusions on identical transactions, so, in a market where speed and predictability drive choice of domicile, capital goes elsewhere. The consequence is stark: London is the world’s largest commercial reinsurance centre, yet we have only 2% of global ILS activity. The catastrophe bond market is over $60 billion and the wider ILS market exceeds $140 billion. We could have a big chunk of that, but we are letting this substantial business, and indeed the tax revenue that would come from it, pass London by.

The new PRA reforms in the Bill are welcome, and London Bridge 2 has brought in new capital, but even that structure repeatedly runs into HMRC uncertainty. If the Government want the market then the guidance has to be clearer. It is only the Government who can fix this if they want the business in the UK. I beg to move.

Baroness Altmann (Non-Afl)My Lords, I support Amendment 87 in the name of the noble Baroness, Lady Bowles. I will speak to my Amendment 92, and I am grateful to her for adding her name to it. Amendment 92 would insert a provision in the Bill to allow life insurers to set up defined benefit pension superfunds outside of their solvency UK ring-fences, enabling them to participate in the superfund market and potentially even help the UK build its own version of Canada’s much-vaunted Maple Eight. UK insurers—with suitable ring-fencing, as set out in the amendment, to ensure separation from their insurance business—are ideally placed to run large pools of pension investments, with existing in-house expertise in areas such as investment, actuarial and legal. At present, insurance buyout is seen as the gold standard for defined benefit pension scheme endgame strategies.

Superfunds could provide a means to add billions of pounds-worth of productive capital into the UK economy and allow pension members to enjoy better benefits, rather than superfunds remaining niche players, if the current system is not changed. Insurers could bring large amounts of capital pooled into the pension scheme area and collect pension assets so that scheme members would have better upside opportunities and robust alternatives to the finality of annuity buyouts, which are generally considered 100% safe but could well not be. Buyout pushes assets into low-return, unproductive opportunities and denies members greater returns and better pensions, which could come from superfunds.

In particular, there are concerns about systemic risk with annuity buyouts. I wondered whether the Minister might agree to meet me and other interested parties to discuss the risks involved in the Government’s current perception that annuity buyout is the gold standard, 100% safe endgame strategy. I hope that he will recognise that the Financial Services Compensation Scheme may not be as secure as expected.

Lord Pitt-Watson (Lab)My Lords, I thank the noble Baronesses, Lady Bowles and Lady Altmann, for their amendments. I will take each in turn, starting with Amendment 87. As was noted by my predecessor, the Government recognise the role which the bespoke tax regime for transformer vehicles plays in ensuring that the UK is competitive. We also recognise, as does this amendment, the importance of robust anti-avoidance measures and clear guidance in ensuring that the regime functions effectively, provides certainty to business and safeguards the integrity of the tax system.

It is right that we preserve HMRC’s ability to effectively pursue instances where vehicles are established for the purposes of avoiding tax, and it is important that we preserve that ability and avoid creating risks for the Exchequer. However, I recognise the strength of feeling in industry over this issue. I therefore offer the Baroness a meeting with HMRC and Treasury officials to discuss it in more depth. I remain of the view that this legislation is not the appropriate place to make provision for the tax regime governing transformer vehicles—the Risk Transformation (Tax) Regulations 2017 being the specific legislation designed to govern this.

On Amendment 92, the Government recognise the important role that defined benefit pension scheme consolidation can play in improving outcomes for pension scheme members and providing additional options for schemes. The amendment seeks to place in legislation an explicit permission for PRA-authorised insurers to establish, own or operate DB superfunds and would introduce statutory requirements governing the separation of superfund and insurance activities. However, insurers are already able to establish and operate superfunds under the existing regulatory framework. The amendment therefore does not create a new route into the market. Rather, its primary effect is to place requirements relating to ring-fencing, capital treatment and the separation of activities into primary legislation. The Government’s view is that matters relating to prudential regulation, capital treatment and the supervision of regulated firms are more appropriately addressed by the relevant regulators rather than through detailed provisions in primary legislation. For those reasons, while I appreciate the intention behind the amendment, the Government do not consider it necessary.

I therefore ask the noble Baronesses to withdraw or not move their respective amendments.

Baroness Altmann (Non-Afl)Would the noble Lord be willing to meet to go through some of these issues?

Lord Pitt-Watson (Lab)If I would be the relevant person to talk to on this matter, I would be happy to meet. If not, perhaps I can direct the noble Baroness to appropriate officials.

Baroness Bowles of Berkhamsted (LD)My Lords, I thank the Minister for his reply. There is nothing in my amendment that is intended to stop pursuit of things that are wrong, but the evidence is that the guidance is not understood. I welcome the opportunity to have a meeting with HMRC officials so that we can explain more clearly where the problems lie and see if a solution can be found. With that, I beg leave to withdraw my amendment.

Amendment 87 withdrawn.

Amendment 88

Moved by

88: After Clause 46, insert the following new Clause— “Digital assets strategy(1) Within 12 months of the day on which this Act is passed, the Treasury must prepare, publish and consult on a strategy for the regulation and development of digital assets and related digital financial market infrastructure in the United Kingdom.(2) A strategy under subsection (1) must consider, in particular—(a) the Government’s approach to the regulation of digital assets, including cryptoassets, qualifying stablecoins, Central Bank Digital Currencies, tokenised securities and other digital and tokenised financial assets,(b) the practical operation of digital asset businesses and activities under current legal, regulatory and market conditions in the United Kingdom,(c) the extent to which firms carrying on, or seeking to carry on, digital asset activities in the United Kingdom are able to obtain and maintain appropriate access to banking, payment and settlement services,(d) the risks to competition, innovation and lawful market participation arising from the withdrawal or denial of such services, including where this is done on a blanket or insufficiently risk-sensitive basis,(e) developments in the law, regulation and supervisory practice of other jurisdictions so far as relevant to the safe regulation of new asset classes and digital financial market infrastructure, including digital currency exchanges,(f) the interaction between the regulation of digital assets and the development of related regimes and initiatives, including in relation to tokenisation, stablecoins, digital settlement assets and other digital payment or settlement arrangements relevant to financial markets,(g) the implications of the current and proposed framework for consumer protection, market integrity, financial stability and the international competitiveness of the United Kingdom, and(h) any legislative or regulatory changes which the Treasury considers may be required.(3) In preparing a strategy under subsection (1), the Treasury must consult—(a) the Bank of England,(b) the Prudential Regulation Authority,(c) the Financial Conduct Authority,(d) representatives from industry forums, and(e) such other persons as the Treasury considers appropriate.”Member’s explanatory statement This amendment seeks to require the Treasury to prepare and consult on a strategy for digital assets, including regulation, tokenisation, practical operating conditions, access to banking and payment services, and international regulatory developments.

Baroness Neville-Rolfe (Con)Amendment 88 addresses a simple problem: digital assets are developing rapidly, but UK policy remains fragmented and uncertain relative to international competitors. Despite the good work being done by Chris Woolard and the Bank of England, I beg leave to test the opinion of the House on my amendment.

3|18:54|194|138|Division on Amendment 88|Amendment 88 agreed.||0|0

19:05:00

Amendments 89 to 92 not moved.

Amendment 93

Moved by

93: After Clause 47, insert the following new clause— “Use of powersThe Treasury must publish and lay before Parliament a report setting out how the powers conferred by the following provisions are expected to be used—(a) section 1;(b) Schedule 1;(c) section 13;(d) Schedule 2;(e) section 14;(f) section 37;(g) section 46.”Member's explanatory statement This amendment and others in the name of Baroness Neville-Rolfe would require the Treasury to provide Parliament with information on the intended use of certain significant delegated powers before bringing them into force for the first time, including powers relating to consumer credit, payment systems regulation, anti-money laundering supervision, overseas recognition regimes and cryptoassets.

Baroness Neville-Rolfe (Con)Amendment 93 and its consequentials are intended as a compromise with the Government. I do not feel that the Government have fully engaged with the practical proposal that we put forward on Monday, and I therefore wish to test the opinion of the House on Amendment 93.

4|19:06|196|138|Division on Amendment 93|Amendment 93 agreed.||0|0

19:17:00

Amendments 94 to 97A not moved.

Clause 50Power to make amendments consequential on this Act

Amendment 98

Moved by

98: Leave out Clause 50

Baroness Neville-Rolfe (Con)My Lords, Amendment 98 would remove Clause 50, thus returning us to the broad principle that we raised in our discussions on Clause 3, which led to a majority of 81 in a vote on its deletion. Clause 50 will allow the Treasury to amend or repeal primary legislation without introducing another Bill, which is another Henry VIII power. We need clarity from the Minister about how the Government envisage the power will be used. Our concern is that it goes further than technical housekeeping, as the text of the clause gives Ministers a broad and potentially permanent power to amend or repeal primary legislation, including devolved legislation, without the full scrutiny afforded to a Bill. I am grateful for the support of the noble Baroness, Lady Bowles. In the absence of a satisfactory reply, I am minded to test the opinion of the House.

Baroness Bowles of Berkhamsted (LD)My Lords, I have signed this amendment because there are bad things in this Bill and I do not want any more of them.

Noble LordsOh!

Lord Vaux of Harrowden (CB)My Lords, I am not sure how to follow that. I have added my name to Amendment 98. Clause 50 is a very broad, catch-all Henry VIII power. Given that the Bill already has over 50 delegated powers in it, this seems entirely superfluous and it should be removed.

Lord Pitt-Watson (Lab)My Lords, Amendment 98 would remove the consequential power contained in Clause 50. The Government understand the concern that delegated powers should be used appropriately and should not become a vehicle for making substantive policy changes without parliamentary scrutiny. Indeed, I think that, on Monday, in response to issues to do with Henry VIII powers, I gave some sympathy to that argument. However, the power in Clause 50 is not a power to introduce new policy, nor is it a power to revisit the policy that Parliament will have approved by passage of the Bill; it is a narrow, regulation-making power limited to dealing with matters that arise as a consequence of the provision that Parliament has already approved within the Bill.

It is common and often necessary for legislation of this scale and complexity to require consequential adjustments elsewhere on the statute book, so that provisions operate as intended. Without such a power, relatively minor or technical changes would require further primary legislation, creating unnecessary delay and complexity. For these reasons, the Government do not believe that removing this clause would improve the Bill. I would also note that this was not a point raised by the Delegated Powers Committee about the Bill.

Finally, I assure the noble Baroness that parliamentary committees will of course be able to call the Government to appear in front of them and account for the use of consequential power or, indeed, any other power in the Bill. I therefore ask the noble Baroness to withdraw this amendment.

Baroness Neville-Rolfe (Con)My Lords, the fact is that Clause 50 gives Ministers a broad and potentially permanent power to amend or appeal primary legislation, including devolved legislation, without the full scrutiny afforded to a Bill. Unlike other Bills, this is a Bill with many new, unspecified powers, so I seek to test the opinion of the House.

5|19:22|188|125|Division on Amendment 98|Amendment 98 agreed.||0|0

19:32:00

Clause 52Commencement

Amendment 99 not moved.

Amendments 100 to 103

Moved by

100: Clause 52, page 55, line 31, leave out subsection (1) and insert— “(1) The following provisions cannot come into force until the requirement set out in section (Use of powers) has been met—(a) section 1;(b) Schedule 1;(c) section 13;(d) Schedule 2;(e) section 14;(f) section 37;(g) section 46.”Member’s explanatory statement This amendment and others in the name of Baroness Neville-Rolfe would require the Treasury to provide Parliament with information on the intended use of certain significant delegated powers before bringing them into force for the first time, including powers relating to consumer credit, payment systems regulation, anti-money laundering supervision, overseas recognition regimes and cryptoassets.

101: Clause 52, page 55, line 35, leave out paragraph (a) Member’s explanatory statement This amendment and others in the name of Baroness Neville-Rolfe would require the Treasury to provide Parliament with information on the intended use of certain significant delegated powers before bringing them into force for the first time, including powers relating to consumer credit, payment systems regulation, anti-money laundering supervision, overseas recognition regimes and cryptoassets.

102: Clause 52, page 55, line 37, leave out paragraph (c) Member’s explanatory statement This amendment and others in the name of Baroness Neville-Rolfe would require the Treasury to provide Parliament with information on the intended use of certain significant delegated powers before bringing them into force for the first time, including powers relating to consumer credit, payment systems regulation, anti-money laundering supervision, overseas recognition regimes and cryptoassets.

103: Clause 52, page 55, line 38, at end insert— “(da) section (Use of powers);”Member’s explanatory statement This amendment and others in the name of Baroness Neville-Rolfe would require the Treasury to provide Parliament with information on the intended use of certain significant delegated powers before bringing them into force for the first time, including powers relating to consumer credit, payment systems regulation, anti-money laundering supervision, overseas recognition regimes and cryptoassets.

Amendments 100 to 103 agreed.

House adjourned at 7.33 pm.