Financial Services and Markets Bill [HL]

Committee (5th Day)

15:46:00

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

Amendment 130

Moved by

130: After Clause 22, insert the following new Clause— “Digital operational resilience of regulated firms(1) The FCA and the PRA must each make rules requiring authorised persons to meet minimum standards of digital operational resilience, including standards relating to—(a) ICT risk management frameworks appropriate to the nature, scale, and complexity of the authorised person's operations;(b) classification, reporting, and remediation of major ICT-related incidents, including cyber attacks, within timeframes to be specified by the regulator;(c) oversight and contractual requirements for third-party ICT service providers, including cloud service providers and critical technology suppliers; (d) regular digital operational resilience testing, including advanced threat-led penetration testing for systemically significant firms.(2) In making rules under subsection (1), the FCA and PRA must have regard to—(a) the need for proportionality with respect to the size and systemic importance of authorised persons;(b) international standards and frameworks, including those adopted by the European Union;(c) the need to avoid duplication with existing regulatory requirements.(3) The FCA must publish a consolidated digital operational resilience framework within 18 months of this Act coming into force, setting out how requirements under this section interact with existing obligations on authorised persons.(4) The FCA and PRA must review rules made under this section no later than every 12 months.”Member’s explanatory statement This amendment seeks to require the FCA to make rules in relation to the digital operational resilience of financial services firms.

Lord Holmes of Richmond (Con)My Lords, it is a pleasure to open day 5 of Committee on the Financial Services and Markets Bill. In moving Amendment 130, which is in my name, I will also speak to Amendments 131 and 168. This is the latest round of AI and technology amendments to the Bill. It is a Bill that is curiously silent on these subjects. At least today there is something timely about my intervention in that, as I am on my feet, across town Sheldon Mills is launching his review into artificial intelligence in financial services—more of which presently.

Amendment 130 seeks to require financial services firms to have regard to all the issues around digital and operational resilience across all their activities. I know that the Minister in his response will refer to the cyber resilience Bill, which is coming to your Lordships’ House in a fortnight. Indeed, there is much in that Bill to commend. But in consideration of the significant impact and position of financial services in the UK economy, I believe that it would be helpful to have something about digital and operational resilience in this Bill.

We are not just talking about foreign states or negative acts from international adversaries; we are talking about issues around supply chain, third-party overreliance and concentration risk on particular providers—for example, in the cloud. Circumstances change and financial services institutions, believing that things will always be as they are, may find themselves extraordinarily exposed by the flick of a switch with perhaps only 90 minutes’ notice. I ask the Minister to consider this when he responds and state, in respect of financial service institutions’ significant contribution and place in the UK economy, whether he agrees that clauses in the Bill pertaining directly to these subjects would be helpful in our endeavours.

Amendments 131 and 168 are on artificial intelligence. Certainly, some of these concepts are covered in Sheldon Mills’ review. Given the proliferation and already deep penetration of artificial intelligence into financial services institutions—and, indeed, its use by not only sophisticated but retail and individual investors—will the Minister not agree that considering AI, not just in these clauses but throughout the Bill, would be beneficial to all those involved in financial services? When we say, “all those involved in financial services”, we could just as easily say “everybody”. The principles are clearly set out in Amendment 131, which takes us to the issue that I have raised on previous days around the Government’s approach to artificial intelligence. As stated, that is a domain-by-domain approach, yet there is nothing currently within this Bill.

Amendment 168 returns to an issue of which colleagues will be well aware, because I raised it when we deliberated on the Financial Services Act 2021 and FSMA 2023. That is to have an officer responsible for AI in all financial services institutions that develop, deploy and use AI—in other words, pretty much all financial services institutions. This is not cumbersome; it is not about compliance and it is certainly not about putting burdens on smaller firms—the proportionality principle would mean that we would be talking about a function rather than an individual—nor is this about delegation or abdication of the board’s responsibility, or indeed the senior managers’ responsibility, to the business. This is about having a point person: somebody who can orchestrate, who can co-ordinate and who can have that crucial horizontal view across an organisation, to assist internally and indeed present externally as to how AI is being used and deployed, for the benefit both of AI use internally and of customers.

To conclude, without having clauses on AI in the Bill, I believe that the legislation will be chronically insufficient for the challenges of our time. That is not the challenges of next year or five years’ time: AI is already impacting financial services right now. To give one example, how can we consider the consumer duty without considering how AI impacts on all elements of that? The Mills review has much good in it, but this legislation is before us today, and I believe that we have an opportunity to thread AI through it for the benefit of individuals, of institutions, of all of our financial services and, through that, of the entire economy of the United Kingdom. I look forward to the Minister’s response. I beg to move.

Baroness Kramer (LD)My Lords, I was delighted when I saw that the noble Lord, Lord Holmes, had put down these amendments, because it is so apparent, as he has clearly stated, that the whole issue of digital and AI is missing from this Bill. Because of the pace of change and the impact—and strength of the impact—across all our financial services, this is an issue that has to be dealt with and grasped with some sense of urgency.

Like the noble Lord, I have been very interested in the Mills review, although, as it was published today, I have only had time to skim its summaries and some of the newspaper references to it. It is clear that, certainly from Sheldon Mills’ perspective—I think that most of us have, one way or another, dealt with Sheldon Mills over the years and very much respect his judgment—the FCA may well be short of relevant powers in dealing with AI. He noted particularly a lack of powers under the critical third-parties regime, which made sense to me. In his recommendations, he also raised issues around the regulatory perimeter, another area that we have raised on more than one occasion. In recent years, it has not been uncommon—though I dread it—for the Government to present on Report amendments that deal with an area that has been missed from the body of a Bill in Committee. On this Bill, that would allow a period of thought and the opportunity to absorb and consider what is presented in the Mills review. Since financial services Bills do not come around that often, I very much hope that the Minister will seriously consider taking advantage of the Bill to get those kinds of protections in place. If he fails to do that, we might collectively have to come forward with something on Report. Frankly, given the intricacy, detail and complexity, this is an area where the Government coming forward with an answer would, I think, be welcomed across the House and very much, I hope, within the spirit and theme of the amendments presented by the noble Lord, Lord Holmes.

Lord Altrincham (Con)My Lords, I thank my noble friend for his comments today on AI and digital resilience and for his comments on previous days. I declare my interest as the director of South Molton Street Capital, which is regulated by the FCA.

These amendments raise an interesting point about emerging technologies, digital resilience and the use of artificial intelligence in financial services, to be covered, as we have discussed, by the Mills review and the FCA itself. We will return to this subject in a later group, when my noble friend Lord Ranger of Northwood and the Opposition Front Bench will speak to our own amendments, particularly in relation to digital assets. We will also comment on supervision in a later group.

Both digital resilience and the proper use of AI are important. However, I am not convinced that this is the right way or the right place to tackle these issues. Our concern is that this could add another layer of regulation on firms that are already subject to a substantial body of obligations in this area. Financial services firms already operate under a wide range of frameworks relevant to AI governance, digital resilience and technology risk. The consumer duty, which we have touched on already, requires firms to deliver good outcomes for retail customers. The senior managers and certification regime provides a framework for accountability and governance. The FCA senior management arrangements and controls already require firms to maintain appropriate systems, controls, governance and risk management. Firms are subject to data protection law, including rules around automated decision-making and profiling. They are subject to equality law where discriminatory outcomes arise. They are subject to operational resilience requirements, outsourcing and third-party risk expectations, and, in some contexts, more specific requirements around algorithmic trading and market conduct.

We should therefore be cautious before adding new statutory requirements on top. That is particularly important because technology develops quickly and a prescriptive regulatory framework can rapidly become out of date. It can also lead to duplication, uncertainty and compliance activity that is focused more on satisfying the form of the requirement than managing the underlying risk. I would be grateful for reassurance from the Minister about how Amendment 130 would interact with existing operational resilience and outsourcing requirements, and whether the Government believe that further statutory provision is needed.

On Amendment 131, the issues of transparency, bias, human oversight, and redress are all important, but they also overlap with existing duties on fair treatment, governance, data protection, discrimination and consumer outcomes. I would be reluctant to support an approach which simply adds a new AI-specific regime without first demonstrating that the existing framework is inadequate.

On Amendment 168, I understand the attraction of having a named individual responsible for AI governance. Accountability matters, but in financial services we have the SMCR regime to address supervision, and that regime is already quite complex, as we will address in a later group. A mandatory AI officer would probably cut across existing accountability structures in conduct, compliance, operations, risk, data and product governance. It could, in fact, cut across all existing supervisory positions.

This group raises important questions about the future of financial regulation. We must be alert to new risks, but we must also be careful not to respond to every emerging technology by simply adding another layer of regulation. The better approach is to ensure that regulation is proportionate, technology-neutral where possible and focused on real outcomes. I look forward to the Minister’s response.

The Minister of State, Department for Business and Trade and HM Treasury (Lord Stockwood) (Lab): My Lords, the Government recognise that the pace and significance of the current wave of technological change is already having an effect on the whole of society. For the purposes of this discussion, I will state that it is clearly having a notable impact on the financial services sector, as mentioned, and that it is set only to continue to grow. The Chancellor set out in her Mais Lecture just a few months ago the importance of the UK grasping the opportunities presented by AI to ensure that we are at the forefront of safe adoption and innovation, so we are entirely in agreement on how important this topic is.

On Amendment 130, the Government are committed to ensuring the operational resilience of the UK’s financial sector. Operational disruptions harm consumers and markets and have the potential to affect financial stability. That is why the FCA and the PRA have powers to ensure that firms have robust plans in place to deliver important business services, no matter the disruption.

16:00:00

The noble Lord, Lord Holmes, asked me if the Government agree that the sector requires an operational resilience framework. I do, but I do not think that the regulator should be required to set the rules on this. Given the rapidly evolving information and communication technology landscape, it is important that the FCA and PRA are able to maintain the flexibility afforded them by their existing powers to ensure that requirements and threat-led penetration testing keep pace with the changing risks. The regulators have shown that we can trust them to get this right by creating an operational resilience framework for the UK financial sector. This framework supports the sector to prevent, adapt and respond to, and recover and learn from, operational risk and disruption. It includes rules and supervisory expectations on operational resilience; third-party risk management for financial service firms; incident reporting requirements; advanced tools to assess firms’ cyber security and resilience, including threat-led penetration testing for systemically important firms; and a new regime for third parties providing critical services to the financial sector.

On Amendment 131, I agree that the regulatory system needs to reflect the change and challenge brought on by the significant increase in the use of artificial intelligence in the financial services sector. There are huge opportunities afforded by AI and we are committed to securing them for the benefit of the UK, but we also need to be aware of the risks that technology can present to both consumers and financial stability, and we are working closely with our regulators to monitor them. Amendment 131 would require the FCA to make specific rules for AI to manage a range of risks associated with the use of technology. The Government welcome the FCA’s proactive approach to the Mills review and we will work closely with the FCA to determine the next steps on that report. However, I am worried that the amendment would mean that the FCA would have to draw up a range of new rules that would replicate many of its current rules, including in relation to bias and discrimination.

Our approach to regulating AI within the existing regulatory frameworks ensures that firms have clarity about how to meet the requirements relating to AI use, ensures that the high standards that can apply across financial services also apply to the use of AI within them, and allows the rules to apply flexibility over time as these technologies and their applications inevitably evolve, sometimes rapidly. Requiring the FCA to regulate use separately would remove that flexibility and agility from our approach.

On Amendment 168 and the proposal for an AI officer, the Government are committed to ensuring that financial services firms are alive to the potential risks associated with the use of AI, and their governance and accountability mechanisms must reflect the new challenges presented by the technology. That is why, under the senior managers and certification regime, firms are already required to allocate clear responsibility to senior managers for the activities and risks within their business. That includes risks arising from the use of AI, which falls within the responsibilities for the relevant senior managers across the firm. The responsibility needs to sit with the senior managers responsible for the underlying activities. The Bill makes targeted reforms to the senior managers and certification regime to reduce the unnecessary burdens, but those do not affect the underlying requirement for firms to ensure clear accountability for risks, including those arising from emerging technologies such as AI.

The Government are conscious of the risks associated with cyber resilience and AI and have been proactive with the regulators to ensure that the financial services sector is appropriately managing those risks for consumers and financial stability. I hope I have provided some reassurance that the Government and the regulators are alive to the risks identified and taking proactive steps to manage them. I ask the noble Lord to withdraw his amendment.

Lord Holmes of Richmond (Con)I thank all noble Lords who have taken part in this debate and the Minister for his response. I look forward to reading the Mills review in further detail and seeing where we take these issues between Committee and Report. For now, I beg leave to withdraw the amendment.

Amendment 130 withdrawn.

Amendments 131 to 134 not moved.

Amendment 135 not moved.

The Deputy Chairman of Committees (Baroness Pitkeathley) (Lab)I cannot call Amendment 135A as it is an amendment to Amendment 135.

Amendments 136 to 142 not moved.

Amendment 142A

Moved by

142A: After Clause 22, insert the following new Clause— “FCA: wholesale markets and firms division(1) The FCA must, within 12 months of the day on which this Act is passed—(a) establish and maintain a dedicated unit (a “Wholesale Markets and Firms Division”) within its organisation, and(b) appoint a Deputy Chief Executive to lead this division.(2) The FCA must ensure that its relevant functions in relation to wholesale markets and firms are exercised and discharged through a Wholesale Markets and Firms Division.(3) The FCA, in discharging its functions through a Wholesale Markets and Firms Division, must—(a) act in a way which advances the regulator’s operational objectives,(b) act, so far as reasonably possible, in a way which advances the regulator’s duties under section 1EB (competitiveness and growth objective) and section 3B (regulatory principles to be applied by both regulators) of the Financial Services and Markets Act 2000, and(c) have regard, in particular, to the desirability of—(i) reducing regulatory burdens on participants in wholesale markets,(ii) facilitating innovation in wholesale financial services, and(iii) promoting sustainable growth and international competitiveness of UK wholesale markets.(4) A Wholesale Markets and Firms Division must be responsible for—(a) the development, implementation and supervision of rules and policies relating to wholesale markets;(b) authorisation and supervision of wholesale markets and firms; (c) engagement with market participants active in wholesale markets, including international firms;(d) advising the regulator on the impact of its policies and rules on wholesale market activity, investment and competitiveness.(5) The FCA must, at least once in each calendar year, prepare and publish a report on the activities of its Wholesale Markets and Firms Division.(6) A report under subsection (5) must—(a) be provided to the Treasury, and(b) include an assessment of—(i) steps taken to reduce regulatory burdens in wholesale markets,(ii) progress in supporting innovation,(iii) the contribution of wholesale markets to investment and growth in the United Kingdom, and(iv) the extent to which the regulator has advanced its secondary competitiveness and growth objective in relation to wholesale markets.(7) In this section—“wholesale firms” means regulated firms whose customers, clients or counterparties are pre-dominantly not covered by the UK consumer duty;“wholesale markets” means such markets, activities or classes of regulated activity as may be specified for the purposes of this section by the Treasury by regulations, having regard to—(a) the nature of transactions undertaken primarily between market counterparties acting in a professional capacity;(b) existing distinctions within the FCA Handbook (including, but not limited to, provisions relating to wholesale market conduct, eligible counterparties, and professional clients);(c) the role of such markets in facilitating capital allocation, risk transfer and investment at scale.(8) A statutory instrument containing regulations under subsection (7) may not be made unless a draft of the instrument has been laid before and approved by a resolution of each House of Parliament.”Member’s explanatory statement This amendment seeks to require the FCA to develop a dedicated division to undertake their regulatory activities in regard to wholesale market participants.

Lord Hunt of Wirral (Con)My Lords, in moving Amendment 142A and speaking to the other amendments in this group, which I also support, I am asking for the FCA to be able to develop a dedicated division to undertake its regulatory activities regarding wholesale market participants.

This amendment is all about ensuring that in what is a highly competitive global marketplace the FCA can balance its priorities and resources effectively to benefit the consumer or clients who use them in those markets that the FCA regulates. The FCA’s protection of the individual consumer is rightly prominent, but businesses that are customers of wholesale markets, such as our world-leading London insurance market, require a very different level of protection. Currently, the definition used by the FCA is very unclear and does not distinguish between these two very different sets of needs.

I declare my long-standing interest in financial services Bills over the last 50 years, particularly as a practising solicitor in the City of London and a partner in the firm DAC Beachcroft LLP. I have slowly but surely seen the evolution of regulation, but I am concerned that it is now inhibiting the growth of what is for us one of the great global centres, particularly for insurance. However, the definition of wholesale does not just apply to insurance; it applies to other aspects of financial services as well. The FCA is well aware of the issue. Indeed, it has been raised actively with the FCA over the last few years and there have been commitments to action. However, sad to say, progress is not being made. The FCA appears to be struggling with the definition of a retail consumer and has not found the best way forward.

Once again, we rely on our Select Committee to highlight the issue. The cross-party Financial Services Regulation Committee identified this as an issue, finding in its report last year:

“The FCA does not do enough to distinguish between firms that cater to wholesale and retail markets in its regulation and supervision which … imposes unnecessary burdens and frictions on firms … These issues have fuelled an increase in bureaucracy and imposed significant monetary and resource demands on firms”.

Witnesses to that Select Committee gave key examples. They show that wholesale and retail markets serve fundamentally different customers. Retail regulation is designed to protect individual consumers, whereas wholesale markets are primarily used by professional investors, insurance firms, banks, pension funds and corporate entities. The London insurance market deals almost exclusively with corporate clients, but the regulations take a one-size-fits-all approach, applying consumer-focused rules to firms and activities for which they were never really intended.

We have a situation where pet insurance is essentially regulated in the same manner as marine or aviation insurance. Policies and services delivered in the London market are bespoke to the individual client or individually negotiated and tended, where there is no evidence of this type of market failure. They are not unit-based commoditised products that are offered within the retail market. The FCA’s implementation of what is described as the consumer duty has introduced considerable uncertainty for domestic and international firms operating in the London market. This uncertainty is driven by a lack of clarity on the FCA’s expectations as to how firms should comply with the consumer duty, including which markets and consumers it applies to.

I believe, therefore, that a dedicated wholesale division would help to ensure that regulation is proportionate to the sophistication of market participants. That is why I feel so strongly that this amendment and my noble friend Lord Ashcombe’s amendment should be contained in the Bill. I hope that the Minister will be able to address this issue for the first time as a Minister on a financial services Bill, recognising that, at the moment, we are dealing with two separate markets that are merged under the consumer duty, which is wholly inappropriate. I beg to move.

Lord Ashcombe (Con)My Lords, I declare my interest as an employee of Marsh, which is an FCA-regulated firm. I shall speak to Amendment 142C in my name, which seeks, in essence, to achieve something modest but necessary: equipping the regulator with a clearer and more effective framework within which to operate.

I am—as, I suspect, other noble Lords are—unequivocal in my support for well-judged regulation. It is the foundation of consumer protection, market integrity and London’s standing as an international global financial centre, particularly in insurance, as my noble friend Lord Hunt mentioned. However, the position in which we find ourselves today is one not of insufficient regulation but of fragmentation, with a system that in parts lacks clarity and coherence.

At present, the FCA operates without a clear statutory distinction between retail and wholesale clients. The distinction between wholesale and retail markets is not academic; it is fundamental, particularly in insurance. Retail regulation exists to protect individuals and small businesses. Wholesale markets are, by contrast, the domain of larger and corporate entities. These participants are not passive consumers. They are typically active, informed buyers engaging in complex and often bespoke transactions, as I said on Monday last week. This is very much in line with my noble friend Lord Hunt’s Amendment 142A, to which I have added my name.

This situation leads to a consequencea degree of inconsistency that is, frankly, difficult to justify. Businesses of broadly similar scale and sophistication can find themselves subject to different regulatory treatments depending on the regime applied or the particular lens through which they are viewed. That uncertainty serves no one well. It imposes a cost on, first, firms, which must devote increasing resource to navigating overlapping and at times contradictory interpretations, and, ultimately, on consumers and smaller businesses, which bear that burden through higher costs and reduced access to services.

There is, however, a straightforward solution. Where my amendment takes that further than my noble friend’s is as follows. A turnover threshold of £6.5 million already exists in statute and is used by the Financial Ombudsman Service to reflect the size of companies. It reflects a determination made by Parliament of the point at which a business can reasonably be expected to possess a degree of financial sophistication and resource, and it could easily be adopted by the FCA.

My amendment does not seek to innovate for innovation’s sake; rather, it seeks to bring coherence by anchoring the distinction between retail and wholesale clients to that already established threshold. In doing so, it would provide the regulator with a clear statutory direction. It would also introduce a necessary discipline: that retail-style protections should not be applied to wholesale clients unless there is a demonstrable and proportionate case for doing so.

This is not about weakening regulation; it is about smart regulation. It is a call for regulation that is properly targeted and grounded in the realities of the market. This matters because we must allow the FCA to focus its efforts where they are most needed, which is on genuine customer protection for individuals—you and me when we are purchasing insurance, for example—rather than dispersing them across forms of compliance that add bureaucracy cost without delivering commensurate benefit. There is a genuine competitive point here too. Post Brexit, we have the chance to move faster than Europe, but we can do that only if the industry has certainty. Businesses need to know where they stand. They cannot plan investment or hire teams based on regulatory guidance that shifts depending on whom you talk to and when. They need law. My amendment offers a measure of that certainty. It would reduce unnecessary friction and support the FCA in meeting its secondary objectives of growth and competitiveness, and it would do so without in any way diminishing the protection afforded to those who genuinely require it. This is a measured and pragmatic proposal that respects the importance of regulation while seeking to improve its application. I support the other amendments in this group.

16:15:00

Lord Vaux of Harrowden (CB)My Lords, this group is really two separate groups as far as I can see, and I am not quite sure why they have been lumped together. One is on operational readiness and the other is on the different treatment of wholesale and retail activities. I will add my support briefly to the principles behind the latter, on wholesale and retail activities, and to Amendments 142A and 142C, tabled by the noble Lords, Lord Hunt and Lord Ashcombe. These bring us back to proportionality, which we have debated a number of times. The Minister can probably see a few themes coming through, and proportionality is definitely one.

In this case, the question is whether the regulators treat wholesale businesses with no retail customer exposure proportionately. By definition, wholesale businesses are dealing with sophisticated customers on a much more equal basis. It cannot be controversial to suggest that the regulation of these businesses could be lighter touch than for those dealing with retail customers.

The report of the Financial Services Regulation Committee on the secondary competitiveness and growth objective gave a number of examples where it appears that the FCA may not be doing enough to differentiate between these two parts of the market, while recognising that this is not always a clearly defined black and white boundary. Howard Davies put it well in his witness evidence:

“In wholesale markets, you are aiming to produce a fair contest, whereas in the retail markets you know it is not a fair contest because there is a significant information asymmetry problem between the consumer and the firm”.

The noble Lord, Lord Hunt, quoted the committee’s conclusion on this matter, so I will not repeat that. Whether this means that we need a separate wholesale markets and firms division within the FCA, as the amendments propose, is debatable, but I will be interested to hear how the Minister proposes to ensure that businesses that are primarily or wholly wholesale in operation are regulated proportionally.

Lord Holmes of Richmond (Con)My Lords, I support Amendments 142A and 142C from my colleagues, the noble Lords, Lord Hunt and Lord Ashcombe. As has been said, this can be summed up in one word: proportionality. We have debated these themes on previous days in Committee and they are still as strong as they were when we mentioned them on day one. To “proportionality” I would add “specificity” and “applicability” because, without making this critical distinction—though difficult in some of the marginal cases—we are effectively saying that rules apply across the piece, which inevitably means increased burdens, increased costs, a lack of specificity, inapplicability, and holding firms and the UK economy back.

As the noble Lord, Lord Hunt, rightly said, we have the at least odd situation right now where pet insurance is treated the same as marine or aviation insurance. I can see only one potential case where this would be appropriate: if many people were petting flying fish. As I do not believe we have an increase in flying fish petting, I believe that proportionality, specificity and applicability would be achieved by embracing the principles set out in Amendments 142A and 142C.

Baroness Bowles of Berkhamsted (LD)My Lords, I broadly support Amendment 142A, and I thank the noble Lord, Lord Hunt, for bringing it forward. I also think that the amendment in the name of the noble Lord, Lord Ashcombe, or something similar would obviously be needed as some kind of companion to it.

Whatever the FCA may have been intended to be, it is now proudly and explicitly a consumer protection body. For much of its work that is good, but some noble Lords will know that it has taken me and others four years to get incorrect cost disclosure descriptions for listed investment companies corrected, simply because consumers like the incorrect versions. Indeed, that saga led to a telling exchange at a meeting of the Financial Services Regulation Committee. The FCA chair insisted that consumer views always took priority, and I replied, “If you ask whether one and one makes two or three, and the consumer says, ‘I like three—it’s a bigger number’, is that what you use?” There was no denial. That is the scale of the problem: a regulatory culture where consumer preference for something factually incorrect overrides market integrity. It is a mindset that has already cost billions in potential investment in productive assets.

That was where it touched consumers; now let us move on to look at the wholesale areas. The trouble is that that mindset gets pasted across too. We do not need to debate whether the FCA went overboard in demanding that wholesale businesses had to proactively prove that they do no consumer harm in transactions that never touched consumers. The admission is there in consultation CP26/23 at paragraph 1.3, acknowledging overreach, as well as acknowledging

“unnecessary cost, complexity and uncertainty, without clear benefits for retail consumers”.

However, having finally identified the cancer, the regulator is merely applying a sticking plaster. All that is being offered is the mildest semantic tweak to guidance—effectively, a guide to guidance. It has no legal effect. It allows the regulator to continue its current trajectory with a slight adjustment to its vocabulary. We all know that this change was extracted only after heavy nudging by the Chancellor and intense parliamentary scrutiny. It is hardly being done with good grace and provides no guarantee of permanence. The fact is, we must deal with the FCA as it is, not as it might have been. Since the advent of the consumer duty, the retail-first culture is irreversibly embedded into the psyche of staff, and in many instances it is the reason why they joined the regulator in the first place.

Perhaps one of the most telling things is to look at what is said about other regulators. On the Monetary Authority of Singapore, which I found a very enlightened body on my visit there some years ago, the comment is, “Although MAS is a unitary regulator, it splits its internal policy divisions strictly by target market rather than by trying to govern everything under an overarching outcomes-based code like the UK’s consumer duty”, and, “It works because the wholesale division, answerable to the MAS leadership, is judged primarily on market liquidity, innovation and international competitiveness. There is zero risk of a consumer advocacy group hijacking a wholesale policy consultation”. I wonder where they were thinking about. A ring-fenced, structurally separate wholesale unit within our regulator’s architecture must live up to that standard.

Some may argue that all wholesale activity impacts retail eventually, and I agree, but there is a massive, fundamental difference between regulating wholesale markets for the integrity of the system, which protects everyone, and regulating as if they are a high-street retail shopfloor. The former ensures safety, the latter ensures paralysis. For any noble Lord worried about this structural change, nothing being suggested would remove liability for wrongs or harms to consumers, should that occur. Let us be clear: this amendment is not an attempt to escape oversight; it is an attempt to ensure that oversight is competent, technically accurate and focused on the reality of the market being regulated. Let nobody forget that MiFID and other legislation already provides a rigorous framework governing transparency, best execution and conflicts of interest. This is no soft ride: this amendment is a necessary structural correction, and I support it.

Baroness Lawlor (Con)My Lords, I support all the amendments in this group, but I shall confine my remarks to Amendment 165 and the linked Amendment 173 from my noble friend Lady Neville-Rolfe for an FCA operational readiness report presented by the Treasury. Amendment 165 would mean that Parliament has the opportunity to ensure, by a Treasury report, that we have an assessment of the FCA’s operational readiness to exercise any significant new regulatory function conferred by the Act of staffing, resourcing and the capability of the systems in place and of the impact expected on authorisations, supervisions and enforcement timeliness. This will be a formal report to Parliament. Until we have such a report from the Treasury that the FCA is operationally ready, Amendment 173 would ensure that the Act cannot start.

My Amendment 165A proposes that the report must also assess readiness in terms of preparatory training and the interpretation of the application of the Act. Such a requirement should prompt the FCA to deploy and train existing staff with the specific knowledge and understanding of the new powers they will operate under the Bill and to therefore be up to date and competent to regulate firms under the law. It would require the Treasury to report to Parliament and, in this way, there is a measure of accountability.

It might be contended that this requirement is otiose, but the FCA’s workforce is around 5,000, recruited from candidates with a diverse range of skills under different headings. Finance and operations make up 46%; engineering makes up 30% and sales and marketing make up 23%. The median employee tenure is 4.2 years. Regulators come to their post with a diverse range of skills; some are highly experienced and others less so. Today, 17 posts are advertised that cover a wide range of jobs and responsibilities for which different skills are required. For example, there is a senior insurance supervisor job, a financial crime marketing interventions associate, an L&D associate, a lead for global strategy and engagement, a primary markets supervisor, a senior crypto and payment supervisor and a technical specialist in AI—my noble friend Lord Holmes will be pleased to hear that.

The skills range required can include the common skills we would expect or generic skills, for instance, in data systems. The senior crypto asset and payment supervisor responsible for working in this developing sector, who will lead difficult cases, identify risks, deal with crossborder problems and help prevent crime, is also expected to “drive improvements in standards”.

These are important and demanding tasks. They also operate in a rapidly developing area. Given the nature of the system and that the principles still apply, regulators are internally accountable for what will be subject to interpretations and judgments. There should therefore be the requirement of at least general and specific knowledge, and competencies for each role but, as financial products continue to be developed and the framework of law continues to change, there must also be continuous learning and updating in the law and the powers given to the regulators under it, rather than assuming that somehow the regulators will be equipped and operationally ready to do the job.

16:30:00

If we do not go ahead with such an amendment, it would add to the problem that businesses experience today. We have heard a great deal about these problems throughout the Committee and again today: a lack of regulatory predictability, transparency in applying the principles and consistency and an overarching question of accountability, all of which exists now and may be exacerbated by the Bill. We have also heard that this was tellingly illustrated in the Financial Services Regulation Select Committee report. Of many examples, I picked out one on the consumer duty. The FCA was reported to have insufficient clarity on how it expects firms to comply with this duty while duplication and complexity have been created and there is ambiguity in the rules. The lack of clarity provided by the FCA makes it difficult for firms to know what is expected of them. That was according to evidence from the Investment Association.

There may be different reasons for the absence of clarity, predictability and consistency—we have discussed some of them—but this raises the question of how knowledgeable the regulators are about the law, the legislative framework under which the system operates and what is in their hands. There is accountability to the Treasury internally but it is important that Parliament knows, through the Treasury, that it is adequately equipped to exercise the new powers under the Bill in what is still a rather unaccountable, quasi-legal system. For this reason, I support my noble friend Lady Neville-Rolfe’s amendments and have tabled my own small addition, so that the Treasury must report that the FCA is operationally ready for the task and that the Treasury is satisfied that it is.

Baroness Noakes (Con)My Lords, I will just comment briefly. I completely agree with the notion that wholesale markets and retail markets should be dealt with separately for the reasons that have been given. I am less than clear that a structural solution, such as the one proposed by my noble friend Lord Hunt of Wirral, is the right one. I think that the problem is deeper; it lies in the construction of FSMA because the FCA is given a consumer protection objective that makes no differentiation between wholesale and retail markets . The meaning of “consumer” is generic and there is no understanding that there are radically different markets for retail and wholesale participants. All that means that the burden of treating these markets differently falls on the applicability of the proportionality principle in Section 3B, which we have discussed many times and is due to be downgraded under the current proposals. I do not know what the answer is, but I suspect that, in legislative terms, it is a deeper answer than simply setting up a separate division within the FCA because the construction of FSMA simply does not accommodate easily the fact that there are two quite different types of market.

Baroness Neville-Rolfe (Con)My Lords, I am grateful to my noble friends Lord Hunt and Lord Ashcombe for bringing forward Amendments 142A and 142C. We have heard from industry that there is often insufficient clarity around whether retail or wholesale regulatory standards apply in particular cases. That lack of clarity matters because it means that firms can find themselves applying regulatory standards, processes and levels of prudence that go above and beyond what is required simply because they are concerned that the boundary is not clear. That is why the proposals from my noble friends Lord Ashcombe and Lord Hunt of Wirral for a clearer statutory distinction are important. Any threshold would, of course, need to be carefully considered, but the principle is right. Firms should know which rules apply to which clients. Regulators should avoid applying retail-style requirements to wholesale clients unless that is genuinely proportionate.

I also welcome the broader point behind Amendment 142A, which would create a dedicated wholesale markets and firms division within the FCA. The case for that amendment in a highly competitive global industry, as my noble friend Lord Hunt explained, is that wholesale markets require specialist expertise and a regulatory culture that understands institutional, professional and capital markets activity. If the FCA is regulating retail consumer markets, with lots of SMEs, and complex wholesale markets at the same time, it must have the internal structure and expertise to apply the right approach to each. The noble Baroness, Lady Bowles, a member of the Lords committee, rightly suggested that consumer preference has become a problem mindset in the wholesale area. My noble friend Lady Noakes explained that that followed from the way that FSMA was set up. Interestingly, the noble Baroness, Lady Bowles, cited MAS in Singapore, where regulation is split by target market. Another member of the committee, the noble Lord, Lord Vaux, rightly called for proportionality, which was endorsed by my noble friend Lord Holmes. This is complicated, but it is important that we look at these amendments seriously.

Amendments 165 and 173 are in my name and that of my noble friend Lord Altrincham. These raise the related but distinct question of whether the FCA is operationally ready to take on the significant new functions being handed to it under the Bill. This is a matter for the FCA, as it is an independent regulator, but the fact is that some do not trust it, including those in the payments and consumer credit industries who will be new or largely new to its fiat.

We need a plan to show what will happen and when in all cases where the regulator is taking over responsibilities from elsewhere—which, on reflection, I should have added to our amendment. We also need to know how many staff the FCA plans to add and the accommodation arrangements. The industry pays for our regulators, and the latter should spend every pound as carefully as if it were their own. In time, we would hope to see some economies of scale as the proposed changes drive efficiency. The Explanatory Notes for the Bill explain that because the FCA will take over AML supervision of legal service providers, accountants and trust company service providers, it will need significant preparatory work, including the hiring and training of staff and establishing necessary IT infrastructure. We need more clarity on that point, and particularly on ensuring service standards and value for money.

The point behind Amendment 165 is simplebefore significant new FCA functions are commenced, a report would look at FCA staffing and resourcing; systems capability; the impact on authorisation, supervision and enforcement timeliness; the effect on service standards for firms and consumers; and any mitigation measures considered necessary by the Treasury and the FCA. That would have the benefit of allowing Parliament and its committees to examine the plans.

One example that has been raised with us is the movement of the Payment Systems Regulator into the FCA. Firms have told us that there is very limited clarity about the timeline for that transition, the operational arrangements, the treatment of existing PSR work, the continuity of functions and how the FCA will absorb these responsibilities without disruption. They do not see that as a satisfactory position.

I thank my noble friend Lady Lawlor for her support and for her amendment to my amendment. It makes a valuable point about the importance of training staff to ensure a smooth transition, and I very much agree with this from my experience in business and in government.

I look forward to hearing from the Minister, first, on how we can better avoid duplication and the excess caution that is sometimes caused by the existing overlap between retail and wholesale at the FCA, and, secondly, on his view on how Parliament and stakeholders can best scrutinise plans for the handover of new areas of responsibility to the FCA.

Lord Stockwood (Lab)My Lords, the FCA currently regulates around 42,000 businesses of different shapes and sizes in the UK, across a wide range of different activities. It is incredibly important, therefore, that the FCA has in place the right structures, with adequate resources and governance, and the right people with the right skills to fulfil its role effectively.

Amendment 142A would require the FCA to develop a dedicated division to undertake its regulatory activities with regard to wholesale market participants. Amendment 142C would require the Treasury to introduce a statutory definition of “retail and wholesale clients”. The purpose of this would be to ensure that regulators avoid applying retail-focused requirements to wholesale clients, except where proportionate and appropriate.

I recognise the intention behind these amendments. I am aware that this point about distinguishing between retail and wholesale activities was made by the committee in its report, Growing Pains . Wholesale markets are a vital part of the UK’s financial services sector. The Government fully agree that regulation of those markets must be proportionate, targeted and internationally competitive. But we must be careful about embedding the distinction between retail and wholesale in law. The distinction between retail and wholesale activity is important, but it is not always absolute. For this reason, the FCA needs to be able to regulate proportionately across the markets it oversees, with it being called on to explain the decisions it makes so that they can be scrutinised properly.

The Government agree that the FCA must ensure that its retail-focused rules do not unduly affect wholesale activity. Last July, in her Mansion House speech, the Chancellor tasked the FCA with assessing the impact of the consumer duty to provide more certainty on its scope and application to wholesale firms, addressing a key concern raised by the wholesale sector. In response, the FCA committed to four workstreams aimed at removing disproportionate burdens on wholesale firms and giving firms the confidence to comply with their obligations in a proportionate way, avoiding overcompliance.

I remind noble Lords that those four workstreams were for the FCA, first, to clarify its supervisory approach when firms work together to manufacture products for retail customers; secondly, to consult on its client categorisation to reset how firms distinguish between retail and professional clients; thirdly, to consult on removing businesses with non-UK customers from the duty’s scope; and, fourthly, to consult on the wider scope and proportionality of the duty.

The FCA published consultations on the first two of these workstreams at the end of 2025. Last week, it published a further consultation proposing to remove businesses with non-UK customers from the duty’s scope, as well as proposing wider changes to the proportionality of the duty. In the light of the work that is under way, I do not think that we need to amend the Bill to embed a distinction on which the FCA is already acting. I turn to Amendments 165, 165A and 173. I have listened carefully to the arguments that have been made. I agree that it is important that we are confident that the FCA is ready to take on its new functions. There are many benefits associated with consolidation: it reduces the number of separate regulators with which businesses need to deal, it promotes consistency of approach between different areas, and it builds on expertise within effective regulators.

As I said earlier, the FCA is responsible for ensuring that it has the resources and capability it needs to advance its objectives and implement any new responsibilities it is given. It also has the powers it needs to do so: it is able to set its own budget, in order to secure the resources it needs, and to set its own pay scales so that it can hire the talent and expertise it needs. However, I reassure noble Lords that the Treasury does not simply confer new additional responsibilities on the FCA without careful and close engagement between organisations.

For example, the Government and the FCA are working closely on reforms to anti-money laundering and counterterrorism supervision in order to ensure that the FCA is ready to take on this new responsibility. The Government are providing funding from the economic crime levy to support the implementation of the reform and to build the capability and sector-specific expertise that is needed, alongside close engagement with existing supervisors and stakeholders.

The Treasury has also worked closely with the FCA and PSR on the reforms to payment systems regulation. The FCA already has extensive familiarity with the payments ecosystem and is actively preparing for taking on its responsibilities for payment systems regulation from the PSR through a phased transition. The Government are confident about the FCA’s operational readiness and will continue to work with regulators to support them in implementing this change.

I hope I have reassured the Committee on how the Government have engaged with the FCA to make sure it is ready to take on the functions that this Bill will give it, and that the right set of actions is being taken on wholesale regulation. I ask the noble Lord, Lord Hunt, to withdraw his amendment.

16:45:00

Baroness Neville-Rolfe (Con)I am grateful for some of the reassurances that the Minister has given, but the one area that it is difficult for business to cope with is not knowing when these things are going to happen; it is the timelines that are the problem. The Minister may want to reflect on that.

Lord Stockwood (Lab)I am actually speaking to the FCA next week, so I will get some clarity on that and feed back to the Committee.

Baroness Noakes (Con)The Minister referred to the four workstreams that the Chancellor set up last year. Can he say when firms might feel any difference?

Lord Stockwood (Lab)I will come back on that after getting clarification on when those will come into effect.

Lord Hunt of Wirral (Con)My Lords, what an important debate this has been. It has highlighted some of the difficulties facing the FCA in its wide remit, covering both wholesale and retail markets. I am grateful to my noble friend Lord Ashcombe; as he pointed out, industry needs certainty. I warmly welcome the contribution of the noble Baroness, Lady Bowles, with all her knowledge of this area. She readily reminded us that the FCA acknowledges overreach. So the problem is there, but what is happening about it?

I am delighted to hear from the Minister that all these workstreams are progressing. But from talking to those outside—the London Market Group, for instance—they point out that the UK has to compete with New York, Singapore, Bermuda, Hong Kong and the EU financial centres, and it just cannot do that with the system of regulation that we have at the moment governing the wholesale markets.

I agree with the noble Lord, Lord Vaux of Harrowdenit is all about proportionality. If I can pick up one point that the Minister made, it is to stress the need for proportionality or, as my noble friend Lord Holmes of Richmond called it, applicability. I just think that there is a way through here. My noble friend Lady Neville-Rolfe talked about the overlap between wholesale and retail. There must be a solution if we are to continue to be the global centre that we always have been.

At the moment, bearing in mind the growth and competitiveness objectives, and regarding a move by the FCA suddenly to take out wholesale, I would site it in Canary Wharf. That would send a message across the world that the UK really means to grow and be internationally competitive in this vital marketplace. We are bound to return to this on Report but, in the meantime, I beg leave to withdraw the amendment.

Amendment 142A withdrawn.

Amendment 142B

Moved by

142B: After Clause 22, insert the following new Clause— “Facilitation of inheritance tax payment before probate(1) The FCA must make rules to ensure that financial institutions facilitate the payment of inheritance tax by executors before probate is obtained through the Direct Payment Schemes for Inheritance Tax (IHT423) form.(2) For the purposes of this section, “financial institutions” include banks, building societies and investment account providers that—(a) are registered with the FCA;(b) are regulated by the FCA.”Member's explanatory statement This amendment seeks to place the informal procedure of executors using the IHT423 scheme to pay inheritance tax before obtaining probate into legislation, and to require all financial institutions regulated by the FCA to facilitate that service. As things stand it is at the discretion of financial institutions to decide whether to facilitate the IHT423 scheme.

Lord Mackinlay of Richborough (Con)My Lords, as noble Lords have noticed, this is a very skinny list of amendments; it is a group of one. I will put on record my registered interests: I am a chartered accountant and a chartered tax adviser, and, back in the day, I did the appropriate examinations that allowed me to be licensed for non-contentious probate work under the ICAEW. I suppose that it needs the ingenuity of a chartered tax adviser to get an amendment to the Financial Services and Markets Bill relating to inheritance tax.

Noble Lords may have noted the Economic Affairs Finance Bill Sub-Committee report of 28 January this year. It focused on the six-month rule for paying inheritance tax. It is not actually six months; it is six months after the end of the month of death. For instance, if somebody passed away in December 2025, the due date for inheritance tax would be the end of December plus six months: namely, the end of June 2026. The House of Lords Economic Affairs Finance Bill Sub-Committee was considering how, after next year, the system will deal with SIPP—self-invested personal pensions—coming within the scope of inheritance tax from 6 April next year.

As I hope to show the Minister this afternoon, the system of getting inheritance tax paid is lumpy at best and mixed at worst. It is also very complicated for personal representatives and executors to deal with, at some of the worst times that people have to deal with the state and the system for getting affairs settled. They say that there are three dreadful events in life—death, divorce and moving—but I think most would appreciate that death is a particularly difficult time for all concerned.

I have been administering probates for a very long time, and it is an area where the state really interposes itself to stop the administration of an estate until HMRC is happy that it will get its wedge. It is the absolute blockage, and at a time when the state and the individual are in some conflict, because the state will not move to allow probate to be achieved and those assets to be released until the tax is payable. I do not think there is any other area of tax where an absolute blockage comes into play. There is completely no trust between the state and the individual when administering an estate.

I could say that all used to be well, but it was not really. There was a painful hangover from the November 2025 disaster Budget. It increased interest on all overdue taxes to 4% above base. That is a hefty rate above base whereas, if you have overpaid your taxes, you get credit interest at 1% below base. So the Government enjoy a 5% spread, and there is a huge imperative to get taxes paid when they are due. I hope that is the underlying reason why we currently have a penal rate of 7.75% on taxes that are due.

For many executors, getting the cash together to pay that tax within six months, plus possibly a few days, after death is a very difficult procedure, because probate can rarely be obtained within that timeframe. A scheme has been presented over time, and it has developed quite well, but it is discretionary and varies from institution to institution: it is the direct payment scheme allowed by the IHT423 form, which has been in place for many years. Executors ask banks and building societies to pay the tax in advance of the due date, and often in advance of putting the appropriate forms in to HMRC, so that probate can be obtained smoothly. If anybody has been involved with a probate situation, they will know that one cannot get probate until the tax is paid. How do you get the money out to pay the tax? Well, you could do it with probate, so we end up in this Catch-22 situation, which the IHT423 system was designed to help break. On 1 October 2024, the IHT423 arrangement, which used to apply only to banks and building societies, was widened to include a greater range of investments with traditional investment houses.

I might not have come across this problem had I not been administering my father’s estate—I am his executor. In my professional years, I had never come across an institution that refused to pay the tax due on an IHT423 request. Now, sadly, I have come across one: M&G plc group, now a dual structure between M&G Investments and Prudential. As huge names in the marketplace, they must have a significant percentage of all investment management in the UK.

My father’s estate is due to pay inheritance tax—I take the “my” away from this as it would apply to any executor—and I had relied on the IHT423 procedure to liberate an appropriate amount of IHT from an M&G Prudential investment that he had held for 24 years. The answer came back, “No, we don’t do that”. I asked why not, since I have been doing probate for many years and have never had a refusal of an IHT423 request. They simply said, “No, we don’t do that”. That gets to the heart of what my amendment is all about. It states that all FCA-registered institutions doing business in this country must be part of the IHT423 scheme—no discretion, no “We don’t do that”—because this a period of great difficulty for executors up and down the country.

This makes no difference to me, because I am done, but I will explain what many executors have to do. They can either borrow money—which in itself is a tough ask but, given the 7.75% interest rate levied by the Government, perhaps it is cheaper than having any amount outstanding and due—or they can pay the IHT personally, as I had to do. So there is an estate asset, an institution that just says, “No, we don’t do that”, and an estate liability of IHT that has to be paid, or you have to pay 7.75%.

As we go towards Report, I hope that the Government and the Minister will be keen to think about this and say, “Yes, we want to be part of smoothing the administration of estates for people at a tough time in their lives”. I can but guess, and I certainly hope, that the reason for the 7.75% interest rate is to encourage people to pay, and that it is not meant itself to be a receipt for the benefit of the Government. If this is not accepted as an amendment on Report—I would very much like the Government to consider it and draft one—I will be left with the conclusion that the Government are rather more keen on earning money at 7.75% than on helping the administration of estates.

That is a story that is probably being played out in tens or fifties, if not hundreds of thousands of households around the country as I speak. The fact that one of the giants of investment, M&G Prudential, with probably well over 10% of administered funds in this country, simply says no, is not good enough. We must therefore put this on a statutory basis, and this Bill seems to be an appropriate place to do so. I beg to move.

Lord Davies of Brixton (Lab)The noble Lord makes a compelling case, but can he say what is meant by “facilitate” in the amendment?

Lord Mackinlay of Richborough (Con)Facilitating means merely that any financial institution registered with the FCA in this country would have to use the IHT423 procedure—it could not say no. At the moment, we have a framework that is purely discretionary. In my professional life every single institution has always said yes, but obviously there are some out there which are saying no. So I want to put the facilitation not as a facilitation of choice but a facilitation of “must” on the request of an executor. There is no risk here. The risk is that either the funds remain in an investment account or they are in the account of HMRC, which, the last time I looked—despite my being a chartered tax adviser—is a safe place for people’s funds to be.

17:00:00

Baroness Kramer (LD)My Lords, the noble Lord, Lord Mackinlay, makes so much sense to me on this issue. Having gone through the struggles of probate, I think that anything that will make it easier and more straightforward is good. I have worried since the announcement of the change that came with the last Budget, which brought pension pots into inheritance tax, that all kinds of consequences would significantly follow because most people who thought that they had a fairly straightforward settlement upon death will now find that they have handed a very complex picture on to their executors.

I want to put in a plea from personal experiencewhere there are people who have more than one nationality, or tax residency in one country and nationality in another, the nightmare becomes even more acute. I am not an adviser but I will give this advice: if one is aware that someone close is likely to die, it has almost become necessary to create a separate savings account to deal with all the relevant tax payments because it is so long before probate can be completed, particularly if that is in more than one jurisdiction. I felt at one point that I virtually lived at Kingston Crown Court because I was so often having to get new and updated copies of the death certificate to satisfy some new requirement from someone somewhere else. That is a painful and difficult time, but what the noble Lord, Lord Mackinlay, suggests seems straightforward and effective. Even if it deals with only one small piece, that is something.

Baroness Neville-Rolfe (Con)My Lords, I am grateful to my noble friend Lord Mackinlay of Richborough for tabling Amendment 142B. I am especially sorry to hear of the difficulties that he faced with his father’s estate. That is typical. When people die, their loved ones and executors often have a difficult time, and one of those difficulties is the delay that they often encounter with probate, as I know from family experience, and as we have heard from the noble Baroness, Lady Kramer.

There is both an emotional toll and a worry as to how to pay any IHT within the six-month window. Hopes that this might be extended by the Chancellor to 12 months have now been dashed, so this is a timely amendment. As I understand it, the issue is that, when someone dies, their bank, building society or investment accounts are frozen. Executors may then need to pay inheritance tax before probate can be granted, but they may need probate in order to access the funds from which that tax would be paid. The IHT423 direct payment scheme is designed to address that problem by allowing inheritance tax to be paid directly from the deceased’s bank, building society or investment account to HMRC before probate is granted. The difficulty, as we have heard, is that participation in that scheme is not consistent across all relevant financial institutions. That situation may mean that people have to find funds elsewhere, use personal savings, as we have heard, arrange borrowing or enter into more complicated interim arrangements.

The amendment rightly seeks consistency. It would require the FCA to make rules ensuring that the relevant regulated financial institutions facilitated the payment of inheritance tax through the IHT423 direct payment scheme. There may of course be operational legal issues that the Government will want to consider, but the basic principle seems right: if inheritance tax must be paid before probate, it would be in the interest of all if this inconsistency could be sorted out as a matter of urgency.

We should bear in mind that the interest mounts up at a punitive rate—4% above base rate, so that is 7.75% at present—and that it affects thousands of households every year. The Minister will know that more generally it will be a difficult year for those paying IHT, with IHT payable on pension pots from April 2027. That is all the more reason to show flexibility and sort out this issue, and to use the Bill to do so if that is necessary. I look forward to hearing what the Minister has to say.

Lord Stockwood (Lab)My Lords, Amendment 142B would require the FCA to ensure that financial institutions that are registered or regulated by the FCA facilitate the payment of inheritance tax by executors before probate is obtained through the direct payment scheme.

I appreciate that the purpose of this amendment is to make it easier for estates to pay inheritance tax. I am sorry to hear of the issues that the noble Lord, Lord Mackinlay, has had with the current system and I am very happy to take that up with HMRC to explore why M&G Prudential is not a member of the current scheme.

I can assure your Lordships from the research for this question that HMRC internal analysis suggests that most taxpaying estates are already able to fund at least a first instalment of inheritance tax before applying for probate. The direct payment scheme allows executors to ask banks, building societies or investment account providers to pay some or all of the inheritance tax due from the deceased person’s accounts. The scheme works well in its current voluntary form and provides an important mechanism to help executors pay any tax that is due.

We need to be very careful here. Releasing funds from a deceased person’s estate before probate is granted carries risk for financial institutions. Those institutions need to ensure that those payments can be made lawfully. The current system enables financial institutions to assess whether it is appropriate to make payments directly to HMRC on a case-by-case basis, ensuring that institutions make payment only if satisfied that the personal representative is indeed acting on behalf of the deceased’s estate and that they are releasing those funds correctly. FCA rules cannot put this issue aside as it is a matter of the wider law. Financial institutions would need to ensure that making these payments is appropriate whatever the FCA rules say. This would leave financial institutions on an uncertain legal footing.

I understand the spirit of this amendment but I do not agree that it is the right solution, and the existing voluntary scheme is working well on the whole. But I will definitely pass on the point the noble Lord raised about HMRC and will come back to him on that. I therefore ask the noble Lord to withdraw the amendment.

Lord Mackinlay of Richborough (Con)I listened carefully to what the Minister had to say; I thought he was on a good track for a while but he finished rather poorly.

I am grateful for the very sensible words from my noble friend Lady Neville-Rolfe, who understood the situation completely and absolutely, and for the comments of the noble Baroness, Lady Kramer. If people actually listen to what happens in this Committee—I am sure the audience is fairly skinny—I will give a word of advice to them that is exactly on the tack of the comments of the noble Baroness, Lady Kramer. It is not a problem of a multitude of nationalities that might exist. I recommend to anybody who is getting a little older to make their affairs that little bit simpler, so that, once they depart, they are easier to unwind.

I will give your Lordships a very easy example—this is aimed at the point made by the noble Baroness, Lady Kramer. If one holds shares that are denominated in, say, Jersey—it is not uncommon, and there are listed shares on our stock exchange that are headquartered in an overseas territory, which is quite typically Jersey—one would then need to go through the whole probate procedure just for those Jersey-registered assets. There would be cost and aggravation, and my advice is to sell them.

I do not really have a criticism of HMRC, and I am sorry if my speech came across with any criticism. There are two systems. There are relevant assets, which are typically property that cannot be easily realisable into cash to pay IHT. The system has accepted that for many years, and one can pay the tax due on those types of not easily realisable assets such as property or land over 10 instalments over 10 years ahead. But the 7.75% interest applies, so most executors—I am particularly thinking about the beneficiary—would like to clear the inheritance tax as quickly as they possibly can, because 7.75% is not a good deal in terms of an interest payment. That has been flexed for the BPR/APR assets that come in next year, of £2.5 million each, where the 10-year instalment plan will be interest-free. But the point is that the 7.75% interest rate makes it essential that people try to pay.

I do not accept the Minister’s observation that there is risk for the financial institution. In my experience over many years, I have found that 99% of institutions are happy to take that very small degree of risk, because the money will be residing in HMRC’s bank account, which is a safe place for money to reside. The risk is not just small but extremely small. If things have gone wrong, you just ask for it back, or somebody will, from HMRC. Given the speed of operation of HMRC, it might take quite some time to get the money back, but at least it is somewhere safe. So I do not accept the risk, because it is somewhere where there is no risk. It is unfortunate that this has fallen in a family issue, but M&G Prudential is the only institution that I have ever come across that simply says no.

Can the Minister go back to his officials and consider it further? I would be very pleased to meet him or his officials for blue-sky thinking about this. We have Report ahead of us. I am happy to withdraw my amendment.

Amendment 142B withdrawn.

142C not moved.

Amendment 142D

Moved by

142D: After Clause 22, insert the following new Clause— “Litigation funding as a regulated activityAfter paragraph 24 of Schedule 2 to the Financial Services and Markets Act 2000 (regulated activities), insert—“Litigation funding agreements 24ZA Rights under a litigation funding agreement.24ZB Entering into a litigation funding agreement as funder.24ZC Administering a litigation funding agreement.24ZD Arranging a litigation funding agreement.24ZE Advising on a litigation funding agreement.24ZF (1) For the purposes of this Schedule, a “litigation funding agreement” is an agreement under which—(a) a person (“the funder”)—(i) agrees to fund (in whole or in part) the provision of advocacy or litigation services (by someone other than the funder) to another person (“the litigant”), and(ii) the litigant agrees to pay a sum to the funder in specified circumstances, or(b) a person provides financial support to a firm of solicitors which is involved in contentious matters or to a claims management company.(2) The sum to be paid by the litigant may be—(a) an amount calculated by reference to a multiple (if any) of the amount of the funding provided by the funder,(b) an amount calculated by reference to a percentage (if any) of any specified financial benefit obtained by the litigant in connection with the matter in relation to which the funding is provided,(c) an amount calculated by reference to a rate of interest, or(d) such sum, or method of calculation, as is prescribed by the Treasury pursuant to sub-paragraph (3),provided that in respect of the sum to be paid, howsoever calculated, it must not exceed such sum as may be prescribed by the Treasury pursuant to sub-paragraph (3).(3) The Treasury may by regulations make such consequential, supplementary, incidental, transitional or saving provision as it considers appropriate in connection with this paragraph.”” Member’s explanatory statement This amendment brings third-party litigation funding within the FCA regulatory perimeter by creating a new category of regulated activity under FSMA 2000.

Baroness Bowles of Berkhamsted (LD)My Lords, my amendment proposes that the Treasury makes litigation funding a regulated activity, with a list of matters that I propose should be covered in the amendment.

Litigation funding has come into the spotlight for several reasons. There was the 2023 PACCAR decision, which held that litigation funding agreements were a form of damages-based agreement and unenforceable for failing to comply with the DBA regulations 2013. There has also been concern about the source of some litigation funding, especially when a significant proportion of funders who are active in this space are not headquartered in the United Kingdom and may utilise what can be described as dodgy derivatives.

The Conservative Government tried to address the PACCAR decision with a Bill that did not make it through the wash-up. They also proposed a wider review of litigation funding and asked the Civil Justice Council to assess whether the regime was effectively providing access to justice and whether regulation of commercial funders was necessary. An interim report and consultation were launched on 31 October 2024 and the final report was published on 2 June 2025. This was a substantial and diligent review with stakeholders across the spectrum, including litigation funders, welcoming and endorsing its recommendations. In December last year, the Labour Government made clear their intention to reverse the effect of the PACCAR judgment, so that litigation funding agreements would no longer be treated as damages-based agreements. At the same time, the Government said that they would take steps to regulate the third-party litigation funding sector—one of the central purposes of the review and its recommendations.

The issue is not whether there should be regulation but when and by what route. It is urgent. That urgency has been acknowledged by the previous and current Governments in commissioning the review. But a year has passed since the final report and we need fast delivery. At present, the sector is essentially self-regulated, which in practice means that it is unregulated. More than 70 funders operate in the UK, collectively deploying many billions. The Association of Litigation Funders covers only a small proportion of the market and cannot provide assurance about the rest.

17:15:00

The Solicitors Regulation Authority’s review of the mass claims market found that around half of firms provided no advice to clients about funding arrangements. Given the financial nature and the size of litigation funding, it is not appropriate for funders to remain outside the regulatory perimeter in an area with such wide-ranging consumer involvement and complex commercial incentives. Many claimants do not fully understand these arrangements, often entering them at moments of vulnerability. We do not allow this level of opacity for consumer loans or mortgages, and comparable safeguards should exist. We also need clear transparency about the capital itself: where it originates; how returns flow; who stands behind these vehicles; and how governance is structured. Some highly complex arrangements now support mass claims, involving crypto-related structures, sovereign capital, private investment vehicles and hedge fund money.

International capital is not inherently objectionable, but when it shapes litigation in our courts the present framework must provide assurance abut transparency, oversight and accountability. So, if regulated, who should take responsibility? The Civil Justice Council suggested that initial regulatory responsibility should rest with the Lord Chancellor. I understand why that was proposed, but I respectfully submit that the Financial Conduct Authority is better placed to do the job because litigation funding is not, in economic substance, a matter of court procedure. It is a financial product. It prices risk, transfers risk, pools capital and generates returns contingent on future events. That is the territory of the FCA. The funder’s return is contingent on the outcome of litigation. In any other context, that is the definition of a derivative. The FCA regulates every other form of contingent return instrument in the financial system; it is anomalous that this one sits outside the perimeter. Funders use financial risk models, portfolio diversification, capital adequacy calculations and probability weighted outcomes. They are not tools of the Lord Chancellor; they are the daily tools of financial regulation. The risks are financial risks. If a funder collapses mid-litigation, consumers are stranded, solicitors are exposed, defendants face unregulated financial counterparties and mass claims markets become distorted. That is conduct risk, market integrity risk and transparency risk—all statutory FCA objectives.

Internationally, litigation funding is treated as a financial service. Australia requires licensing, capital adequacy, disclosure and conflicts of management. Several EU jurisdictions treat it as alternative investment activity. The UK is the outlier. The Lord Chancellor regulates procedure, not capital markets. He has no supervisory teams, no prudential oversight, no conduct oversight and no jurisdiction over offshore capital. The FCA does. We already ask the FCA to regulate claims management companies, consumer credit used to finance claims and collective investment schemes. It is incoherent to regulate the periphery but leave the core funding mechanism outside the perimeter. This is the core expertise of the FCA.

To be clear, this does not turn solicitors into financial intermediaries. They are not selling a financial product; they are simply entering into commercial arrangements on behalf of clients. The funder is the entity offering the product, and it is the funder, not the solicitor, that should be subject to financial regulation. In fact, the SRA’s review, as I said, found that half of firms provided no advice about the funding arrangements. That is precisely why the FCA’s oversight is needed because solicitors are not acting as financial advisors and should not be expected to. The regulatory responsibility belongs with the body that supervises financial products, financial conduct and financial risk, and that is the FCA. This is not regulation of litigation; it is regulation of the commercial funding arrangements that sit behind it.

There is a further advantage. If we try to create an entirely new regulatory structure from scratch, there will inevitably be delay, duplication and further uncertainty. We would spend years arguing over architecture when what is needed now is a practical route to proper oversight. By contrast, bringing litigation funding within the FSMA 2000 framework would create a set of common rules in an established regulatory system—one that already knows how to supervise complex financial and conduct risks.

I do not suggest that every aspect of litigation funding should suddenly be treated as if it were a mortgage or an insurance product. Nor do I suggest that the courts would cease to play their essential role; they plainly would not. However, where commercial third-party funding is concerned, especially where consumer claims or collective proceedings are involved, it is surely no longer credible to pretend that this activity lies wholly outside the ordinary expectations of transparency, resilience and accountability that apply elsewhere in the financial system. The FCA is already being drawn into consumer harms arising in the wider claims market through the proposed further reform of the Consumer Credit Act, so it is hard to justify leaving a major part of the underlying funding structure wholly outside the perimeter. The FCA is the leading agency for financial conduct risk. At the bottom of this, what else is it?

This would be a practical way forward. It is possible that an even faster way forward or a stepping stone might be to make litigation funding a designated activity, but this issue cannot be left resolved. I beg to move.

Lord Carlile of Berriew (CB)My Lords, Amendment 172B is in my name. I declare two interests. First, I was formerly, for several years, a part-time chair of the Competition Appeal Tribunal, which hears most collective actions; I heard several collective actions there. Secondly, in my professional life, I accepted membership of consultative panels in relation to two current collective actions in which litigation funding agreements are in place. As an aside, I can offer noble Lords a third, fascinating interest. If they are really bored between football matches, they can read my article on this subject in the Law Society Gazette of 30 June. I know that, as a distinguished lawyer, the noble Lord, Lord Holmes, will read it with fascination.

The points raised by the noble Baroness, Lady Bowles, and the points raised in my amendment are mutually exclusive. I am going to talk mainly about the PACCAR case, to which she referred. I do not disagree with her that there may be scope for further regulation, but I disagree with her on two points. First, paragraph (d) of proposed new subsection (2) and proposed new subsection (3), which would be inserted by the noble Baroness’s Amendment 142D, would give the Treasury the opportunity to fix the fees that are charged by litigation funders in litigation funding agreements. One has to bear in mind that that would potentially raise a massive conflict of interest because some of these collective actions are being, have been or will be brought against the Government. The idea that the Government could impose a low fee—indeed, too low a fee—to try to kill off one of those actions is not something that I would expect, but it is implicit in the noble Baroness’s amendment. I turn to my Amendment 172B. I was in this Room on 29 April 2024 when Committee on the Litigation Funding Agreements (Enforceability) Bill was heard in its entirety in one day. I have that Bill in front of me. It is not a long Bill; in fact, it runs to a single page. The idea of that Bill was to reverse the decision of the Supreme Court in the case called PACCAR, which had damaged the working of litigation funding agreements. Second Reading had occurred only two weeks earlier, on 15 April 2024, and I hope I will be forgiven for referring to the excellent speech made in it by the noble and learned Lord, Lord Stewart of Dirleton, who was the Minister in charge of the Bill. Before I get to that speech, I remind your Lordships that, by the time we finished Committee, all parts of your Lordships’ House agreed that that Bill should become law, but it did not, because it was not dealt with in wash-up, probably because it had not reached Report, even though that stage would probably have gone through in a shorter time than Report on your Lordships’ House on the National Security (State Threats) Bill in which I was involved a few days ago.

It is my belief that the change in the litigation funding agreements Bill has waited for far too long. I believe we will find that the Government are not opposed to it. I do not expect to hear that from the Minister, because it may be more to do with the Ministry of Justice, but my belief is that the Government will try to find an opportunity soon to push a separate Bill through.

However, it is a bit puzzling. I tried to table as an amendment to this Bill the page that I have just held out, slightly altered to fit into the Bill. I had a fascinating discussion with helpful officials in the Public Bill Office about scope. I was told that putting in that page was out of scope but that tabling my Amendment 172B, which calls for a review of litigation funding agreements, was in scope. I find that difficult to reconcile. I think it is a circular argument. If Amendment 172B is in scope, then I cannot understand why my one-pager is not, but there we are. If a decision has been made that something is not in scope, it is difficult to challenge it. I believe that has only ever been done successfully once in the hundreds of years of existence of this Parliament. So, brave as I am sometimes in legal matters, I thought I would give that one a miss and try a different route.

I remind your Lordships of the importance of this. As the noble and learned Lord, Lord Stewart, said on 15 April 2024, the Supreme Court ruling in the case of PACCAR

“rendered many third-party litigation funding agreements … unenforceable by bringing them into scope of the regulatory regime for damages-based agreements, or DBAs”.

The result was that third-party litigation looked as though it might lose much of its important role in litigation in this country. When I was a baby barrister doing personal injury cases, small contract cases and so on, I used to do masses of small claims for which legal aid was given, and every month I received a cheque—yes, a cheque, a piece of paper—from the Legal Aid Board, with 10% deducted because it was publicly-funded work, and all those actions were paid for by legal aid. Now, in reality, none of them are paid for by legal aid, so litigation funding agreements are here to replace legal aid.

As the noble and learned Lord, Lord Stewart, said:

“The restoration of the previous funding position is needed urgently to reduce uncertainty for both the future of litigation funding and for”

litigation funding agreements

“that had been entered into previously. By rendering many”

of them unenforceable, the PACCAR judgment

“risks undesirable satellite litigation, an increased burden on the courts, and creating an unfavourable market for litigation funding, which, in turn, threatens access to justice”.

As he added:

“Third-party litigation funding plays a key role in enabling ordinary people and small and medium-sized enterprises to bring large, costly claims against better-resourced companies and institutions ”.—[ Official Report , 15/4/24; col. 798.]

17:30:00

The noble and learned Lord added that litigation funding agreements play a considerable role in our economy, running into billions of pounds, which go into in the courts of London and elsewhere in the United Kingdom and give people access to justice which they would not otherwise be able to obtain. A very famous example—I pay tribute to the work that the noble Lord, Lord Arbuthnot, did in this case—was that a litigation funding agreement was used in the Post Office Horizon case, the celebrated case of Bates v the Post Office, which had the backing of a litigation funder. Some other examples of cases where litigation funding agreements have been used include equal pay cases, motorists bringing claims against the manufacturers of motor cars over false diesel emissions, and consumers bringing claims against multinational companies regarding data breaches and data misuse.

Litigation-funded agreements fall into two categories. If noble Lords are really interested, read my article on opt-in and opt-out; it is utterly fascinating. One example of an opt-in, as a result of another Supreme Court decision, is a case called Evans. That was the forex scandal, where, as a result of the Supreme Court’s ruling, those who wish to sue have to opt in and say that they are going to be claimants. Opt-out is for a big consumer case in which it is assumed that a huge number of people are affected. If any who may be affected do not want to be involved, they can, if they wish, opt out. There are more difficulties in the distribution of damages in opt-out cases, but there are ways of doing it.

I say to the Committee, and to the Minister, that I hope the Government will return in early course saying that this anomaly, which has been created unintentionally in the Supreme Court, as I understand it, will be resolved and that one page, or something like it, will soon be made law.

Baroness Neville-Rolfe (Con)My Lords, this has been an interesting discussion, with cases put forcefully by the noble Baroness, Lady Bowles, and the noble Lord, Lord Carlisle of Berriew, so I approach the issue with some caution. But I will be reading the noble Lord’s article, particularly in view of my contribution to getting to the bottom of the Post Office injustices. I recognise that third-party litigation funding can support access to justice in some cases, but we also need to be clear-eyed about the risks. An expanded litigation funding and claims management industry could fuel speculative low-merit or mass litigation against businesses. It could increase legal costs, insurance costs and settlement pressure. The purpose of reform should therefore be to protect genuine claimants and promote access to justice, without creating a larger litigation finance industry.

Bringing litigation funding within the FCA perimeter would undoubtedly create a more formal framework of oversight, and we know that there are bad apples in the industry. However, there is a danger that FCA regulation could have the opposite effect to the one intended. It could professionalise and legitimise litigation funding as a normal financial service. It would give funders and claims management firms a form of regulatory kitemark, allowing them to say that they are FCA regulated and therefore giving the market a greater sense of safety, respectability and permanence.

That may sound attractive from an oversight perspective, but if the result is that the market expands, that more claims are funded and that more speculative group actions are brought against productive businesses, we will have solved one problem only by creating another. In any event—this is the important point—I do not believe that this is a matter for the FCA or for the Bill, nor am I sure that a Treasury review of claims management services is the right way to take this forward.

The noble Baroness, Lady Bowles, described some of the challenges that need to be addressed. The noble Lord, Lord Carlile, has highlighted the risk of a conflict of interest on fees. Any such review would need to look not only at the impact of the PACCAR judgment but at other forms of redress through the courts, ombudsmen, the criminal cases review board and public inquiries. We need to compare costs to those claimed against, including businesses, and the benefits to those who seek redress.

The implications for the legal system mean that it goes way beyond the reach of this Bill and it is not in the spirit of reducing unnecessary burdens or improving the regulatory framework for existing financial institutions and those coming under the FCA and PRA umbrella. It is more a matter, as we have heard, for the Ministry of Justice, as the Bill Office apparently seems to advise. I share the noble Lord’s frustration with scope in trying to put amendments down to Bills; we have all been there. Having said that, I look forward to hearing how the Minister views these things and what he thinks can be done.

Lord Stockwood (Lab)My Lords, I am grateful to the noble Baroness, Lady Bowles, and the noble Lord, Lord Carlile, for tabling these amendments on the regulation of claims management services and litigation funding agreements. I am grateful to the noble Lord, Lord Carlile, for bringing this issue to my attention when we spoke two weeks ago, and I will continue those constructive conversations outside the Room. I recognise the importance of clarity in the regulation of claims management services and litigation funding agreements, particularly in light of the concerns that have been raised following the 2023 Supreme Court judgment in PACCAR. The Government recognised the urgency of addressing these issues.

Amendment 142D is targeted at bringing litigation funding within the FCA’s regulatory perimeter. The Government agree that the proportionate regulation of litigation funding could improve standards, transparency and protection for litigants who may be in a vulnerable position, but I do not think the FCA is the right body to take this role. We should not move to what would be a significant decision lightly, especially as this issue has already been considered by the Civil Justice Council. Instead, the Government will introduce proportionate regulation of litigation funding agreements. This model is recommended by the respected, independent Civil Justice Council, where courts assess whether agreements meet regulatory requirements. If not, they would not be enforceable. This approach follows other methods for funding civil litigation.

Amendment 172B would require the Treasury to conduct and publish within 12 months of Royal Assent a review into the regulation of claims management services and litigation funding. The 2023 Supreme Court judgment on PACCAR introduced uncertainty about whether litigation funding arrangements remain enforceable. It also brought to light concerns about whether they are always fair and transparent for claimants using them. The Government have committed to remove this uncertainty and ensure these agreements work fairly for all.

Since the Supreme Court’s judgment, the Civil Justice Council has reviewed litigation funding and published its report in 2025. The Government are taking action accepting the council’s two primary recommendations. First, the Government will legislate to clarify that litigation funding agreements are not damages-based agreements and do not need to comply with the requirements of the regulatory regime for damages-based agreements to be enforceable. Secondly, the Government will introduce proportionate regulation of litigation funding agreements. This is the right approach, and we are working urgently to identify a new legislative vehicle to take this forward.

On claims management regulation more generally, the FCA has announced a market study into claims management services to assess how the market is operating and whether further regulatory intervention is needed. This study is in train. I know that the noble Lord, Lord Carlile, thinks that the Government should take the opportunity of this Bill to resolve the issue once and for all. However, the issue under consideration is primarily about litigation and access to justice, rather than the regulation of financial services and markets, so the Bill should not be used for that purpose. These judgments are made by Parliament, not the Government, just as the noble Lord said. We are working to identify a legislative vehicle to take forward the reforms I have mentioned.

I have a lot of sympathy with these amendments. The Government are seeking to legislate on the issue when they can, but we are not able to do so through this Bill. I therefore ask the noble Baroness to withdraw her amendment.

Baroness Bowles of Berkhamsted (LD)My Lords, I thank the noble Lord, Lord Carlile, and the Minister for their comments in this debate. The noble Lord, Lord Carlile, may be interested to know that I am a victim of the PBO too. The reason that “Treasury” appears where I put “Lord Chancellor” is down to the PBO. My intention was correct, but it was one of those things where it was one minute to four—the last moment for getting it in—so I said, “I will make sure it is right if it goes to Report”.

I was inspired, if you like, to put this suggestion forward because I was rather alarmed at the fact of litigation funding becoming an asset class into which speculative and dubious investment was going on in overseas countries. Whichever side of the argument you are on, we do not want that kind of inflated funding meaning that cases are brought that possibly never should be, but the whole thing is just speculative. The more I looked at it, I thought, well, if we need any regulation, as I have explained, it belongs with the FCA. Then I looked further and discovered that Australia and elsewhere, as quite often is the case, have got there first and have already assigned it to being under their financial services regulators. That is my background. I think it has been interesting. I offered it as what I thought would be a faster route, especially if we could do it as a designated activity, but I also admit that, yes, I am stealing a march on what the Government will have to do, taking their time a little more. I hope that the possibility of this route has been noted and for now, I will withdraw the amendment.

Amendment 142D withdrawn.

Amendment 142E

Moved by

142E: After Clause 22, insert the following new Clause— “Building society governance standards(1) The Treasury must, within six months of the day on which this Act is passed, make regulations by statutory instrument requiring the Financial Conduct Authority to make rules establishing minimum governance standards for authorised building societies.(2) Regulations under subsection (1) must require the Financial Conduct Authority to make rules ensuring that—(a) elections of directors are conducted in accordance with minimum democratic standards, including—(i) equal treatment of candidates in election materials and communications;(ii) protection of candidates’ election addresses from alteration except with the candidate’s request or written consent or where alteration is required by law or for production purposes;(iii) minimum statutory duties and reporting requirements for independent scrutineers;(b) voting arrangements prohibit bundled voting instructions and require voting instructions to be determined separately in respect of each candidate and each resolution;(c) members approve, by ordinary resolution at intervals not exceeding three years, the remuneration policy for directors and senior executives; (d) every authorised building society whose total assets exceed £5 billion maintains not fewer than two board positions to be filled by member-nominated directors elected by Members; (e) every annual general meeting is held at a physical place whilst permitting additional participation by electronic means;(f) every question submitted by a member for an annual general meeting, together with the building society’s response or the reasons for not providing a response, is published following the meeting.(3) Before making rules under this section the Financial Conduct Authority must consult—(a) HM Treasury;(b) the Prudential Regulation Authority;(c) representatives of authorised building societies;(d) organisations appearing to represent the interests of members.(4) A statutory instrument containing regulations under this section may not be made unless a draft of the instrument has been laid before, and approved by a resolution of, each House of Parliament.”Member’s explanatory statement This amendment requires HM Treasury to require the Financial Conduct Authority to establish minimum governance standards for authorised building societies. It applies governance principles already recognised by Parliament in relation to listed companies, occupational pension schemes and statutory democratic elections to member-owned financial institutions.

Baroness Bowles of Berkhamsted (LD)My Lords, building societies occupy a unique place in the United Kingdom’s financial system. Unlike banks, they are not owned by external shareholders; they are owned by their members. That distinction is fundamental. It means that the legitimacy of a building society rests not only upon prudent management and financial soundness but also upon effective member democracy. The Building Societies Act 1986 established the statutory framework for that democracy. It has served the sector well for many years. However, Parliament has not stood still. During the four decades since the Act was passed, this House and the other place have progressively strengthened governance standards in many comparable areas of law—I mean company law, obviously.

For quoted companies, Parliament introduced binding shareholder votes on remuneration policy through the Enterprise and Regulatory Reform Act 2013. For occupational pension schemes, Parliament has required member representation on trustee boards. For statutory elections in trade unions, Parliament has established detailed protections to ensure that elections are conducted fairly, that candidates are treated equally and that election addresses are not altered without consent. Building societies, however, remain governed largely by a statutory framework dating from 1986 that has not developed in a similar way. My amendment does not seek to transplant those other regimes wholesale, nor to interfere with the independence of boards or with the mutual model itself—quite the opposite. The amendment is intended to strengthen confidence in mutuality by ensuring that members enjoy democratic protections comparable to those that Parliament has already recognised elsewhere.

The amendment is also deliberately framed as an enabling provision. Rather that attempting to prescribe detailed rules in primary legislation, it would require His Majesty’s Treasury to make regulations requiring the Financial Conduct Authority to establish minimum governance standards for authorised building societies. The FCA is plainly the appropriate body to consult on and develop those detailed standards.

This amendment identifies a number of areas where minimum standards should exist. The first is elections. Members should be able to choose between candidates through elections that are demonstrably fair. Candidates should be treated equally and have equal opportunity to communicate with members, and independent scrutineers should operate to consistent statutory standards.

17:45:00

The second area is voting arrangements. The amendment would require voting procedures that ensure that members determine their voting instructions independently for each resolution. Modern electronic voting should, of course, continue. Boards should continue to make recommendations. Proxy voting should continue. Nothing in the amendment prevents any of that, but it seeks to prevent voting arrangements that diminish independent member choice by combining multiple decisions into a single instruction.

The “quick vote” option is a good exampleit enables a member to cast all their votes exactly as the board recommends in one action, before they have seen any of the candidates or the resolutions. That is bundled blind voting, not independent decision-making . Even proxy voting agencies in listed company markets, which handle thousands of resolutions, require investors to adopt an informed voting policy and allow them to override recommendations; they do not encourage blind, pre-selected voting. Instead of encouraging people to quick vote, should boards not instead encourage voters to take their time, consider the options and exercise their democratic right in a considered manner? In other words, should boards not be asking people to “slow vote” instead?

The third area is executive remuneration. Parliament has already decided that shareholders of quoted companies should have a binding vote on remuneration policy. Building societies have members rather than shareholders, but it is therefore entirely reasonable to ask whether members should enjoy comparable rights in relation to executive remuneration.

The fourth area is member representation. The amendment proposes minimum member-nominated representation on the boards of the largest building societies. That is not a proposal for representative directors; any member-nominated director would owe exactly the same statutory and fiduciary duties to the society as every other director. Rather, it recognises that democratic representation has become an accepted feature of governance in other member-based institutions, including occupational pension schemes.

The final area is annual general meetings. Technology should widen rather than reduce accountability. Hybrid meetings should therefore preserve both digital participation and the opportunity for members to attend and question boards in person.

I anticipate that some may ask whether legislation is necessary. I suggest that it is at least timely for Parliament to consider the question. Recent Parliamentary Questions have asked the Government whether they intend to review the governance framework for building societies, and the answer has been that there are currently no such plans.

The Committee may be aware that concerns have recently been raised regarding the conduct of elections within one of the UK’s largest building societies. I do not intend to comment on the particulars of that case, but it has highlighted the wider question of whether the current statutory framework provides sufficient safeguards for members and candidates. Those wider questions are what this amendment seeks to address.

The amendment therefore provides an opportunity for Parliament to consider whether the framework established in 1986 remains adequate for today’s mutual sector. I emphasise again: this amendment does not prescribe detailed rules, alter the mutual ownership model or affect prudential regulation; it simply asks that the governance standards applicable to member-owned financial institutions should be reviewed in the light of standards that Parliament has adopted elsewhere over the past 40 years.

Strong member democracy strengthens confidence in mutuality. Strong governance strengthens confidence in mutual institutions. I therefore hope that the Minister will give careful consideration to this amendment. If he is unable to accept it today, I hope he will explain how the Government intend to ensure that the democratic governance framework for building societies keeps pace with modern expectations. I beg to move.

Baroness Neville-Rolfe (Con)My Lords, I will briefly speak to Amendment 142E. I can understand the intention behind the amendment, which has been very well described by the noble Baroness, Lady Bowles.

I am particularly sympathetic to the objections to the use of the quick vote, famously used by the National Trust to keep more challenging directors off its governing body. This is known as bundle voting instructions—as in proposed new subsection (2)(b) of the amendment—which not only is rightly prohibited in trade union elections but squeezes out minority views and arguably creates a democratic deficit. I also share the noble Baroness’s concerns about purely electronic AGMs.

However, our concern is whether this amendment is the right way forward to achieve reform. It would impose a new and quite detailed regulatory framework from the centre, requiring the Treasury to direct the FCA to make rules across a wide range of building society governance matters. That would inevitably increase the regulatory burden on building societies, which already operate in a heavily regulated environment. Many are not large, and they are certainly not listed banks with external shareholders and extensive governance departments. Many are regional, community-based institutions, and that is very good. They play an important role in mortgage lending, savings and financial services provision across the country.

There is also a question of proportionality. The amendment would apply a number of quite prescriptive requirements, including on AGM format, publication of questions and responses, voting procedures, remuneration approval and member-nominated directors for large societies. Some of these changes may be sensible in principle, but they could have practical consequences, which need to be carefully understood before being imposed across the sector. We would therefore be cautious before giving the Treasury and the FCA a wide power to regulate all this and things not listed in the amendment. We are, after all, seeking to limit such powers elsewhere in the Bill, in the interests of proper parliamentary oversight. I also have a question as to whether this would not be more appropriate for a corporate governance Bill.

Having said that, there are narrow proposals—for example, on the misuse of bundled voting—that could be put into the Bill without creating such problems or changing its deregulatory thrust. If so, we would be happy to discuss them. We should always ask whether the regulatory lever is the right lever to pull. In my view, central regulation should be a last resort, particularly where the desired outcomes might be achieved through existing government expectations, voluntary best practice, member engagement or a more targeted intervention where there is evidence of a problem.

For these reasons, although I very much understand the purpose behind the amendment and I am glad to have had this discussion, I remain cautious about whether this is the right regulatory mechanism.

Lord Stockwood (Lab)My Lords, I am grateful to the noble Baroness, Lady Bowles, for raising this important issue. Building societies are a key part of the UK’s financial services sector. The Government are committed to supporting the growth and long-term success of the mutual sector, including through our commitment to double the size of the mutual and co-operative economy.

Building societies are already subject to an extensive legislative and regulatory requirement. Building societies must comply with the Building Societies Act 1986, FCA and PRA rules, and the senior managers and certification regime. Of course, there is also wider company law and the financial services regulatory requirements where applicable. The FCA and PRA already have the powers to set and supervise governance standards where they consider it necessary.

However, I do not agree that we should make such detailed rules on things such as board composition, annual general meetings and reporting arrangements. The building society sector is diverse, ranging from small regional societies to large national institutions; this was mentioned by the noble Baroness, Lady Neville-Rolfe. The rules need adequately to reflect the different governance needs, operational models and challenges faced across the sector, and building societies need to focus their energies on serving members. Such governance matters are generally best determined by individual societies, taking into account their size, complexity and membership, while operating within the existing legislative and regulatory framework and ensuring that boards have the skills, experience and expertise needed to govern effectively.

The Government’s approach has been to modernise the framework for building societies while preserving flexibility. Consistent with feedback from the sector, we believe that governance arrangements should uphold high standards while allowing societies to adopt structures that reflect their individual circumstances, business models and memberships. The Government continue to engage closely with the mutuals sector and regulators to ensure that the framework remains proportionate and supports growth, including through the Mutual and Co-operative Sector Business Council and other stakeholder forums. We have welcomed the recent work undertaken by the FCA and the PRA on the mutuals landscape, which is helping inform future policy development as well.

Although the Government share the objective of strong governance and membership engagement, we do not believe that it should be delivered in this way. Building societies already operate within a robust framework, which we continue to keep under review and modernise where appropriate. I therefore ask the noble Baroness to withdraw her amendment.

Baroness Bowles of Berkhamsted (LD)I thank the Minister and the noble Baroness, Lady Neville-Rolfe; I might take the noble Baroness up on her offer to proceed further with something to do with blind voting. I accept that this is the “Full Monty” version, which I put in at this stage because I wanted to draw comments.

I do not think that you can have what is, in essence, a substantial financial institution with a board that can fiddle who gets on to the board and who does not. This is the nub of the issue: it is possible to block in a way that we do not allow for listed companies. Not all listed companies are as big as some of the institutions I am talking about—I accept the proportionality point; maybe one has a threshold—but the situation that has gone on is not acceptable. If we could start with the bundled blind voting point, we might begin to get somewhere. I thank everybody but, obviously, for now, I will withdraw my amendment.

Amendment 142E withdrawn.

Amendment 142F

Moved by

142F: After Clause 22, insert the following new Clause— “Offices for regulatory evaluation(1) The Financial Services and Markets Act 2000 is amended as follows.(2) After section 1RB (requirements in connection with public consultations), insert—“FCA Office for Regulatory Evaluation 1RC FCA Office for Regulatory Evaluation(1) The FCA must establish and maintain an office for regulatory evaluation, to be known as the FCA Office for Regulatory Evaluation (“the Office”), to provide independent evaluation of the FCA’s regulatory actions.(2) The FCA must appoint a person as Director of the Office who will be responsible for the activities of the Office.(3) Treasury approval is required for the appointment or dismissal of the Director.(4) The FCA must provide the resources that are required by the Director to carry out the evaluation of the FCA’s regulatory actions.(5) The Director must draw up a statement of policy of how the evaluation of the FCA’s regulatory actions will be carried out. (6) The Director must report to the governing body of the FCA at least every six months on the work of the Office and the report must be—(a) published,(b) sent to the Treasury, and(c) sent to the Committees of Parliament referred to in paragraph 28(7) of Schedule 1ZA (the Financial Conduct Authority).(7) The Director must report to the chair of the FCA and be independent of the FCA’s board of directors and its executive management.(8) The chair of the FCA will be responsible for the remuneration of the Director and for settling any disputes about the resources allocated by the FCA to the work of the Office.(9) “Regulatory actions” means any actions carried out by the FCA in discharging its general functions under section 1B and supervision, monitoring and enforcement under section 1L.”(3) After section 2NB (requirements in connection with public consultations), insert—“Bank of England Office for Regulatory Evaluation 2NC Bank of England Office for Regulatory Evaluation(1) The Bank of England must establish and maintain an office for regulatory evaluation, to be known as the Bank of England Office for Regulatory Evaluation (“the Office”), to provide independent evaluation of the regulatory actions of the PRA and the Bank of England in respect of its financial market infrastructure (FMI) functions.(2) The Bank of England must appoint a person as Director of the Office who will be responsible for the activities of the Office.(3) Treasury approval is required for the appointment or dismissal of the Director.(4) The Bank of England must provide the resources that are required by the Director to carry out the evaluation of the regulatory actions of the PRA and the Bank of England in respect of its FMI functions.(5) The Director must draw up a statement of policy of how the evaluation of regulatory actions will be carried out.(6) The Director must report to the court of directors at least every six months on the work of the Office and the report must be—(a) published,(b) sent to the Treasury, and(c) sent to the Committees of Parliament referred to in paragraph 36(7) of Schedule 1ZB (the Prudential Regulation Authority).(7) The Director must report to the chair of the court of directors and be independent of the court of directors, the Prudential Regulation Committee, the Financial Markets Infrastructure Committee and the executive management associated with those Committees.(8) The chair of the court of directors will be responsible for the remuneration of the Director and for settling any disputes about the resources allocated by the Bank of England to the work of the Office.(9) “Regulatory actions” means any actions carried out by—(a) the PRA in discharging its functions under section 2AB and supervision of PRA-authorised persons under section 2K, and(b) the Bank of England in respect of its FMI functions under section 30D of the Bank of England Act 1998.””

Baroness Noakes (Con)My Lords, I am grateful to the noble Baroness, Lady Bowles of Berkhamsted, the noble Lord, Lord Vaux of Harrowden, and my noble friend Lord Bridges of Headley for adding their names to this amendment.

Last week, we debated the need for more extensive regulatory evaluation in order to hold the regulators to account effectively. The noble Baroness, Lady Bowles, suggested a Treasury-convened panel to undertake periodic independent reviews, and my noble friend Lord Bridges of Headley suggested an office of regulatory evaluation, which would assess the regulators’ performance in discharging their duties and meeting the regulatory principles. These would not replace the parliamentary committees in each House but would complement them by providing more in-depth and comprehensive analysis, which could then be built on within the framework of parliamentary accountability. My Amendment 142F would be another way of increasing the amount of the evaluation of the regulators.

I remind the Committee of the background. The volume of regulatory activity has grown significantly in recent years, as the matters that used to be dealt with in the EU have been added to the FSMA model. In addition, innovation is presenting major new challenges, which has the effect of increasing regulator activity.

The ability of Parliament to hold regulators to account was already under strain. For example, the Financial Services Regulation Committee of your Lordships’ House recently undertook a major piece of work on stablecoins, but it would not have been realistic to attempt to encompass all developments in digital assets. We cannot cover everything that we think should be covered.

The Bill is adding to that workload by adding the huge area of consumer credit to the FCA’s responsibilities, all of which will need to be implemented by way of new FCA rules. This will involve very significant issues: the balance between consumer protections; the supply of credit; and the efficiency of credit providers. I do not know how all that will be scrutinised effectively.

Instead of looking to solutions that are external to the regulators, which is what we discussed last week, Amendment 142F proposes that each of the regulators sets up an internal but independent office for regulatory evaluation. Apart from safeguarding the independence of the office and mandating regular reporting, the amendment is deliberately not prescriptive beyond that, leaving it to the new offices to work out how to carry out their work.

18:00:00

This is a tried and trusted mechanism in financial services institutions. The World Bank, the International Monetary Fund and the European Investment Bank have them, as do several UN bodies and development banks. Internal evaluation offices do not replace external or internal audit. They tend to work on the core activities—the core work—of the bodies, rather than their systems, controls and financial reporting. Nor would they replace the work of the cost-benefit panels, which focus on the way in which the regulators approach the technical task of cost-benefit analysis supporting new rules. There might be some overlaps, but they can always be managed out in a pragmatic way, as already happens.

The Bank of England already has an internal evaluation office, which was set up 12 years ago, so this concept would not be alien to the Bank. The IEO has many of the features that appear in my amendment; for example, it reports to the chairman of the Court of Directors. My amendment would, however, require the Bank to look again at its arrangements, as they currently cover the whole Bank and relatively little resource has been dedicated to the PRA; indeed, only three reports out of 14 in total since it was set up have concerned the PRA. So the Bank’s internal evaluation office has a relatively low output, and a relatively small element of that output is dedicated to the PRA.

Our debates so far have revealed that there is not a meeting of minds between the Government and those of us who have tabled or spoken to amendments. I should say that the Financial Services Regulation Committee greatly looks forward to its discussion with the Minister and his colleague, the Economic Secretary, later this week. The Minister has consistently described the task of accountability oversight of the regulators in terms of overall performance against their objectives. We, on the other hand, believe that it is necessary to interrogate rules, guidance, supervision and all the other activities that regulators carry out in terms of their proportionality and the impact on those affected by them, whether that is the regulated firms themselves, consumers or other market operators.

That was the vision of the 2023 Act, with its carefully designed notifications of rules and guidance to the parliamentary committees. We continue to believe that that model is effective, and we regard a framework that amounts to not much more than scrutinising five-year plans as falling well short of what could be regarded as effective accountability. If the PRA, the Bank of England and the FCA had offices for regulatory evaluation, they could provide a rich source of material for parliamentary committees without the necessity of creating further external organisations. That is why my amendment would provide for the output of the offices to be sent to the parliamentary committees, thus building on FSMA 2023.

At the end of the day, we are looking to enhance the ability of the existing parliamentary committees, which are, as I have explained, already under some pressure, by finding some way of making parliamentary oversight of the regulators have real meaning in the scheme of FSMA as it was originally set up 26 years ago. I beg to move.

Baroness Bowles of Berkhamsted (LD)My Lords, I support these amendments. They almost follow naturally from the debate that we had earlier about the need for a structurally competent wholesale function within the FCA. It is clear that you cannot produce a credible cost-benefit analysis without a credible evaluation capability. The PRA has understood that and already has the beginnings of an evaluation function, as the noble Baroness, Lady Noakes, said.

I can understand that in part, because prudential regulation requires modelling, capital assessment and an understanding of how rules transmit through markets. The PRA’s world is balance-sheet solvency, capital modelling and risk transmission, so it already employs actuaries, quants and economists, and the evaluation office therefore fits more naturally into that culture. The FCA is different; its culture, as we have discussed, is overwhelmingly consumer focused. That is appropriate for retail regulation but it means that the FCA has never developed the technical machinery for the evaluation of wholesale market impacts. Consumer protection does not require the modelling of liquidity, pricing dynamics or market structure, but wholesale regulation does.

It occurred to me only when I was thinking about this in the context of this amendment that the need for an evaluation office points again to the different sides of the FCA and why somehow upgrading, or separating the wholesale side, becomes more relevant because functions are missing due to the consumer focus. We have heard that the FCA tends to do the minimum of cost-benefit analysis required by statute and then largely ignores it—again, probably because it thinks that it is not relevant to consumer protection, but I would say it is to the particular detriment of the wholesale side. That is an additional reason for supporting these amendments.

Lord Vaux of Harrowden (CB)My Lords, I am sorry that I was not able to be here last Wednesday for the debates on the amendments tabled by the noble Lord, Lord Bridges, and others that proposed the creation of an office for financial regulatory accountability. I have read the debates in Hansard and there is a remarkable similarity to three years ago when we debated similar amendments. This was a significant error in 2023 during the passage of the last Financial Services and Markets Act. It would have been a significant improvement to the ability of Parliament to hold the regulators to account—a complement rather than a replacement.

I shall touch briefly on the ability to scrutinise the proportionality of specific rules. I shall look closely in Hansard at the Minister’s comments during the second group, when he seemed to agree that the specific scrutiny of the rules is in fact important, contrary to the approach that the Bill now takes. This holding of the regulators to account by Parliament has become only more important and more difficult, I think, as we give yet more responsibilities to the regulators under the Bill with, as we have heard, the move of the PRS, the Consumer Credit Act and so on.

Amendment 142 would provide an alternative way of achieving something similar to the amendments that were discussed on Wednesday that might perhaps be easier for the regulators and the Government to accept. It proposes the creation of offices of regulatory evaluation within both the FCA and the Bank but, unlike the office for financial regulatory accountability proposed by the noble Lord, Lord Bridges, it would lie within the regulator, although it would probably have much the same role. Whichever way we do it, I am sure the Minister will have heard loud and clear the concerns that are shared across the Committee about the accountability of the regulators to Parliament, another of the main themes that are emerging as we load ever greater responsibilities upon them.

Baroness Kramer (LD)My Lords, I cannot improve on the three speeches that have been made. I rise simply to make clear that on these Benches, we think that this amendment is really important. We can see in Committee that it is purely random that we have the capacity to raise many of the issues. The noble Baroness, Lady Noakes, and my noble friend Lady Bowles have a deep understanding of the market, as does the noble Lord, Lord Vaux, but it is purely random that they happen to be in the Lords. If we did not have the noble Lord, Lord Holmes, we would struggle to deal with many of the issues around digital assets and the revolution that is taking place. We have no system of ensuring that, in any part of the parliamentary process, there is the capacity to get to the relevant pieces of information, understand the underlying issues and play the role that Parliament should be playing—whether at committee level, with a Special Standing Committee, or as associated with the passage of a piece of legislation. None of that can be done without genuine, adequate and well thought-through information.

Looking at other Parliaments around the globe, in the US, the Senate and Congress have vast numbers of staff available to make sure that those who represent the voice of the people are truly informed in great detail with proper understanding of the articles that are before them and the regulations that they seek to uphold or overturn. We lack this here. We are still an amateur body, which is not appropriate for a modern society. This is a very significant change, but it must be a change in the right direction. From these Benches, we very much support it.

Baroness Neville-Rolfe (Con)My Lords, we support the principle behind this amendment. It follows the same broad logic as the amendment tabled by my noble friend Lord Bridges. If the financial regulators are to exercise very significant powers, there must be a proper mechanism through which they can be evaluated and held to account.

This amendment seeks to require the FCA, the Bank of England and the PRA to establish offices for regulatory evaluation. Those offices would review the regulators’ actions, including rule-making, supervision, monitoring and enforcement. Only the changes to rules are currently considered by the cost-benefit analysis panels. The offices would be led by directors with a degree of independence from the boards and executive structures of the regulators themselves. They would report regularly to the Treasury and to relevant parliamentary committees. My noble friend Lady Noakes quotes an interesting precedent of such arrangements at the World Bank, the IMF and the European Investment Bank—all long-standing pillars of the international economic community.

It is good to welcome the noble Lord, Lord Vaux of Harrowden, to the debate, but this amendment raises very much the same issues as those that we discussed last Wednesday—at col. 501GC in Hansard , for those who were not present—with regard to the amendments from my noble friend Lord Bridges and the noble Baroness, Lady Bowles. I was pleased to hear that the Minister has agreed to reflect further on the issues raised and to meet, with the Economic Secretary, the Financial Services Regulation Committee later this week. I look forward to the results but, in the interests of time, will not repeat what I have already said on the subject. All these amendments raise a fundamental point. We are placing great trust in the regulators. That trust must be matched by transparency, evidence and accountability. Today’s cross-party amendment provides another route for the Minister to consider.

Lord Stockwood (Lab)My Lords, I thank the noble Baroness, Lady Noakes, for notifying us during the debate last Wednesday that this amendment would be tabled. I reiterate that the Government share the view that accountability of the regulators is of great importance. This is why the Government have formalised biannual performance reviews for the regulators and other reporting mechanisms designed to support scrutiny and oversight. As the noble Baroness noted, the Bank of England already has an independent evaluation office which assists the Court of Directors in meeting its statutory responsibility to keep the performance of the bank under review.

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Recent evaluations have focused on the bank’s approach to supervision of financial market infrastructure and the PRA’s secondary competition and growth competitiveness objectives. The Bank of England has a statutory requirement to publish the outcomes of these reviews unless there are public interest grounds for withholding, thereby supporting broader scrutiny. While the FCA does not maintain an equivalent office, it has a substantial framework for evaluation and assurance of its regulatory actions. That includes through the National Audit Office, which is the FCA’s auditor and which, in addition, has a remit to carry out

“examinations into the economy, efficiency and effectiveness”

of the FCA under the National Audit Act, a recent example being the NAO’s 2023 report into the FCA entitled Financial Services Regulation: Adapting to Change .

The proposed offices would create additional costs which would ultimately fall on the financial services businesses which pay the levy that funds the regulators. The Treasury has the power to appoint an independent person to conduct a review of the efficiency, economy and effectiveness of the regulators’ operations, with the resulting report being laid before Parliament, which serves as a further example of an existing accountability mechanism which this new amendment would sit alongside. The Treasury also requires the FCA to publish a report on matters typically covered by its annual report or any other matter the Treasury thinks useful.

The Government are fully supportive of enhancing the accountability of their regulators and always keep the current structures under review. However, I recognise that this is an area where there has been a lot of discussion. The Economic Secretary to the Treasury and I are meeting the Financial Services Regulation Committee later this week, as mentioned, and we are happy to continue these conversations. There is much more discussion to be had between now and Report, therefore I ask for the amendment to be withdrawn.

Baroness Noakes (Con)My Lords, I thank all noble Lords who have taken part in this short debate. I know that it is, in part, a repeat of debates we have held already in Committee, but it is bringing together such an important issue, which is the strength of the accountability mechanisms for the regulators. The Minister outlined the things that exist at the moment. I think I explained that the Independent Evaluation Office in the Bank does not do very much, although what it does is actually very interesting: its report on the secondary competitiveness and growth objective was a good piece of work.

Within the FCA there is no visibility, so anybody involved in external accountability of the FCA would know none of it, with the possible exception of the National Audit Office reports. The National Audit Office, as noble Lords know, will do those value-for-money reviews only very infrequently, and I am not sure that the one the Minister referred to would have had any impact on the work of the Financial Services Regulation Committee had we taken it into account.

I will not labour the points now, because obviously we are going to have more substantial discussions this week in the Financial Services and Regulation Committee, and of course I am sure there will be discussions when we get to Report, and I look forward to any other discussions that we have before we get to Report in the autumn. With that, I beg leave to withdraw.

Amendment 142F withdrawn.

Clauses 23 to 26 agreed.

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

Amendment 143

Tabled by

143: Clause 27, page 32, line 38, leave out sub-paragraph (ii) Member’s explanatory statement This amendment, and my other amendment to this clause, 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”.

Lord StockwoodMy Lords, I beg to move.

Baroness Noakes (Con)Not content.

Lord in Waiting/Government Whip (Lord Wilson of Sedgefield) (Lab)I put on the record that parliamentary counsel has advised that this amendment and all the other government amendments in this group are all technical amendments. If the noble Baroness’s objection is based on the fact that she believes that an all-Peers letter should have been sent for a handful of technical amendments, then that is not normally the case. However, if she wants to object, we will not move them.

Baroness Noakes (Con)The Minister and I had a meeting on this last week, so I am surprised that he is raising the issue today. I notified on Friday that I would be continuing the line that I had taken on the first Committee day.

Amendments 143 and 144 not moved.

Clauses 27 and 28 agreed.

Amendment 144A

Moved by

144A: After Clause 28, insert the following new Clause— “Appointed representatives: impact assessment(1) Before any provision of this Act relating to the appointed representatives regime comes into force, the FCA must conduct and publish an impact assessment of the effect of those provisions on—(a) the number of principal firms choosing to maintain appointed representative relationships,(b) the total number of appointed representatives operating in the United Kingdom,(c) consumer access to regulated financial advice, with particular reference to consumers with modest investable assets who may be dependent on appointed representatives as their primary source of regulated financial advice, and(d) the viability of smaller principal firms for whom the costs of compliance with the new senior manager function requirement for appointed representative oversight may be disproportionate relative to the revenue derived from appointed representative relationships.(2) The impact assessment required under subsection (1) must—(a) have regard to the existing contraction of the appointed representatives population,(b) include a quantitative assessment of the likely further reduction in appointed representative numbers attributable to the provisions of this Act, and(c) assess the consequent effect on the availability and accessibility of regulated financial advice to retail consumers.(3) If the impact assessment concludes that the provisions of this Act are likely to result in a material reduction in consumer access to regulated financial advice, the FCA must publish proposals for mitigating measures before those provisions come into force.”Member’s explanatory statement This amendment calls for an impact assessment to ensure that the measures in this Act do not lead to a large drop in the number of appointed representatives who often provide services to smaller clients thereby promoting financial inclusion.

Lord Massey of Hampstead (Con)My Lords, I should again declare my interest as chairman of Canaccord Genuity Wealth Management, as set out in the register of interests, although I should also state that Canaccord has no appointed representatives, which is the subject of this amendment.

I do not oppose these reforms in principle, although we should recognise that in Clauses 24 to 28 and in other measures we are adding significantly to the regulatory burden of member firms. It can certainly be argued that there is a case for greater oversight of appointed reps, as too many principal firms have historically taken a light-touch approach to supervising the firms acting in their name. Where that has gone wrong, consumers have borne the cost. However, regulation of this kind is always a question of balance, and my purpose in moving this amendment is to ask whether the Bill has struck that balance correctly.

By way of background, this part of the financial sector, affecting mostly retail clients, is surprisingly large, and its fortunes bear directly on financial inclusion, a subject on which the Committee shares a common concern, mindful, as we all are, of the advice gap. The numbers are meaningful. There are approximately 34,000 appointed representatives, according to the FCA, and they generate £11.1 billion in regulated revenue and a further £27 billion in non-regulated financial services revenue, so some £38 billion in total is running through this part of the market. The number of appointed reps fell by 12% in the 3.5 years from 2022 to 2025, but there was a more pronounced fall in the numbers of principal firms—that is, those that appoint representatives. That population has fallen by 26% over the same period, so we are seeing quite a decline in participation in this space.

Why does that matter? Appointed reps are overwhelmingly small firms, often sole traders, regionally based, who work closely with smaller clients. They cannot afford the administrative and compliance burdens of larger firms, hence the need to operate under their regulatory umbrella. They are a significant channel through which smaller clients can access the markets and receive highly personalised service and advice. I am not sure we want this part of the business to be under threat of more serious decline as an unintended consequence of some provisions in the Bill.

Clause 24 introduces a new discretionary FCA gateway before a firm may act as a principal at all. Principal firms will now have to seek specific approval to have appointed reps, and if they enter the business—this is an important point—the FCA can remove their permission at its discretion for vague reasons. Alongside that, the FCA will gain the power to create a bespoke senior management function specifically for AR oversight, layering on a new form of personal regulatory liability to firms taking on ARs. ARs will now be brought into scope of SMCR and will therefore be subject to misconduct rules, so principal firms will have to carry out fit-and-proper tests on ARs, as they do now for their own employees. Furthermore, the compulsory jurisdiction of the FOS is now extended to ARs, which means that principal firms will be held responsible for complaints against ARs in most circumstances. These are significant new duties that represent potential liability risk and a lot of additional cost to principal firms.

We should bear in mind that some of these principal firms are not large organisations, and they may find these new exposures quite onerous, which in turn might render the economic risk-reward of having ARs less attractive. Overall, the clear direction of travel here is to have fewer but larger principal firms. Indeed, this might be the FCA’s agenda for this part of the business.

Amendment 144A calls for the FCA to look before it leaps. It calls for an assessment of the impact of the new rules on the number of principal firms, the number of appointed reps and, most importantly, consumer access to advice, particularly for those on modest means, and the viability of smaller principal firms.

I am not necessarily asking the Government to reverse course, but these measures represent a significant increase in regulatory burden and there is no getting away from that. I am asking for the regulator to measure the impact of what it is doing before the provisions take effect, and to bring forward mitigating proposals if the impact on consumer access turns out to be material. Given that the FCA’s own data already show a firm population in genuine retreat and the implications for the advice gap, this seems to be a modest, proportionate and uncontroversial request. I beg to move.

Baroness Lawlor (Con)My Lords, I will say a few words in support of my noble friend Lord Massey’s amendment. We should not forget that many of these small firms coming into the market are to be valued in Britain’s highly competitive industry—until there was too much regulation, perhaps—and we rely on them. They are what distinguishes the UK’s financial services historically. From the 16th century on, the growth of financial services and the City of London depended on small people coming together to provide for a niche in the market that people wanted.

If we continue to put too much burden on these small firms, they will not emerge. We have heard from my noble friend Lord Massey how important they are, sometimes locally. They are small firms which meet a need, so it is a very good idea to have an impact assessment of what the costs will be for ARs before the law comes into operation, for the competitiveness of the UK’s sector.

Lord Reay (Con)My Lords, we support the questions that this probing amendment is asking. My noble friend Lord Massey of Hampstead has put forward a sensible and important amendment, because it asks the Government and the FCA to consider the practical effects of the Bill’s changes on appointed representatives before those changes are brought into force.

This model is used widely across financial advice, mortgage broking, insurance distribution, wealth management and consumer credit. It is particularly important for smaller advisory businesses which may not have the scale, resources or compliance infrastructure to seek direct FCA authorisation themselves. There are good reasons why businesses use this model. It can reduce regulatory costs, allow faster market entry and give smaller firms access to compliance expertise, training and regulatory support. It can also allow advisers to spend more time serving clients, rather than navigating the full cost and complexity of direct authorisation. That has real consumer benefits.

Many appointed representatives are small local firms or regional advisory practices. They often serve clients who may have more modest assets and need mortgage advice, pension advice, insurance advice or investment guidance, but who may not be attractive to larger firms focused on wealthier clients, so we should be careful. If the effect of the Bill is that principal firms face significantly higher costs or liabilities, some may reduce their appointed representative networks or withdraw from the model altogether. That could mean fewer advisers, less competition, less local provision and reduced access to financial advice, particularly for retail customers with smaller portfolios or less complex needs. That is the concern which Amendment 144A seeks to test.

That assessment would consider the number of principal firms likely to continue AR relationships, the overall number of appointed representatives, the effect on consumer access to regulated financial advice, and the impact on smaller principal firms, whose compliance costs may be disproportionate. That seems to me to be a reasonable thing to ask. The policy objective should be to improve standards and reduce harm, without undermining a model that supports competition, market entry and access to advice.

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The wider issue is one we have discussed repeatedly in Committeeregulation can have unintended consequences. Measures designed to improve consumer protection can, if not carefully calibrated, reduce consumer access. Measures designed to increase accountability can increase costs in a way that drives smaller firms out of the market. We must make sure that the cure does not create a new problem. I would therefore be grateful if the Minister could provide clarity on this point.

Lord Stockwood (Lab)My Lords, I am grateful to the noble Lord for raising the importance of ensuring that measures to make the appointed representatives regime safer do not undermine the benefits provided by that regime. This amendment would require the FCA to publish an impact assessment before the measures can take effect.

I am happy to assure noble Lords that the measures have already been assessed as part of the impact assessment completed for the Bill. That concluded that the measures for appointed representatives should result in a net benefit of £108 million over the next 10 years. Before implementation, the FCA will also need to publish proposals for new rules, including on the approach to bringing appointed representatives within the senior managers and certification regime. FSMA already requires the FCA to publish a cost-benefit analysis when it proposes new rules; this analysis may be scrutinised by the independent cost-benefit analysis panel to ensure that it accurately captures the costs and benefits that are likely to result.

I also want to provide some reassurance on the introduction of the senior management function within principal firms responsible for overseeing appointed representatives. The FCA will have the flexibility to apply the senior management function in a proportionate way; it will not be obliged to require this of every principal firm, and may judge that it is not proportionate for smaller principal firms.

The Government share the objective of ensuring that we have a safer regime that does not undermine the benefits provided by appointed representatives. That is why the approach to implementation is designed to minimise disruption and cost to firms, and will be subject to further consultation and cost-benefit analysis by the FCA. I therefore ask the noble Lord to withdraw his amendment.

Lord Massey of Hampstead (Con)I thank the Minister for his response and take reassurance that some of the measures that I raised have been dealt with already by the FCA, as it has—hopefully—assessed the impact of these quite significant changes, which, as I mentioned at the beginning, do add to regulation, rather than taking away from regulation. I also thank my noble friends for supporting this amendment. I beg leave to withdraw the amendment.

Amendment 144A withdrawn.

Clause 29Temporary Part 4A permission

Amendment 145

Tabled by

145: 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 this clause).

Lord Stockwood (Lab)I beg to move.

Baroness Noakes (Con)Not content.

Lord Wilson of Sedgefield (Lab)Can I just ask the noble Baroness, Lady Noakes, on that basis—parliamentary counsel has advised that these are technical amendments, and therefore that Peers’ letters do not need to be sent out—does she not agree with the parliamentary counsel?

Baroness Noakes (Con)I am merely keeping to what I said on the first Committee day.

Amendment 145 not moved.

Clause 29 agreed.

Clauses 30 and 31 agreed.

Amendment 146

Moved by

146: After Clause 31, insert the following new Clause— “Review of notification arrangements for previously approved senior managers(1) Within 12 months of the day on which this Act is passed, the Treasury must lay before Parliament a report on whether the new notification framework for senior manager appointments could be used in cases where an individual has already been approved for the same or a similar function, including within the same group.(2) In preparing a report under subsection (1), the Treasury must consult—(a) the Financial Conduct Authority,(b) the Prudential Regulation Authority, and(c) such other persons as the Treasury considers appropriate.(3) The Treasury must publish the report.”Member’s explanatory statement This probing amendment would require a review of whether the new notification framework for senior manager appointments could be used in cases where an individual has already been approved for the same or a similar function, including within the same group.

Baroness Neville-Rolfe (Con)My Lords, Amendment 146, in my name and that of my noble friend Lord Altrincham, is a modest and probing amendment. It follows the discussion we had last week on speeding up the senior management and certification regime. It does not seek to change the regime immediately. It would require the Treasury to carry out a review and publish a report within 12 months on whether the new notification framework for senior manager appointments could be used where an individual had already been approved for the same or a similar function, including within the same corporate group.

The amendment echoes my noble friend Lord Howard of Rising’s amendment on a fast-track authorisation process for applicants who have been authorised before, but it would look at how that was working in practice a year after the Act came into effect. The Minister gave a hint that he was sympathetic to my noble friend Lord Howard and would be talking to the FCA about this, so I am hoping we can make some progress on this amendment.

We have heard from the industry that there are several problems with the SMCR regime. One concern is that the regime was originally intended to apply to a relatively limited number of senior people within a firm. Over time, however, roles have become more complicated, responsibilities have overlapped and some organisations have ended up needing a much larger number of people to receive SMCR approval. Regulation should not make legitimate business harder to do and should not slow down sensible appointments where there is no obvious additional risk, yet that is too often the practical effect of the regime as it stands.

The specific issue is what has sometimes been described as SMCR passporting. Where an individual has already been approved, has a strong regulatory track record and is moving into a genuinely comparable role, it seems sensible to explore whether a streamlined notification process could be used. That would have several advantages: it would reduce duplication, it could speed up appointments, it could reduce costs to firms, it could make it easier for groups to move experienced people into appropriate roles and it could allow regulators to focus their resources on genuinely new, higher-risk or more complex appointments. That is the point of the amendment. It does not prescribe the answer. It asks the Treasury to review the position, consult the FCA and the PRA and other relevant parties and report back to Parliament.

If we want the UK to have a regulatory system that supports growth and competitiveness, we need an approval process that is rigorous but also efficient. We should not require firms to repeat the same process unnecessarily where the regulator has already assessed the individual and where the new role is substantially comparable. I would therefore be grateful if the Minister could give us some reassurance on this important matter and agree that an ex post review could be a helpful way of ensuring the direction of travel that I know we both want. I beg to move.

Baroness Kramer (LD)My Lords, I am always in favour of trying to provide streamlining, and this amendment offers a common-sense approach to that. However, an issue that I want to take up with the noble Baroness, Lady Neville-Rolfe, is that the focus of the FCA should always be on new hires, not previous ones. The ongoing fit and proper process is crucial, particularly if we are going to have lighter-touch regulation as people move from one position to another, but that ongoing process is critical. Perhaps the Minister could expand on that because I am not quite clear about how all the various changes in FCA rules change what has been an annual review process but now gives more flexibility in what that means.

I shall give some examples. I am not sure that when Sir Fred Goodwin—he was not “Sir” then, obviously—was appointed as chief executive of RBS anyone recognised that he was going to get caught up in what I think most people would describe as an addiction to completely irrational acquisitions, which eventually led to the collapse of a major bank. I am not sure that when Jes Staley was hired to be CEO of Barclays people were aware of the significance of his extensive involvement with Epstein. I am not sure that when the Reverend Paul Flowers was approved as chairman of the Co-operative Bank people were conscious that he was potentially someone who would become seriously addicted to and affected by a number of drugs, notably crystal meth. In other words, there is an ongoing process that is critical; it should not be only a one-time process. I hope that will be absorbed into the thinking if this amendment moves forward. The ongoing process is vital. Fit and proper is not a one-time-only process.

Lord Massey of Hampstead (Con)My Lords, I rise quickly to support this amendment, which is exactly the sort of streamlining amendment we are looking to achieve in this Bill. I politely take issue with the remarks of the noble Baroness, Lady Kramer, on people such as Fred Goodwin, Jes Staley or the Reverend Flowers. The FCA would not have picked up those problems; they all emerged much later. We should give credit to member firms for being able to judge who they should be hiring. If they are already licensed, why would notification not be sufficient?

Lord Stockwood (Lab)My Lords, I am grateful to the noble Baroness, Lady Neville-Rolfe, for tabling this amendment. The Government agree that the regime should operate more proportionately where that can be done without undermining accountability—in fact, that is what the Bill aims to do. The core objective of these reforms is to reduce unnecessary regulatory and administrative burdens for firms, while preserving the accountability standards that underpin the regime. The changes will help to deliver the Government’s and the regulators’ ambition to reduce burdens from this regime by 50%, while retaining its core benefits.

As set out in the impact assessment for the Bill, the reforms to this regime alone are expected to reduce administrative burdens on the sector almost £600 million over 10 years. The Bill is already speeding up the target for the regulators to make these decisions. As I said in the debate last Wednesday, in Q4 of 2025-26, 50% of senior manager cases were determined within 19 days and over 99% were determined within the new target of two months.

The Bill moves to a more flexible system, led by regulators. Rather than requiring pre-approval for all senior managers, it allows the FCA and PRA to decide which senior management functions require approval and which can simply be notified to the regulators. The regulators will not take this decision without direction. Schedule 3 sets out the factors the regulators may use when designing the notification approach. These include whether an individual has previously been approved for a different role. The detailed operation of the new framework will be taken forward by the regulators through their rules, which are already subject to the statutory consultation and parliamentary scrutiny mechanisms. The regulators already operate a proportionate application process for individuals applying for a similar senior manager function to the one they are already approved for, including when within the same group. This usually allows for a faster and more targeted assessment.

I note the question from the noble Baroness, Lady Kramer. I will pick that up with the FCA. The continued accreditation assessment of senior managers needs to be something that is reported back on; she makes an important point about that.

Finally, I assure the noble Baroness, Lady Neville-Rolfe, that the Government will continue to engage closely with the regulators as they implement these changes, to ensure that the regime operates as intended and delivers a more proportionate approach in practice. I therefore ask her to withdraw the amendment.

Baroness Neville-Rolfe (Con)My Lords, I am grateful to my noble friend Lord Massey for his support and to the Minister for his assurance that administrative burdens will be reduced by these changes. Of course, quite a lot of that is down to the dropping of the certification regime, which we have welcomed. Individual cases can make for bad rules. I think Fred Goodwin was approved—or not approved—before the SMCR regime came in. I am confident that our regulators learn from their mistakes in these matters of appointments; that is one of the features of having a proper, professional regulator. But I remain concerned that the system can still create delay and duplication. Delays affect hiring, promotion, succession planning, business continuity and the ability of firms to operate effectively in a sector where we are trying to support growth and competitiveness. I cannot emphasise that point often enough.

I hope that the Government will continue to look seriously at whether there is scope for some form of SMCR passporting or a more streamlined notification process in cases where a person has already been approved, has a good regulatory track record and is moving to a similar role. I and my noble friend Lord Howard of Rising would like to see progress before Report, ideally in a form that makes my proposal for a review redundant, but for now I beg leave to withdraw the amendment.

Amendment 146 withdrawn.

Schedule 3 agreed.

Clause 32 agreed.

Clause 33Requests for conditions or time-limited approvals

Amendments 147 to 150 not moved.

Clause 33 agreed.

Clauses 34 to 36 agreed.

Amendment 151 not moved.

18:45:00

Clause 37Overseas recognition regimes

Amendment 152

Moved by

152: Clause 37, page 43, line 10, leave out “section 408A” and insert “sections 408A or 408B” Member’s explanatory statement This amendment requires the Treasury to consult the regulators about regulations which designate countries or territories for recognition.

Baroness Noakes (Con)My Lords, in moving this amendment, I will speak also to Amendment 153 and the Clause 37 stand part notice.

I am instinctively suspicious of Clause 37 because I think that the best people to judge whether overseas financial services firms should be able to operate in the UK, and to determine the terms on which they operate, are the regulators. The Bill hands major judgments to the Treasury, which means that they are likely, at least in part, to be political judgments. Although new Section 408A requires the Treasury to have regard to various things, that list is not exclusive, so there is nothing to stop the Treasury taking into account factors other than those listed in new subsection (2). Decisions could be made, for example, in pursuit of foreign policy aims against a wider background of international relations in relation to the EU reset. Financial services could also be traded away in the context of international trade agreements. Even if the Treasury sticks with the list of “have regards” in new subsection (2), that subsection has no hierarchy of criteria. Financial stability is on a par with international competitiveness and growth.

This is in stark contrast to the regulators, where international competitiveness, growth and competition are secondary objectives that cannot override their core objectives. I fully support the Government’s quest for economic growth and the pursuit of international trade agreements but, under new Section 408A, the Treasury could set aside any concerns about the integrity and stability of the UK’s financial system because it favours facilitating international competitiveness and growth. Is this really what the Government are trying to enable?

We know that some countries, such as China, seem to have technical compliance with many international financial services standards although, in practice, the degree of state control and the weakness of local regulators leave a lot of questions to be answered about the organisations in their financial services sectors. We know that the Treasury wants more trade with China. Will it let Chinese financial services firms freely into the UK in order to facilitate that? How will the Treasury ensure that it gets a good deal for British financial services firms? Some countries, such as India, give the appearance of allowing foreign firms to operate in them. However, in practice, India places many hurdles in their way, and many organisations give up the struggle after a while. Does the Treasury really have the granular understanding of what is happening in these countries? My own view is that it would be dangerous to let the Treasury loose on this area, and that the independent financial services regulators are the best people to determine who can operate in the UK and on what terms. This is why I oppose Clause 37 standing part of the Bill. However, I have heard from some in the City that they welcome this new overseas recognition regime, because the regulators do not prioritise negotiations with their foreign counterparts and there is little faith that they ever will. That has a ring of truth to it. The FCA has far too many other things to do, and the Bank and the PRA are exceedingly cautious. For that reason, I have tabled Amendments 152 and 153 in order to emphasise the important role that the regulator should have in the process.

Amendment 152 would add a requirement for the Treasury to consult the regulators when it uses the power under Section 408B. As currently drafted, the Treasury has to consult the regulators only if it exercises the power to recognise overseas firms to operate in the UK under Section 408A. The Treasury does not have to consult the regulators if it uses the Section 408B power to recognise overseas territories. My amendment poses the question: why not? The regulators are likely to know more about financial services and regulation in the overseas countries than the Treasury.

Amendment 153 is aimed at improving the information given to Parliament when the Treasury brings forward regulations to use these new powers. It would require the Treasury to publish any information or advice received from the regulators in connection with the use of the powers. As I mentioned, the Bill requires the Treasury to consult the regulators on only one of the two powers, but then the Treasury could completely ignore the information or advice that it receives from the regulators and Parliament would be none the wiser. This should be more transparent. The Treasury must be prepared to say why it has ignored or overridden the advice that is received, if that is indeed the case. It must therefore be prepared to share any relevant information with Parliament.

We all know that secondary legislation processes give Parliament no effective power over the Executive. That does not mean, however, that Parliament can be ignored. I believe it is necessary to force a bit of daylight into the process and not tolerate the suppression of relevant information from Parliament. Consistent with the stance I have taken throughout this Committee, if the Minister wishes to move his Amendment 154, I shall call, “Not content”. I think even the noble Lord, Lord Wilson, will accept that this amendment is not a small technical amendment.

I had hoped that the Treasury would have organised an all-Peers letter by now. It has had two weeks to do so since I first raised the issue. I was informed on Friday that the Government think it is okay just to write to the Front Benches on some government amendments. Since I was the only Peer who had tabled amendments in relation to Clause 37, I believe it was, at a minimum, discourteous not to have written to me at the same time.

I do, however, stick to my broader point that the whole House should be informed. The scrutiny of Bills is not something that belongs in a cosy club of Front-Benchers. Someone needs to stand up for Back-Benchers and that is what I am doing in this Bill. I beg to move.

Lord Vaux of Harrowden (CB)My Lords, I will be very brief. I am sympathetic to ensuring that the overseas recognition regulations are as pragmatic and seamless as they can be to enable easier international competition. But I have quite a lot of sympathy with the comments of the noble Baroness, Lady Noakes, about giving these powers exclusively to the Treasury.

I want to ask one question of the Minister. New Section 408A(2) sets out a list of areas that

“the Treasury must have regard to the importance of”

when making regulations. As an aside, that is quite odd wording; normally it is “have regard to”. I am still not sure I understand what difference

“must have regard to the importance of”

makes to the meaning. Maybe the Minister might explain that. New Section 408(1) does something similar but in a slightly different way. It seems that one area is missing from the lists of “have regards”: the question of economic crime, particularly anti-money laundering and the transparency of ownership in the relevant jurisdictions. Can the Minister say whether he agrees that those are important and explain why they might be missing from the list?

I will just finish with something I should have said earlier today, given that I think we are finishing early and the Minister is going to get some of his evening back: I wish him a happy birthday.

Baroness Lawlor (Con)I endorse the concern of the noble Baroness, Lady Noakes, about the political pressure that the Treasury will be under to recognise certain countries. Without adequate scrutiny, wider advice and deep analysis, the problem of overleveraging in some banking systems, despite them appearing perfectly respectable, would expose the UK and its financial sector to the dangers of debt and contamination.

I therefore have doubts about the economic implications of the Treasury making these calls on account of political reasons. We see this all the time, whether on international agreements—I sit on that committee—or on European affairs, whose committee I previously sat on. There is constant pressure by Governments to sign treaties that are rather bad for the UK and its various sectors, including financial services. I would have concerns if there were no adequate scrutiny and no proper advice taken on whether such recognition is a good thing for our systems.

Baroness Kramer (LD)My Lords, I will speak briefly. As the Committee will know, I have expressed before my concern about heading towards a lowest common denominator. The constraints on the engagement of the regulator and Parliament in a process of recognition of overseas regimes is crucial. It provides transparency and challenge, both of which are constantly necessary. So these are well-drafted amendments from the noble Baroness, Lady Noakes.

I want to go a little further. The noble Lord, Lord Holmes of Richmond, is not in his place, but he has tabled Amendment 164D, which would go further in seeking to instruct the Secretary of State to establish memoranda of understanding with a whole series of regulatory authorities. I have significant concerns about that, without the same set of constraints. We must be aware that, at the moment, there is fragmentation in the world in which we are living. International agreements are often treated as “pick and mix”. I object when we do that in the UK, but it is certainly a behaviour that we are watching in the United States at all times. We can see it with the development of AI and the various steps that the White House is taking. It is hard to work out whether or not it will go for AI licensing. A memorandum of understanding that passively accepted whatever the United States decided was the appropriate standard would trouble me hugely.

This is a very good set of amendments. Although the noble Baroness, Lady Noakes, and I often take very different positions on regulation and the primacy of financial stability, in this instance, she is absolutely right. There is nothing more troubling than reading all three objectives be put on a par. That has been my great fear. Anyone looking back on what happened in the 2008 crash will see that a focus on competition and growth without any focus on financial stability led to a crisis that I suspect nobody in this Room wishes to see again.

Baroness Neville-Rolfe (Con)My Lords, as this is the last group, I too wish the Minister a very happy birthday. He will be glad to know that, on this side, we think this is an important part of the Bill. The overseas recognition regime, which would replace the arrangements put in place as we left the EU, could provide a valuable mechanism for recognising overseas regulatory regimes and allowing certain firms, services or market infrastructure from other jurisdictions to access the UK market without having to duplicate regulatory requirements unnecessarily.

19:00:00

However, as has been said, recognition decisions can be very significant. They can affect financial stability, market integrity and the competitiveness of UK markets. They involve judgments about the quality, reliability and effectiveness of another jurisdiction’s regulatory and supervisory framework. They require knowledge of other countries and regulatory regimes, and the nature of negotiating with other countries, whether it is India or the EU—which is tough to negotiate with, as I know from 40 years’ experience. That is why I welcome the amendments tabled by my noble friend Lady Noakes. Once again, they speak to the important point about ensuring that there is proper oversight of the regulations that give effect to these policies.

Amendment 152, which would require the Treasury to consult the regulators before making regulations designating a country or territory for recognition, seems a sensible safeguard. The FCA, the PRA and the Bank of England will often be best placed to assess whether an overseas regime is genuinely comparable, whether the supervisory arrangements are robust and whether recognition could pose any risks to UK markets or consumers.

Amendment 153 raises a related transparency point. I agree with my noble friend Lady Noakes and the noble Baroness, Lady Kramer, that, if the Treasury receives advice or information from the regulators, Parliament should be able to see that material when considering the relevant regulations. That would allow noble Lords and Members in the other place to understand the basis on which a recognition decision has been made. Like my noble friend, I would welcome clarity from the Minister about how the regulators will be involved in the process and how he proposes to respond to the concerns raised by the noble Lord, Lord Vaux, and my noble friend Lady Lawlor.

I will also say a word about Amendment 154, tabled by the Minister. We initially had some concerns about this amendment, but I now understand that the intention is, in essence, transitional and consolidating: to allow existing recognition arrangements to be brought within the new overseas recognition regime, where doing so does not materially change the legal effect. The Minister will wish to respond to the concerns of my noble friend Lady Noakes about process, particularly given her position as chair of the committee. My own view is that courtesy is a good principle.

The noble Baroness, Lady Kramer, mentioned the amendment in the name of the noble Lord, Lord Holmes, who is not here to speak to it. He is seeking to encourage cross-border co-operation, particularly for digital. I have to say that I will take some convincing that this amendment is proportionate, but I look forward to a fuller discussion on these digital issues on Wednesday, when we will have a group of amendments. The considerations behind his amendment are probably more relevant to that discussion, in any event.

Finally, the overseas recognition regime could be a useful and important part of the UK’s financial services framework, but if it is to command confidence, it must be supported by regulatory expertise and parliamentary scrutiny. For that reason, I hope the Minister will engage constructively with the amendments in this group.

Lord Stockwood (Lab)My Lords, I thank noble Lords for their warm regards. The fact that this is the most attractive way to spend my birthday probably tells them something about how my life has changed in the past 11 months. I will turn first to Clause 37 and explain why it should stand part of the Bill. I will then cover the amendments, including the government amendment.

The UK is a truly global financial services hub. We are the largest global net exporter of financial services, totalling £103 billion in 2025, representing half of the UK’s services export surplus. Excluding the US, UK financial services exports in 2025 were greater than those of the rest of the G7 combined. Different counties have different rules for the same financial activities. As such, many countries have frameworks to recognise where rules are comparable to their own. For example, the EU has equivalence regimes, and the US has comparability determinations.

At EU exit, the UK assimilated more than 270 EU equivalence decisions across 40 EU equivalence regimes. However, the UK has no way to grant these kinds of decisions except where we have inherited that power from the EU. In new areas of regulation, such as stablecoins, the Treasury currently has no ability to create recognition regimes nor, consequently, to recognise overseas jurisdictions where they have high standards and our firms want to do business.

Clause 37 enables the Treasury to make new overseas recognition regimes. Creating these regimes is done through the affirmative procedure, meaning that no regime can be created without debate in Parliament. Designation under those regimes must then be made by regulations, with the evidence base clearly set out before Parliament each time.

A number of noble Lords, including the noble Baroness, Lady Noakes, and the noble Lord, Lord Vaux, asked me how the “have regards” that the Government must consider will function, and why they have been drafted in the way they have. I have been told that this is a complex piece of drafting, so I will write to them to explain the “have regards” in more detail and why the Government have taken the approach that we have.

Turning to the amendments, there are established processes in place that support the creation and operation of recognition regimes. I assure noble Lords that the points raised in Amendments 152 and 153 speak to matters for which current processes already exist, which support clear and balanced scrutiny of these regimes. The Treasury will always, as part of its designation process, summarise the evidence that it has received and considered in relation to other jurisdictions and their regulatory frameworks. That includes advice received from the UK’s financial services regulators.

The Treasury published, in July last year, guidance on overseas recognition and a memorandum of understanding with the regulators detailing the role of regulatory advice in the decision-making process for recognition designations. Within those documents, the Treasury has already committed to seeking advice from the relevant regulators in all but exceptional circumstances.

On Amendment 164D, tabled by the noble Lord, Lord Holmes, and spoken to by others, the Government recognise the potential benefits of working towards recognition arrangements on crypto assets with compatible jurisdictions. As I have mentioned, this supports the case for the Treasury to have the powers in Clause 37. However, the Government have the tools they need to be able to respond appropriately to international regulatory developments to facilitate the UK’s access to global markets and vice versa, while ensuring that consumers are adequately protected. These tools include the powers in Clause 37 alongside the existing power to create mutual recognition agreements that was introduced in the Financial Services and Markets Act 2023.

I reassure the noble Lord, Lord Holmes, that this does not reflect any desire on the part of the Government to be insular in the development of crypto asset regulation. The UK continues to play an active role in the development of international standards for crypto assets, including through the financial stability board and the work of the International Organization of Securities Commissions. The Government also remain committed to working closely with international partners through multilateral fora on our approach to crypto assets. I turn now to the amendment in my name. When the Bill gains Royal Assent, there will already exist a number of overseas recognition regimes created using existing powers inherited from the EU. This amendment is a transitional provision that enables the Treasury to restate the existing regimes within the new overseas recognition regime framework. The power is narrowly framed; it can be applied only to regulations listed in a specific schedule to which the overseas recognition regimes are currently added once they are in force, and it can be used only to create substantially the same effect as the existing regulations. This is essentially a tidying-up exercise. Without this amendment, overseas recognition regimes created before and after Clause 37 comes into effect will be rooted in different legislation. As my noble friend Lord Wilson said, parliamentary counsel has agreed that this amendment is minor and technical. However, I understand that the noble Baroness, Lady Noakes, objects to this amendment, so I will not move it.

I thank noble Lords for this debate, and I hope that I have sufficiently explained the Government’s intentions. I ask the noble Baroness to withdraw her amendment.

Lord Vaux of Harrowden (CB)The Minister has not answered the question I asked about why the “have regards” do not include the economic crime issues of anti-money laundering and transparency of ownership. If he wants to write on that, that would be fine.

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

Baroness Noakes (Con)Before I decide what to do with my amendment, I ask the Minister—because I may not have been paying attention—whether he explained why there is a requirement to consult the regulators for powers under new Section 408A but not under new Section 408B.

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

Baroness Noakes (Con)The Minister is stacking up rather a lot of letters that need to be written.

I thank all noble Lords who have spoken in this debate. It raises important issues. The Minister said, in relation to consultation, that the Treasury would summarise the evidence. That is not the same as being transparent about the advice from regulators. Although I am quite happy for the Treasury to summarise most other evidence on any consultation it undertakes, I think the regulators are a special case here. However, I will read Hansard and consider what, if anything, I will do with this topic before Report. Before sitting down, I too add my birthday wishes to the Minister. I beg leave to withdraw the amendment.

Amendment 152 withdrawn.

Amendments 153 and 154 not moved.

Clause 37 agreed.

Clause 38 agreed.

Committee adjourned at 7.11 pm.