My Lords, I rise to address these three significant pieces of legislation, which collectively aim to refine and enhance the regulation of our financial services sector. The measures come at a pivotal time for not only our financial services industry but the broader economy, as we navigate the challenges and opportunities presented by our post-Brexit regulatory autonomy.
My overall concern is that we are moving too slowly and too modestly to reduce the constraints that existed in the EU regime, and to encourage the competition and dynamism that we need for growth. This means that the US financial services industry and the industry in newer markets, such as Singapore, are eroding our prime position despite our dual advantage of time zone and the English language. Questions have been asked about the effectiveness of our stock market; indeed, that was highlighted today by the reaction to the Canal+ listing in London, which, obviously, we all welcomed. We look forward to debating the reforms announced in the Mansion House speech.
In the light of all this, the instruments demand careful scrutiny. I will also follow the sequence on the Order Paper. The first measure under consideration deals with the supervision and enforcement of designated activities. This legislation builds on the regulatory framework of the Financial Services and Markets Act 2000, empowering regulators to oversee specific activities that pose systemic or consumer risks. From our perspective, this is a necessary and prudent step. By focusing regulatory attention on designated activities rather than institutions alone, we can ensure that oversight remains targeted and proportionate.
Yet it is vital that this power is exercised judiciously. Overzealous enforcement could stifle innovation and deter smaller players and start-ups from entering the market at all. We would like to see a regulatory approach that provides clarity and certainty, enabling businesses to thrive while protecting consumers and market integrity. We also want to keep compliance costs down for business, especially smaller business. Historically, that has not always been the way of the financial regulators—nor, I am afraid to say, of the Treasury. Does the Minister agree that financial regulation should be more careful about the costs that it imposes? I know from the Mansion House speech that the Chancellor wants to be more competitive; I would like to see that reflected in financial regulation.
Incidentally, I was surprised to see this in paragraph 9.1 of the Explanatory Memorandum:
“The government does not generally assess successful enforcement action—such as fines levied after a breach of rules—as a cost to firms”.
From my experience, enforcement can be very costly to a firm: in legal fees, to fight any unfairness and possible reputational damage; in diversion of management time and talent; and in finding money from tight budgets for any fine. That is a good reason for a firm to comply with the established rules but it is also a reason for our regulators to work hard, in order to make compliance with the law easy, and not to judge themselves on the amount of fines they levy.
There is a related point on which I would very much welcome a response. The Minister may be aware of the huge concerns raised by the financial services sector about the FCA’s proposals earlier this year to name and shame firms involved in FCA enforcement action. It is consulting again, I am glad to say, on modified proposals. Can the Minister say whether the FCA intends to apply these new rules to the persons who are within the designated activities regime, which is at issue today, rather than, or as well as, the authorised persons regime? I know that the Chancellor, like her predecessor, has expressed concerns about naming and shaming. Clearly, we need to tread with great care in this area.
I look forward to hearing the answers to the questions from the noble Baroness, Lady Bowles of Berkhamsted, about tribunals and speed. I should like to say that her grasp of technical aspects of financial services law is extremely helpful to this Committee in the scrutiny of complex SIs such as these; we owe her a great deal. However, I have to say, I am not sure that I completely agree with her on FCA objectives, as I think that responsible growth and dynamism need also to come through in the way the FCA behaves.
That brings me to the second measure, which addresses short selling—an activity that has long been a point of contention in financial markets. Short selling, when responsibly undertaken, contributes to market liquidity and price discovery, as the Minister explained. Personally, I would have been more radical in moving away from the EU regulation, and perhaps in giving the FCA narrower rule-making powers. However, the proposed regulations seek to establish a robust framework for managing the risks of short selling while preserving its legitimate role, for example in times of crisis; I think that “exceptional circumstances” was the term the Minister used.
Moreover, on public disclosure, I welcome the move to a list of securities that are within the scope of the rules—this is in paragraph 5.11 of the second SI’s Explanatory Memorandum—rather than having a list of shares the FCA considered to be exempt. This will be clearer and easier. However, I urge the Government to ensure that the reporting and compliance burdens on market participants arising from this new instrument remain proportionate. Excessive red tape hinders the competitiveness of our financial markets, and I believe that we still have too much of it.
I say in response to the noble Baroness, Lady Kramer, that I, too, have learned a lot from history. She mentioned what I think she called “casino banking” but, as a former bank non-executive director—long after the financial crisis—I can vouch for the thoroughness of the checks that are made on personnel with responsibilities. My only concern is that this might be a less leisurely process because, obviously, personnel changes are often needed to run organisations well.
The third and final measure relates to amendments to the ring-fencing framework established in the wake of the global financial crisis. Ring-fencing was designed to protect retail banking operations from the risks associated with investment banking. Although this principle remains sound, the financial landscape has evolved considerably since the original provisions were enacted.
The proposed amendments rightly seek to introduce greater flexibility into the ring-fencing regime. This is a sensible response to changing market dynamics and the need for regulatory frameworks to evolve. Having said that, I think that increasing the limit from £25 billion to just £35 billion is timid, especially given recent inflation. Like the noble Baroness, Lady Kramer, I would like the Minister to remind the Grand Committee which of our banks will need to be ring-fenced going forward and to name some of those that will escape and be able to grow and diversify, both here and overseas, more easily.
In other respects, I say to the Minister and his officials that the Explanatory Memorandum and de minimis assessment on this instrument were very thorough and helpful.
As Conservatives, we understand the critical importance of maintaining the UK’s status as a global financial hub. This requires not only robust regulatory frameworks but a willingness to adapt and innovate in response to new challenges and opportunities, such as AI. I urge the Government to continue the processes of dealing with retained EU law and of engaging with industry stakeholders in order to ensure that domestic measures are implemented effectively and without unnecessary burdens or delays. In doing so, it should be possible to foster a competitive financial services sector that drives economic growth and innovation, creates jobs and enhances our nation’s global standing.