A vision to promote competition, innovation and growth but does it go far enough on financial inclusion, the environment, and the role of the regulators?

I have written before about the Financial Services and Markets Bill - an incredibly important piece of legislation currently before Parliament. The Bill is set to usher in the largest change to financial services in a generation.

It is a substantial bill, consisting of 20 separate measures and over 335 pages, which comes about after several Treasury consultations and years of dialogue with the City and trade bodies that represent the financial services industry. 

The Bill had a second reading in the House of Commons on the 7th September, the first opportunity for a substantial parliamentary debate on the new legislative proposals.

This Bill will bring stablecoins into payments legislation. Greater regulatory clarity around stablecoins can only be a good thing, providing better conditions for issuers and service providers to operate and grow in the UK.

The Economic Secretary to the Treasury, Richard Fuller MP, opened the debate by stating: “The Bill has a single vision: to tailor financial services regulation to the UK’s needs, to promote global competitiveness and innovation, and to contribute growth in our economy.”

He also set out five objectives of the Bill: to implement the outcomes of the future regulatory framework (FRF) review, to bolster the competitiveness of UK markets, to promote the UK’s leadership in the trading of global financial services, to harness the opportunities of innovative technologies in financial services, and to promote financial inclusion and consumer protection.

This initial objective, establishing the FRF and ‘sweeping away EU regulations’ has been characterised by some as a key Brexit opportunity, and described by the Rt Hon Rishi Sunak MP during the debate as a Bill that “delivers” on “what Brexit was all about.”

The FRF proposals are based on the model of regulation introduced by the Financial Services and Markets Act 2000 (FSMA) which delegates standard setting to independent regulators working within an overall policy framework set by government and Parliament. This model is intended to retain a “coherent, agile and internationally respected approach” and was reiterated by the Economic Secretary to the Treasury during the debate:

“Schedule 1 contains more than 200 instruments that will be repealed directly by the Bill. While in some cases these rules can simply be deleted, in many areas it is necessary to replace them with the appropriate rules for the UK, in our own domestic regulation. These instruments will therefore cease to have effect when the necessary secondary legislation and regulator rules to replace them have been put in place.”

We were lucky during the debate to benefit from contributions, not only from the ex-Chancellor of the Exchequer but also from the former Economic Secretary to the Treasury, John Glen MP, who had held that post for the last four and a half years and has been absolutely key in developing this Bill.

In commenting on the FRF he stressed: “We are not seeking to deviate from norms in other jurisdictions; what we are trying to do is right-size those rules for the UK.”

The current Economic Secretary to the Treasury also highlighted: “The Bill also delivers … the most urgent reforms to the markets in financial instruments directive (MIFID) framework, as identified through the wholesale markets review. It will do away with poorly designed and burdensome rules, such as the double volume cap and the share trading obligation, which will allow firms to access the most liquid markets and reduce costs for end investors.”

He also pointed out, “For the first time, the Prudential Regulatory Authority and the Financial Conduct Authority will be given new secondary objectives, as set out in clause 24, to facilitate growth and international competitiveness.”

The sections of the Bill dealing with crypto-assets and stablecoins are Clause 21 and schedule 6. This part of the Bill will, “extend existing payments legislation to include payments systems and service providers who use digital settlement assets that include forms of crypto-assets used for payments, such as stablecoin, backed by fiat currency. This brings such payments systems within the regulatory remit of the Bank of England and the payments system regulator, allowing for their supervision in relation to financial stability, promoting competition and encouraging innovation.

“To foster innovation, clauses 13 to 17 and schedule 4 enable the delivery of a financial markets infrastructure sandbox by next year, allowing firms to test the use of new and potentially transformative technologies and practices that underpin financial markets, such as distributed ledger technology.”

The final of the five objectives, to promote financial inclusion and consumer protection are covered in Clause 47 and schedule 8 of the Bill. The Minister drew attention to an amendment I tabled to the previous Financial Services Act that permits cashback without purchase. This Bill goes further in protecting access to cash and will give the FCA “the responsibility to ensure reasonable access to cash across the UK.”

The second reading is an important step in the legislative process in which MPs can identify areas of concern and seek clarification on particular issues. Despite warm words and generally widespread support from across the house, this final part of the Bill dealing with financial inclusion raised the majority of questions and concerns. Several MPs focused on the issue of access to cash, seeking reassurance that access to cash would be free, that ‘reasonable access’, would be carefully defined to cover distance, accessibility, include face to face banking services and also consider cash acceptance and cash infrastructure.

Unfortunately, the Minister could not reassure the House: “When I say “access to cash” I mean access to cash. My Honourable Friend raises the question of whether that access should be free; that is a matter to which we will return in Committee, but I cannot give him that assurance at this stage.”

My colleagues also raised the issue of Buy Now Pay Later (BNPL), the terrible situation facing ‘mortgage prisoners’, people trapped in high-cost mortgages, the need for more affordable credit and whether the FCA should have a ‘must have regard to financial inclusion duty.’ I have spent years campaigning on improving financial inclusion and have raised many of the same issues in Parliament.

Powerful arguments were also made about the environment. Caroline Lucas MP pointed out: “The Bill contains a new statutory objective on competitiveness and growth, which ranks those elements above the UK’s legally binding nature and climate targets. Given that a thriving economy depends on a thriving environment, will the Minister look at this again and consider introducing a climate-and-nature-specific statutory objective as well…?”

She went on to point out that we have “a real opportunity to be a green competitive financial centre.”

These are familiar arguments, similar to those myself and colleagues made in the UK Infrastructure Bank Bill debates recently when we pushed the government to be absolutely clear about how they would ensure that the bank invests in infrastructure that will tackle climate change as well as supporting economic growth. 

Concerns were raised about the regulators, particularly around power, accountability, and capability. In terms of accountability, questions were asked about whether the Henry VIII powers – passing power from Parliament to the executive (in this case regulators and Treasury) would lead to a lack of appropriate accountability for Parliament – Angela Eagle MP said she was worried about “the fact that a great deal of extra power will be given to the regulators and the Treasury.”  

John McDonnell MP was the most critical of the FCA stating that the FCA has been a “catastrophic failure.” He also pointed out that “40 bodies are regulating our finance sector in some way and there is a need for consolidation and to learn the lessons of experiences so far.”

Other concerns centred around greater action to prevent scams and improve fraud protection; for example, the suggestion by Damien Hinds MP that push payment scams and auto reimbursement should extend beyond banks to social media firms and tech companies.

Another bill just published – the Economic Crime and Corporate Transparency Bill – is designed to help crack down on fraud and other financial crime through reforms to information sharing and extending powers to deal with economic crime. The Bill proposes new intelligence gathering powers for law enforcement, reforms to Companies House and the rules around limited companies as well as additional powers to seize cryptoassets.

On the day after the debate the House of Commons Public Bill Committee published a call for written evidence. If you have relevant expertise and experience or a special interest in the Financial Services and Markets Bill, then I would urge you to be part of this process and write in. This Bill proposes an ambitious and much needed set of reforms that has the potential to assert the UK’s global leadership in financial services and be absolutely transformative for citizens, businesses, and UK Plc.