Long reads

The Westminster Series: Optimising the potential of the Financial Services and Markets Bill

Chris Holmes

Chris Holmes

Peer, House of Lords

I have written here before about the Financial Services and Markets Bill - the biggest reform of financial services in a generation. It is a huge opportunity. According to the Government the bill will:

  • implement the outcomes of the Future Regulatory Framework review (reshaping the UK’s regulatory and legislative regime as an independent state outside the EU),
  • bolster the competitiveness of UK markets and promote the effective use of capital,
  • promote the UK’s leadership in the trading of global financial services,
  • harness the opportunities of innovative technologies in financial services, and
  • promote financial inclusion and consumer protection.

I first wrote about the bill three Prime Ministers ago when it arrived in the House of Commons (in July last year), again following second reading of the Bill in the House of Commons (on Sept 7) and now to report back on the second reading debate in the House of Lords, in which I was delighted to take part. 

In the same period, we have been through a similar number of Economic Secretaries to the Treasury (responsible for the areas covered in the bill). Andrew Griffiths MP is the current incumbent, although John Glen MP who held the post in July is now Chief Secretary to the Treasury – which is good news.

The bill is substantial and contains 20 measures and more than 335 pages although my focus is on regulatory reform, fintech, crypto and finally, and most importantly, financial inclusion. One of the positive aspects is bringing digital assets into payments legislation. As I have said before, greater regulatory clarity in this area can only be a good thing, providing better conditions for issuers and service providers to operate and grow in the UK.

In her opening remarks the Minister, Baroness Penn, stated:

“The Bill takes steps to ensure that the regulatory framework facilitates the adoption of cutting-edge technologies in financial services. Clauses 21 and 22 and Schedule 6 extend existing payments legislation to include payment systems and service providers that use digital settlement assets, including forms of crypto assets used for payments, such as stablecoin backed by fiat currency. This brings such payment systems within the regulatory remits of the Bank of England and the Payment Systems Regulator. Clauses 65 and 8 clarify that the Treasury has the necessary powers to regulate crypto asset activities within the existing financial services framework, as extended by this Bill.”

We could debate the merits of the term ‘digital settlement assets’ although it is definitions that will be key and it is unequivocally positive that the Government is taking steps to regulate stablecoins, albeit in this part only as a medium of exchange.

The Bill does also make provision for going far wider and using secondary legislation to enable regulation for other digital and crypto assets. This is another area in which questions remain and the detail will be drawn out and fully dissected as the Bill makes its way through the committee stage, starting next week.

Generally, colleagues from all sides of the House welcomed these preliminary steps in regulating digital settlement assets, although many questioned the Minister about the Government’s strategic approach to crypto assets.

The Minister’s response reiterated that:

“We are committed to creating a regulatory environment in which firms can innovate while crucially maintaining financial stability and regulatory standards, so that people can use new technologies safely and reliably. We have already taken action in the area of crypto—for example, bringing it into the remit of the anti-money laundering regime and banning the sale of crypto asset derivatives to consumers. We are committed to consulting on a broader set of crypto assets, including those primarily used as a means of investment, such as bitcoin.”

The Minister also confirmed that the Royal Mint was working on the creation of a new NFT with an update in “due course”.

The IMF have pointed out that we are in an era of reimagining regulation as the only way to cope with fintech or big tech which blur and exploit the boundaries of regulation. We need agile principles and simple regulation.

We also need a lot from our regulators. Many colleagues wondered whether our regulators were up to the scale and difficulty of the job before them and whether this Bill provides them with the resources, authority, structure, framework, independence, and accountability to do what is needed in this space.

I am aware of complaints about how the regulator is operating at the moment. It cannot be the case that it takes nine months for an overseas CEO to be able to come over to work in our financial services. It cannot be that it takes over a year for a start-up business to get a licence to operate in this country.

We know how to get this right with regulators. We saw that in the first part of the 2010s with our approach to fintech, and with the sandbox and with GFIN, which came as result of that. There was no better measure of success from the sandbox, and no better KPI, than the fact that it has been replicated in well over 50 jurisdictions around the world.

That was all under Project Innovate; we need a second, third and fourth version of that project to drive forward all the opportunities which currently exist, combining common law, new technologies, and the potential geographic and historical benefits for London and the rest of the UK. As everybody in financial services knows, history is no guarantee of future success.

There is no more important aspect of financial services than financial inclusion. True financial inclusion matters not just for those who find themselves on the wrong side of it but for all of us – better communities, a healthier society. That is why I am pleased to see the access to cash clauses in the Bill. It is important because cash still matters - and it matters materially to millions.

Access to cash is but one part of this. The other side of the coin is acceptance of cash. If this Bill enshrines reasonable access to cash but doesn’t look at your right to spend it then it will be a one sided Bill indeed. With more and more businesses going cashless this is an area we must explore.

I asked the Minister if the Government thought it time to consider cash as critical national infrastructure, and not just for financial inclusion? In the current uncertain world in which we exist, if there were to be a serious and sustained cyberattack on our financial systems cash would provide a pretty robust first line of resilience.

Although I made several points about cash, it is just as important that we consider digital payments. The future is digital, but that future has to be inclusive for all—and the transition to that future has to be similarly inclusive. I firmly believe it is time to build on the work of the Access to Cash Review that the Government commissioned with a review of access to digital payments.

As you may be able to tell I will be bringing forward multiple amendments to the Bill in an effort to explore the issues raised above and improve the legislation. this is the most important financial services Bill in a generation. It has extraordinary potential and is an incredible opportunity to set a financial services and markets framework optimized to support Covid recovery, levelling up, enabling, and empowering.

Comments: (1)

Bob Lyddon
Bob Lyddon - Lyddon Consulting Services - Thames Ditton 19 January, 2023, 13:58Be the first to give this comment the thumbs up 0 likes

His Lordship reminds me of a Paul Whitehouse character from The Fast Show, the one for whom everything is brilliant. When he goes on holiday it’s ‘Flooding – yeah! Forest fire – brilliant! Tornado – fantastic!’, regardless of any damage done or of contradictions.

‘Fintech – yeah! Open Banking – brilliant! Crypto – fantastic!’.

His Lordship having been a major cheerleader for this stuff, it sits ill that His Lordship should overlook its detriments and also complain about access to cash, the inevitable victim of the developments he has championed. That is contradictory. Whilst cash is in reality a facilitator of financial inclusion, His Lordship infers that only digital products serve that objective.

Anyway, it must be obvious – and particularly to one who walks the corridors of power - that the government has done a deal with the banks: the banks must make their IT systems ready for the digital age and, to meet the cost, they are allowed to slash their branch and ATM networks.

The Bill's outcome will be to crystallize the environment for the resulting take-over by digital. His Lordship has helped to lay the groundwork for this outcome by cheerleading for digital; now the rest of us will be compelled to bear the consequences. Yeah! Fantastic! Brilliant!