by Lord Chris Holmes of Richmond
The Financial Services and Markets Bill is an incredibly important piece of legislation currently before Parliament. When it was debated at second reading in the House of Commons on September 7, it was described as ‘the biggest reform of financial regulation in a generation’.
It is certainly a substantial bill, consisting of 20 separate measures and over 335 pages, and coming about after several Treasury consultations and years of dialogue with the City and the trade bodies that represent the financial services industry.
Of particular interest to readers of this publication will be the fact that 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 that “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, which involves reshaping our regulatory and legislative regime as an independent state outside the EU;
- to bolster the competitiveness of UK markets and promote the effective use of capital;
- 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 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“Schedule 1 contains more than 200 instruments that will be repealed directly by the Bill.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 that: “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 that “The Bill also delivers, through schedule 2, 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.”
“These changes will lower costs for firms and align our approach with that of other international financial centres such as the United States. To improve the smooth functioning of markets, we will introduce a senior managers and certification regime for key financial market infrastructure firms. We will expand the resolution regime for central counterparties to align with international standards and enhance the powers to manage insurers in financial distress.”
“Outside the EU, the UK is able to negotiate our own international trade agreements, including mutual recognition agreements—MRAs—in the area of financial services. The Government are currently negotiating an ambitious financial services MRA with Switzerland. Clause 23 enables the introduction of any necessary changes through secondary legislation to give effective to this and to any future financial services MRAs. Schedule 2 contains measures that enable the United Kingdom to recognise overseas jurisdictions that have equivalent regulatory systems for securitisations classed as simple, transparent, and standardised, allowing UK investors to diversify their portfolio while maintaining the level of protections they currently enjoy.”
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 permitted 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.”
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 by far the majority of questions and concerns.
Several MPs focussed 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 hon. 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 BNPL (Stella Creasy MP) Mortgage prisoners (Seema Malhotra MP) affordable credit and whether the FCA should have a ‘must have regard to financial inclusion duty.’ (Emma Hardy MP) I have spent many years campaigning on improving financial inclusion and have myself raised many of the same issues in Parliament.
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) the environment (green finance), Henry VIII powers (parliamentary scrutiny) and whether the regulators have the powers and fitness for purpose to deliver on the ambitious objectives of the Bill.
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.