The Financial Services and Markets Bill: after the Public Bills Committee

The Financial Services and Markets Bill had a busy few weeks. Each clause and schedule of the Bill and several suggested amendments and new clauses were debated in the Public Bills Committee in the Commons, as the Bill continued its legislative journey. Over 5 days' worth of sittings the Committee heard evidence from regulators, industry associations and experts, and discussed the wide range of proposals in the Bill. The Committee sitting ended on 3 November, and we now have a new version of the Bill for the Report stage. In this article we look at what was controversial and what wasn't, and what the Bill now looks like.

Highlights of evidence sessions

The first day, 19 October, comprised evidence sessions with invited witnesses. Key opinions expressed by the regulators, including Sir Jon Cunliffe of the Bank of England, Victoria Saporta of PRA, Sheldon Mills of FCA and Chris Helmsley of the PSR included:

• The need for regulatory independence: none of the regulators had seen the proposed Government amendment to intervene to require regulators to make, amend or revoke rules in matters of significant public interest, so could not comment in detail on it, but stressed that regulatory independence and operationally independent regulators need to be at the heart of the financial system. Martin Taylor, former external member of the FPC, said that the proposed intervention power is “a shockingly bad idea”
• How the ability for regulators to transpose retained EU law into UK law gives an opportunity to think in terms of what is needed for the UK financial services system, and the competitiveness objective gives a spur for regulators to think about growth and competitiveness in pursuing their primary objectives. Jon Cunliffe cited the "strong and simple" prudential framework for banking, which would not have been possible before Brexit
• The proposal for a specific “have regard” power in relation to financial inclusion. Sheldon Mills did not think was necessary given FCA’s existing remit and powers.

Highlights from other evidence included:

• Natalie Ceeney from the Cash Action Group and Martin Coppack of Fair by Design, who said the Bill should perhaps consider the need for face-to-face services and giving FCA powers, while Mr Coppack was critical that the Bill does not properly address the “poverty premium"
• representatives from the building society and credit union sectors, who were broadly pleased with what the Bill would bring them
• CIFAS, which noted that if a high limit for APP reimbursement was set, it not only provides protection for victims but effectively passes the losses onto the banks, making it easier in some ways for fraudsters to have no moral dilemmas about who they are stealing from.

The debates

The debates, which lasted for 8 sessions, started on 25 October. Each clause, with related scheduled and tabled amendments, was discussed. Andrew Griffith, Financial Secretary to the Treasury, explained the context for each proposal. Committee members then had the opportunity to ask questions, make representations or speak to amendments they had proposed. The Committee had grouped relevant clauses, schedules and amendments together for ease, and then all new clauses unrelated to a specific existing clause or issue were discussed in the last sitting.

Many of the proposals passed through the Committee with little discussion or debate, including:

• The proposed Designated Activities Regime (after the discussion discussed below)
• The proposed Designated Critical Third Parties Regime
• Regulatory principles and the net zero emissions target (although with some recognition that further action would also be needed)
• The financial promotions gateway
• Composition of regulatory panels
• Exercise of Bank of England powers in relation to Financial Market Infrastructure providers – taking on powers formerly held by EU institutions;
• Wholesale cash distribution
• Application of the Senior Managers and Certification Regime to Central Counterparties and Central Securities Depositories (and potentially in future to Recognised Investment Exchanges and Credit Rating Agencies)
• Expansion of the regimes to help Central Counterparties and insurers in financial difficulties
• Broadening the permitted activities of credit unions (with a note that perhaps the Bill does not go far enough)
• That the Chair of the PSR should be a member of the FCA Board
• An amendment to include a definition of “cryptoasset” within FSMA and allow for Treasury to amend it by statutory instrument, and to add cryptoassets to the financial promotion and regulated activity restrictions in appropriate places.

Some proposals were more controversial, and caused significant discussion and sometimes ultimate disagreement with members reserving their rights to raise issues at a later stage.

Regulatory independence and the Government intervention power

The rumoured Government intervention power was probably the most controversial proposal. The power would allow the Treasury to direct a regulator to make, amend or revoke rules where there are matters of significant public interest. Unfortunately, since the proposal was neither in the original Bill nor published before the Committee sitting, it was not possible to have a full debate. Even less satisfactorily, Andrew Griffith stated at the beginning of the proceedings that it should be available before the end of the Committee stage, but then had to announce that it would not. The letter from Andrew Griffith to Dame Angela Eagle of the Labour Party explaining that there will be a further delay states that the Government only ever intends this power to be used in extreme circumstances, but that it is right that it should have the power - and also that the power should be subject to appropriate safeguards. Mr Griffith said that the delay is because of the change in Prime Minister and the need for the government to consider the detail carefully.

In response, Dame Angela criticised the Government for not having introduced the power in the original Bill. She asked for confirmation that the power will be introduced in the House of Commons so MPs can examine it, and not left until the Lords, and also asked whether the Government will consult the regulators on it. She said the parliamentary process must also build in adequate time for the Committee to take evidence, scrutinise and table amendments to the power.

Legislative changes following Brexit

The principle that all remaining "onshored" EU legislation be revoked and replaced was accepted. However, several Committee members questioned the process, timing and controls over the changes, and how to strike the right balance. Peter Grant from the SNP proposed that Treasury should not be permitted to revoke any retained EU financial services laws if it would be prejudicial to the interests of consumers. He said his party was close to voting against the Bill in second reading because they do not believe that it will be possible, given the scale and speed of the process, to replace it with something at least as good. So he said Parliament should be given a choice as to whether the proposed replacement is suitable. Dame Angela Eagle said that the opposition does not have a problem with the principle of the repeals but is concerned about how the wide ranging power would work – given the experience of how long it took and how many mistakes were made in onshoring the EU legislation on Brexit. Tulip Siddiq for Labour welcomed the opportunity to tailor the laws but wondered how the end of 2023 deadline had been arrived at.

Andrew Griffith replied that the Government does not seek divergence for divergence’s sake, and that there is no arbitrary backstop date (which anyway is not in the Bill). He also noted that the Bill is giving regulators significant power, but that the sheer volume of laws means Parliament cannot always be the rule setter. He stressed that the approach being taken is that which is already in FSMA, and noted the Government’s proposal for a public interest intervention power. He did not see the need for the amendment proposed by Peter Grant, and it was voted against.

Andrew Griffith went on to explain how Treasury would modify EU law that it restates and how almost all changes will be subject to the "affirmative resolution" procedure in Parliament, which means they must be positively approved by both Houses of Parliament, rather than merely not opposed. He said the Government will have to act within the admittedly broad powers given in the Bill but said these are constrained by existing objectives, parliamentary scrutiny and in relation to retained EU law.

He further commented that the Bill is designed to achieve efficient transfer of regulation to regulatory rulebooks – and to exempt the regulators from the need to do a cost-benefit analysis when they are not making any real changes for firms.

Designated activities

The “designated activities” regime for market participants would effectively bring within the scope of regulation, but not within "regulated activities", various activities related to the UK financial markets or to financial instruments or products sold to or by persons in the UK. No-one would be able to carry on a prohibited designated activity, and anyone carrying on a designated activity not prohibited would have to comply with rules FCA will have the power to make. Andrew Griffith explained the purpose of the regime and discussed the regulatory powers relating to it – in particular that Treasury should be able to future-proof criminal law on offences under the regime, but could not create new offences. While the proposal was uncontroversial, Peter Grant proposed an amendment that would bring businesses that seek to raise finance from the general public otherwise than by share issue within the regime – although he said the issue might be more appropriately addressed in the Economic Crime and Corporate Transparency Bill. He said the aim is to stop businesses that on the face of it have a different purpose from effectively raising money for their directors. Andrew Griffith clarified that the amendment seeks to make it clear that non-equity security offers to retail investors can be covered by the regime, so it would extend to crowdfunding, and he assured Peter Grant that the changes to regulate offers of mini-bonds and similar products would address his concerns. Mr Grant did not agree but withdrew the proposed amendment.

The proposed Government amendment to include the power to regulate cryptoassets under the designated activities regime recognises the need to regulate beyond stablecoins. Andrew Griffith also clarified that the new Clause 14 tabled by the Government clarifies that cryptoassets would be brought within the regulated activities regime. 

Andrew Griffith later wrote to Dame Angela Eagle to follow up on questions she raised regarding the delegated powers in the Bill. In particular, Dame Angela raised the provisions which give Treasury the power to modify existing criminal offences, specifically in relation to the designated activities regime. In his letter, Mr Griffith confirmed what he had said in Committee, that these provisions do not give Treasury a power to create new criminal offences under the regime. He explained that the government will only be able to apply and modify, including by extending the scope of, criminal offences which already exist in FSMA, to the extent that they apply to the carrying on of the designated activity in question, but that this would not enable Treasury to create a wholly new criminal offence in relation to that activity.

Stablecoin regulation

The main question on the draft clause 21 came from Tulip Siddiq who queried why the proposed scope was so narrow and feared that the UK could become a centre for illicit activity without appropriate regulation. Andrew Griffith agreed, and said the proposal was only a start and the Government has committed to consult more widely before the end of the year. He confirmed his belief that the definition of “digital settlement assets” encompasses what it currently needs to.

A letter written by Andrew Griffith before the Committee stage started was later published, and this addresses the Government’s approach to regulating stablecoins. The letter explains that, for the time being, only stablecoins used for payment and backed by fiat currency will be regulated, and that the high volatility of other cryptoassets makes them unsuitable for payment. So the Treasury intends to consult on a “world-leading” regime for a wider set of cryptoassets, including those primarily used for investment, later this year. It also notes that it is likely that any future Central Bank Digital Currency (issued by a central bank, as opposed to stablecoins which are issued by a private issuer) would exist alongside cryptoassets and stablecoins. The Government and BoE are still deciding whether to introduce a CBDC in the UK and will also consult on that later this year;

Mr Griffith also wrote to Andrea Leadsom on how cryptoasset regulation interacts with fiat currency regulation. He explained that the immediate intention (as above) is to regulate stablecoins used for payment that are backed with fiat currency, and to regulated them in a similar way to other forms of payment. He also outlined plans for investor protection and greater regulation of cryptoasset promotions.

Mutual recognition agreements

Andrew Griffith explained the Bill aimed to allow changes to give effect to MRAs to be made through secondary legislation only, but assured the Committee that Parliament would have the usual powers to scrutinise any proposed instruments. Tulip Siddiq said that Labour supports the amendment but it was not clear how it would help to secure these important agreements. Members of the Committee then pressed to know when there would be an agreement with the EU. Andrew Griffith could not say, but noted he had just met his German counterpart. Dame Angela Eagle asked whether the Treasury Committee could have advance notice of negotiations, which was agreed to be a valid request.

Financial inclusion

In relation to Clause 29 (matters to consider when making rules), a set of proposed amendments to include specific mention of financial inclusion were discussed. Emma Hardy had tabled the amendments and noted that existing rules do not adequately take account of those that financial institutions do not want as customers. There was broad support for a version of “having regard to” financial inclusion. Dame Angela Eagle noted that previous attempts to create simple stakeholder products had not worked, because the industry did not want them to, and so there is a need for regulators to have regard to the needs of those who cannot access products. Emma Hardy commented that one of the unintended consequences of the Consumer Duty could be to make marginally profitable products unprofitable, thereby actually excluding more people from them. Andrew Griffith said the Government opposes the amendments, but that he himself was not willing to dismiss any of the arguments he had heard. The Committee was divided, but the amendment was not voted through.

Access to cash

Many Committee members spoke to their concerns for their constituencies, which included both rural and urban communities. In all cases, there was concern that both free access to cash and also access to deposit facilities should be maintained. Martin Docherty Hughes spoke to his proposed amendment, explaining the drop in ATMs in his constituency, meaning people from rural Scotland may have to go to Glasgow for cash, while businesses have nowhere to deposit cash they take. Shaun Bailey echoed this, and noted that for many people, also, paying for cash is unacceptable. Siobhan McDonagh also spoke to the necessity of access to free cash, noting that for customers who can only take out £10 per time, some machines are charging £2 to enable them to do this. She said she does not believe the FCA will force through free access unless the legislation tells it to. Tulip Siddiq felt the Bill went “nowhere near” far enough in ensuring cash is available for those who depend on it and said that is the key concern of those who have tabled amendments. She noted that the Bill would be undermined if it cannot legislate for free access and deposit for cash. Andrew Griffith, while agreeing with all the sentiment, said that up to now, there has been no substantive legislative framework for access to cash, so this is a major development. However, he said the Treasury would publish a policy statement “in due course” – when pressed, he said as soon as possible after the Bill is passed. He agreed it was essential for FCA to collect data. He urged that the Clause stand, without the many amendments proposed, the main reason being that nothing can happen before the Bill becomes law, and that the Government does not feel it is appropriate for legislation to stipulate that access to cash must be free as this may have unintended consequences and result in legislation that is too prescriptive. After some negotiation, and some acknowledgement by Andrew Griffith that perhaps FCA had come too late into intervention on bank branch closures, amendments were withdrawn and the original proposals agreed to.

A proposed amendment would have required Treasury and FCA to prepare a report on the state of access to essential in-person banking services in local communities, and for Treasury to provide an essential banking services policy statement within 6 months of the Act being passed. There was significant discussion, in which all parties broadly agreed, which ended in the withdrawal of the clause by Tulip Siddiq on the promise of later discussions.

Liability of Payment Service Providers for fraudulent transactions

The Bill would enable and require the PSR to take action to improve reimbursement of authorised push payment scam victims. The clause removes barriers that EU legislation had put on PSR powers and places a duty on it to take action in relation to Faster Payments in particular. Tulip Siddiq said the opposition fully supports the amendment but thinks the Government must go further on protecting against fraud. She also asked why the clause ignores the risks that EMIs and crypto firms pose. Emma Hardy noted the evidence from both Barclays and Which? that said similar powers should be given to PSR in respect of other schemes also. Andrew Griffith said he believed this was the case. After some heated debate as to whether Mr Griffith was saying the EU had prevented the UK from legislating against fraud, the Clause was agreed to.

Buy Now Pay Later (BNPL) regulation

Stella Creasy had proposed an amendment to require regulations on BNPL to be published within 28 days of the Act’s Royal Assent. Her proposal also said that these regulations would require FCA to regulate not only BNPL but also other lending services that have non-interest-bearing elements, and that all individuals accessing the services should have access to the Financial Ombudsman Service and be subject to pre-approval credit checks. Emma Hardy additionally proposed it should ensure individuals accessing the services would benefit from the protections of s75 Consumer Credit Act. Stella Creasy said that over 2 years since the debate over BNPL started, and over a year after the Government agreed to act, still nothing has been done. Tulip Siddiq pointed out that the Government’s consultation had concluded in June so the Bill was the perfect time to address regulation. Andrew Griffith said that to require the Government to produce regulations at “breakneck speed” would not be supported, because it is critical to get it right, because what the Government does not regulate creates a “floor” beneath which various nefarious operators will work. He said that the Government’s aim is to lay secondary legislation in “mid-2023” (although a letter written before the debate, but published after, referred to further consultation before the end of 2022). The clause was put to a vote, and narrowly negatived.

Fraud prevention strategy

An amendment to require Treasury to lay before the Commons a national strategy for fraud prevention, detection and investigation within 6 months of the Act being passed was tabled. Andrew Griffith said that the Government was committed to the Home Office, supported by Treasury, publishing a strategy later this year. The clause was put to a vote and narrowly negatived.

Separate letters from Andrew Griffith addressed:

• Illicit activity and misleading promotions of crypto assets, noting what is already required under the AML regime, and that the government has already committed to ensuring certain cryptoassets will be within the scope of financial promotion regulation. It feels that and the proposals in the Economic Crime and Corporate Transparency Bill will address the issues
• The Government’s commitment generally to making payments systems more robust, with mandatory Confirmation of Payee and other initiatives, and how cheques are now easier to cash in as banks more widely use cheque imaging. It also addresses financial education initiatives in schools, how the Government is supporting the credit union sector through proposals in the Bill and assured her the Government appreciates the importance of MRAs and that any proposed MRAs will be subject to parliamentary scrutiny.

Liability of regulators

A proposal to provide that regulators may be the subject of civil damages actions where a consumer has suffered as a result of a prohibited act which the regulator did not do enough to prevent was debated. This was withdrawn after debate, but may be brought up again at a later time.

What next?

After the scheduled debates finished, Parliament published notes of all clauses and amendments, showing which were being carried forward, which amendments had been withdrawn and which amended, together with an updated copy of the Bill, which will now go to Report stage. At Report stage, MPs on the floor of the House can speak, consider further amendments and vote. All MPs may suggest amendments or new clauses at this point. While there is no set time period between the end of the Committee stage and the Report stage, the Report is normally followed by the Commons Third Reading, before the Bill proceeds to the Lords for the same actions. It culminates in a consideration of amendments and "ping pong" whereby the Commons must agree (or not) any Lords' amendments and vice versa. This stage continues until everything is agreed, at which stage the Bill will proceed to Royal Assent.

So, although it feels like the Bill has cleared a huge hurdle in emerging from the Committee relatively unscathed, there is still plenty of opportunity for dispute and change, and no indicative hoped-for timescale for the remaining stages.

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This article was originally published in Compliance Monitor (Compliance Monitor).