As we come to the end of the 2022/23 parliamentary session, the Lab’s Policy and Public Affairs Manager Tom Shields explores how the landmark Financial Services and Markets Bill was influenced by public interest campaigning and advocacy. He also suggests what some of the key issues in financial services policy will be now that this Act is on the statute book.
On 29 June the Financial Services and Markets Act 2023 (FSM Act) received royal assent. This means that the legislation – previously known as the Financial Services and Markets Bill – became an Act of Parliament and is now formally adopted as law.
A long time in the making, the FSM Act establishes the framework for how the UK’s large financial services industry will be regulated for the foreseeable future. The Act was drawn up in response to the UK’s exit from the European Union as, since Brexit, the UK has had greater control over its financial services rules and regulations.
The Act presented a real opportunity to reimagine how the finance sector is regulated and to rethink the purpose of such regulation. As this blog outlines, the Finance Innovation Lab, the Finance For Our Future coalition and other civil society organisations worked hard to improve the legislation and the new regulatory framework it would deliver, before it became law.
climate, nature and the environment
A key aspect of the new regulatory model created by the FSM Act is a substantial delegation of rulemaking powers to the financial services regulators (primarily the Financial Conduct Authority and the Prudential Regulation Authority). This was intended to transfer to the UK’s expert regulatory authorities much of the rulemaking responsibility the UK government has repatriated from the EU. Therefore, it was key that the legislation should give the regulators the right objectives to pursue.
The regulators’ “statutory objectives” are binding goals that they must advance through their work. They are enshrined in law, and the government always intended to shake up the statutory objectives via the FSM Act.
Despite the huge impact the financial services sector has in terms of financing climate-damaging activity – and despite the potential of the sector to help deliver the net zero transition – the financial sector regulators have never had an objective to green the sector.
The government drafted the FSM Act to give the regulators a “regulatory principle” on net zero. A regulatory principle is a much weaker part of a regulators mandate than a statutory objective: regulators only have to take into account their regulatory principles when pursuing their objectives (rather than actively advancing them).
Given broad concern that a regulatory principle is insufficient for the regulators to lead on greening the financial sector, organisations such as the Finance Innovation Lab and WWF advocated for the FSM Act to be used to give the regulators a binding statutory objective to align the financial system with the UK’s net zero and nature protection targets. Support was sought in both the House of Commons and the House of Lords to amend the legislation to do just that.
Despite significant support from City firms for such an amendment, ultimately there were not enough backers in the House of Commons to push the government to accept it. Nevertheless, the government did offer a compromise in expanding the scope of the net zero regulatory principle mentioned above to ensure that it explicitly refers to targets for the protection of nature in the Environment Act 2021 as well as the UK’s net zero target.
Ensuring the regulators are properly set up to deliver the government’s stated vision of making the UK a net zero financial centre remains a key concern for the Finance Innovation Lab and our partners. We will continue to push for bold action in this area and advocate for regulators’ mandates to reflect the scale of the crisis we face.
Deforestation
As well as pushing for the Act to give regulators a remit to help deliver the UK’s net zero and nature protection targets, civil society voices also advocated for specific action on the financing of deforestation. This is because just as the UK finance sector funds climate change in the broadest sense, it also channels money into the specific destructive practice of deforestation.
Global Witness led a campaign to amend the FSM Act such that it would impose a mandatory due diligence requirement on financial institutions to prevent the financing of illegal deforestation. Financial institutions representing more than £2.7tn assets under management backed this amendment, and so did a majority in the House of Lords.
Unfortunately, the Commons ultimately rejected the amendment, but the government did offer a concession in the form of a Treasury-led review into deforestation finance. This represents a hard-fought recognition that the UK must do more to ensure it isn’t contributing to the degradation of the world’s forests. The review will hopefully create an opportunity for firmer action against the financing of deforestation in the future.
Financial Inclusion
As drafted by the Treasury, there were some welcome provisions in the legislation to help promote financial inclusion. In particular, the legislation was intended to secure access to cash and to enable credit unions to provide a greater range of products.
Following a successful campaign by Which?, the access to cash aspects of the Bill were strengthened while the Bill progressed through Parliament. Which? argued that simply securing access to cash isn’t enough: free access to cash is vital, given the charges vulnerable cash users often have to pay to access their money. After numerous MPs and peers echoed Which?’s refrain, the government eventually acquiesced and made the necessary amendment to protect free cash access via the Act.
Even so, the FSM Act should have gone further to deliver financial inclusion. The government should have used it as an opportunity to give the Financial Conduct Authority a duty to consider financial inclusion in the round – something it currently has no requirement to do and which limits the proactive work the regulator does to ensure inclusion is advanced.
Fair By Design led a campaign to push for an amendment to the legislation to give the FCA a responsibility to fully consider financial inclusion. The campaign’s demands were backed by a majority in the House of Lords. Unfortunately, the minister refused to support this change when the crucial vote was held in the House of Commons.
While the FSM Act didn’t result in a win for this campaign, the Opposition has indicated this issue will remain a priority in its eyes. We continue to see this as a key initiative to push forward, alongside other interventions to promote financial inclusion such as the Fair Banking Act.
COMPETITIVENESS
While civil society sought for the FSM Act to task the regulators to take greater action on climate and financial inclusion, the Treasury drafted the legislation so that it would force the regulators to care more about the finance sector’s “competitiveness”. This was achieved via the addition of a statutory objective to the regulators’ duties concerned with the promotion of “growth and international competitiveness”.
The Finance Innovation Lab has consistently argued that such an objective is inappropriate for regulators and as such represents a risk to regulatory independence, consumer protection and financial stability. Over 50 economists and policy experts agreed that the government’s approach was problematic.
Ultimately, Parliament did not mobilise against the new objective in sufficient numbers to overturn it. However, it is likely that opposition to the objective that came from many corners before it was formally unveiled contributed to its attenuated final form.
Indeed, some prominent voices in the industry wanted the competitiveness objective to be a “primary” objective (i.e. at the very top of the regulators’ mandates and thus more risk-inducing), rather than the “secondary” objective it ended up being. And the final wording of the clause in the legislation shifted the target of the objective somewhat so that it is concerned with the competitiveness of the overall economy (but with a troublesome focus on the competitiveness of the financial services sector), rather than solely with the competitiveness of the financial services sector.
How the regulators now interpret the new objective is very important – and the Lab will keep up efforts to ensure it doesn’t lead to an undermining of work to put the public interest and the environment at the core of policymakers’ concerns.
Moving Forward
This blog has highlighted some of ways in which the FSM Act was improved thanks to advocacy from civil society groups and allies, but the Act represents a starting point as well as an end point. The new regulatory framework it establishes means we can expect continued reviews, consultations and reform efforts on specific policy areas (for example, pensions) to follow. The campaigns of civil society groups and allies to improve policy and regulation and to put social and environmental interest at their heart will grow ever more important, especially as the UK seeks to exercise its enhanced control over the financial services rulebook.