Financial Services and Markets Bill: what we know so far

On 10 May, the Queen’s Speech unveiled 38 bills that form the government’s legislative programme for this Parliament: an agenda the government claims will strengthen the economy and help families through the cost of living crisis. However, we are yet to see evidence that the Financial Services and Markets Bill announced in the speech will advance these efforts – or indeed our progress towards net zero.

Crucially, through the Bill’s delivery of the Future Regulatory Framework (‘FRF’) we are promised a far-reaching change to how we regulate financial services, with implications for the economy, climate and levelling up. Long term, this means the Bill might be the most important piece of legislation announced in the Speech.

A dangerous focus on ‘competitiveness’

The Queen’s Speech said the Bill would ensure the finance sector will continue “to act in the interest of all people and communities”. In the Treasury’s own public announcement on the Bill it focussed on access to cash and fraud reimbursement as being key elements. However, the Treasury also confirmed that – by delivering the FRF – ministers will use the Bill to:

“[Update] the objectives of the financial services regulators to ensure a greater focus on growth and international competitiveness”

We have written before about our concerns with tasking finance regulators with pursuing the ‘international competitiveness’ of the sector they police. It is just not the Lab that is worried on this front – on 16 May over 50 leading academics and policy experts published an open letter to the government warning against asking regulators to champion competitiveness.

Professor Sir John Kay gave an interview to Sky News explaining the signatories’ concerns, in which he detailed the distinction between ‘competition’ between firms to drive better outcomes for consumers (which regulators already have an objective to promote), versus ‘international competitiveness’, being the ability of London to attract international business and for UK firms to compete for business overseas.

The risk is that a competitiveness drive from regulators might promote unduly light-touch regulation, particularly given the FRF will give regulators substantially greater powers without a commensurate increase in Parliamentary or other oversight.

As such, despite the government’s stated desire to “grow and strengthen” the economy, renewed focus on regulatory competitiveness is a backwards step – in 2010 the Treasury identified “excessive concern for competitiveness” as one of the reasons for regulatory failure in the lead-up to the financial crisis of 2007/08. In the long run, the Bill threatens to exacerbate economic woes rather than ameliorate them.

Alongside other civil society organisations, the Lab has campaigned for improvements to future-proof the FRF. We maintain that regulators should be given statutory objectives to promote financial inclusion and to bring the financial system in line with a net-zero transition. From what we know so far this is not reflected in the Bill, so anyone who wants to see the financial system work for all people and the planet should be pushing on these issues.

Financial exclusion: a sticking plaster

As it currently stands, the Bill’s promised improvements on access to cash and fraud compensation are welcome, but they are narrow solutions and alone won’t solve the deep-seated problem of financial exclusion.

On cash, we understand new legislation will formalise work that the industry and regulator are already doing to identify locations that have low access to cash facilities. Hopefully, it will encourage innovation in how cash is made available to people (and businesses that accept it). However, we’ve seen no indication that the Bill will require vendors to accept cash (a point Lord Holmes raised in the Lords’ debate on the Queen’s Speech), or any intention to address the growing cost of cash infrastructure.

Financial scams have exploded since the start of the pandemic. The government has focussed on Authorised Push Payment (APP) fraud in its Bill, and we are glad to see that APP victims will be protected. But this is just one way innocent victims are tricked out of their savings: common fraudulent activity includes pension scams, investment fraud and cryptocurrency swindles. In the year to June 2021, fraud was committed at least 5 million times and is now the UK’s most common crime. Given that financial fraud often affects the most vulnerable in society the most, we hope the Treasury will consider action to reduce the wider problem of financial fraud when it introduces the Bill.

Broader problems of financial exclusion have long been recognised by civil society and regulators, as highlighted in this 2016 report commissioned by the Financial Conduct Authority. Giving regulators a statutory objective to promote financial inclusion would mean they prioritise and take a proactive approach to such issues. The regulators wouldn’t have to wait for the government to recognise emergent issues of financial exclusion before considering intervention. As it stands, the Bill risks being a sticking plaster for financial exclusion rather than a long-term solution.

Silence on climate change

The government failed to mention climate or net zero anywhere in relation to the Bill in the speech or supporting documents. Given the UK is still chair of the UN’s COP climate conference – and has promised the world’s first net-zero financial centre – this is of fundamental concern.

In another worrying sign, just days before the Bill was announced, the government removed the promised Sustainable Disclosure Requirements from it. These requirements would have forced big companies and financial institutions to disclose and justify their net zero transition plans to ensure the greening of the economy.

To effectively green the finance sector and economy, the government must use the FRF and the Bill to give regulators statutory objectives to align the sector with net zero. This would ensure that the referees of the finance industry are aligned with societal goals. We have written more on this ask here; evidence that the Bill will take such a bold approach is not yet apparent.

More to come

The Treasury has also confirmed the following will be included in the Bill:

  • Solvency II reform. This entails plans to delegate powers to the Prudential Regulation Authority to amend the EU derived insurance legislation to free up some of the capital insurers are currently required to hold in reserve. The government indicates this newly unleashed capital might be channelled into socially useful investments, but it is not yet clear if all of this capital will be put to such uses. Crucially, policyholder protection must not be put under threat as a result of these reforms, and these, indeed all, reforms must help shift assets out of climate-damaging investments and into green alternatives.
  • Reform of capital markets regulation. This means tweaking EU-derived rules currently applied to UK markets in favour of the needs of UK market participants. We are keen to understand what the cumulative impact of these amendments represent when taken together in the broader package of the Bill.

The government has promised more information on the Bill when it is introduced, which could be any time from this summer.

We are now working with civil society organisations in the Lab’s community to make sure that the voices calling for social and environmental needs are heard as the Bill passes through Parliament. If you would like to know more or work together with us, please email hello@financeinnovationlab.org.