Pat McFadden
MP for Wolverhampton South East · Labour · United Kingdom
“In his review Alan Milburn considered that issue and said that, “the UK’s NEET crisis is much more long-term and deep-seated than any decisions taken in the last few years.” As I said earlier, 400,000 more people are in work this year than last year, and the number of young people in employment is up since the election.”
“Since our last DWP questions, both Alan Milburn and the Pensions Commission have published their respective interim reports on young people and on the current state of saving for retirement. I look forward to receiving their final reports later in the year.”
“As Alan Milburn pointed out in his recent report, the UK’s NEET crisis is much more long-term and deep-seated than any decisions taken in the last few years. There are 400,000 more people in work than last year. The number of young people in employment is up by 74,000 since the election.”
“I thank the right hon. Gentleman and send him commiserations for whatever has left him reliant on his crutches today. I am happy to congratulate the businesses he mentioned in his constituency. He raises a serious point: it is important not only to come up with the right policy, but to make it simple for businesses to use.”
“My hon. Friend is right, and I thank Cardiff football club for being a partner. We are supporting nearly 1 million young people and creating up to half a million opportunities for jobs and training.”
“We are making strong progress on expanding youth hubs, with around 130 already in operation across Great Britain. In March, I announced the locations that we want to open in this year, and I have just announced a further 180 locations for the following two years.”
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“A similar proportion of cases were found to be areas of weakness in money laundering defences in other sectors. So we have a problem with supervision. The first line of defence against money laundering is tasked to the private sector, and yet the supervisory bodies that are meant to ensure that that is being done well, both in terms of guidance and in subsequent enforcement of regulations, are not effectively ensuring that those defences are good. At the end of the day, the police estimate that the impact of money laundering on the UK economy is of the order of £100 billion a year. We can have lots of good measures and lots of good policies, which at times the Government will have been congratulated for, but the upshot is that we still have a big problem, which is not going away.”
“OPBAS has identified conflicts of interest between the advocacy and supervisory functions of those bodies. The effectiveness of their enforcement activity is really inadequate. If we take Her Majesty’s Revenue and Customs as one of the supervisory bodies, the fines imposed are barely a couple of thousand pounds and will quite possibly be less than the value of the commission or fee on any individual transaction. That is clearly an inadequate incentive for private sector actors to say no to handling illicit funds. The quality of the money laundering defences in the private sector has also been found to be poor. The Solicitors Regulation Authority recently conducted reviews into about 60 companies. In nearly half of those cases, they are pursuing the findings they had for potential disciplinary action.”
“Q In terms of potential amendments to the Bill, that would be top of your list. Are there any other areas that you think could usefully be amended or added to? Duncan Hames: I certainly think we need to look at the area of supervision. This is a regulatory function. We have private sector supervisory bodies tasked with helping the business sector to put in place the necessary preventive measures to prevent money laundering. While we welcome the introduction of the Office for Professional Body Anti-Money Laundering Supervision a couple of years ago, its reports—these are not activist or campaigner reports; these are Government regulatory reports—have been very damning of the effectiveness of the supervisory bodies. It is very fragmented—I think there are 14 supervisory bodies for the accountancy sector alone.”
“I do not think that is good for the corporate reputation of UK plc, and I do not think it is how we would want things to proceed as Britain defines a newly independent role in international commerce.”
“Q The last thing I wanted to ask you is about the most recent FinCEN files. This all comes out through the United States authorities. We find out about the actions of British financial institutions through the actions of a regulator in another country. How would you fix that so that the actions of UK companies are uncovered and publicised here, rather than coming out through another body in another country? Duncan Hames: We have to recognise that the FinCEN files were a leak; I would want us to be hearing about suspicious transactions as a result of enforcement having been taken by law enforcement agencies. It has been a concern of the now Secretary of State for Justice that too often we see enforcement, effectively, outsourced to the United States authorities.”
“It is the way that we are going, and I think about this as a real signal that the UK wants to be the leader in this field and takes it very seriously.”
“I know the Bill covers legislation on PRIIPs—packaged retail and insurance-based investment products—which is a huge, €10 trillion market in the EU. One specific example we have suggested is that, if we could improve the key information document that investors receive when they are looking at PRIIPs to include disclosure on environmental, social and governance issues, and ask the FCA to ensure that that happens, that would be an important signal. I think that there are real opportunities here to change the nature of the discussion and set the UK as a leader in this area. We know that the direction of travel is towards much greater ESG integration across the financial sector. Investors are pushing for it. We do a lot of work with the big four banks in the UK, and many of them are pushing a purpose-driven agenda.”
“I do not think it would take a huge change, or huge amendments to the Bill, to set that precedent and really kick-start what I agree is a cross-party consensus that we need to deal with the climate crisis and the rising problems —inequalities caused by covid and so on—and that the financial system is central to that. How it is regulated determines a lot about how it will react to those points. I can give some examples. Of course, it would be helpful if the Bill required the FCA to refer to the Climate Change Act when preparing secondary legislation. If you wanted to be more ambitious, it would obviously be helpful if capital requirements for investment firms introduced weightings on environmental, social and governance issues—for example, by penalising assets that have climate risks.”
“If the UK really wants to be a leader in green finance in a serious way, we need our regulators to be on board with that mission. Obviously, that starts with this piece of legislation and others. We would fully support the amendments to the Bill that have been put forward already, and we would potentially suggest further ones. Jesse Griffiths: I think that the absolutely fundamental issue with regards to the Bill is that it is an opportunity to put social and environmental purpose at the heart of both the regulation and the duties of the regulators.”
“There are some other amendments on social practice and corporate governance that are really important, and there are potentially bigger amendments that we could be thinking about, which would embed sustainability in the regulatory framework of our regulators, such as the FCA and the PRA. That would involve further amending the Financial Services and Markets Act, which I know is being amended already in the Bill, but we could add an environmental sustainability objective, for example, to the FCA’s or PRA’s objectives. It is worth noting that the UK’s financial institutions are among the worst culprits in Europe for fossil fuel financing. HSBC and Barclays alone have funnelled about £158 billion into fossil fuels since the signing of the Paris agreement.”
“We know there is cross-party agreement on wanting more of our productive and manufacturing sectors to grow, and we need to level up. Some Conservative MPs, such as Kevin Hollinrake and Danny Kruger, have done reports on that and on the need for a different banking system. We have to recognise that that will all require quite a significant shift in the direction of financial regulation, yet there is not anything in the Bill that suggests that such a shift in direction is something that the Treasury is interested in at the moment. We would certainly support the hardwiring of ESG considerations into the regulation. I looked this morning at the proposed amendments, and we would be very supportive of amendments 20 and 24, which have regard to climate and net zero in terms of investment firms and CRR—that is on climate and environmental.”
“The Bill sets the direction, and it needs to integrate the needs of the wider economy, social responsibility, the environment and thinking about how we set a direction that is different from the one that led to the global financial crash in 2008. As you mentioned, there is clearly cross-party agreement, and we have had announcements from the Government this week and last week on wanting to be a leader in green finance, especially ahead of COP26. There is also pretty much cross-party agreement on issues such as the banking sector severely under-serving small and medium-sized businesses. In his speech yesterday, Andy Haldane, the chief economist at the Bank of England, mentioned that the funding gap is £20 billion.”
“I would like to ask whether you think it is appropriate for broader goals to be considered in that regulatory framework, and I am thinking particularly of environmental, social and governance goals. The UK wants to be a leader in that area. The Chancellor of the Exchequer set out an ambitious environmental agenda for our financial services industries in his statement about 10 days ago. Do you think that the Bill is an opportunity to put regulatory weight behind the ESG agenda? Fran Boait: That is a really great question. It is definitely something that stood out for me when I first read through the Bill.”
“Q Thanks to both of you. We had a bit of a discussion earlier about a suggested reform for preventing economic crime. We were saying that when we get into it, we are probably going to be told to wait for the Law Commission. I have a feeling that, on accountability, we are going to be told to wait for the future regulatory framework review to conclude, but I do want to ask you about this area and about the duties on regulators, and I would like to start with the latter. The Bill, in schedules 2 and 3, sets out new accountability frameworks for the regulators. They are to abide by relevant international standards and to have regard to the relative standing of the UK as a place for internationally active investment firms to be based, or to other matters specified by the Treasury.”
“Setting up a new Select Committee or some kind of Joint Committee is also a strong proposal.”
“As I mentioned, they are subject to legal challenge from the industry. Although, ideally, there would be greater scrutiny in Parliament, and I think that a Joint Committee would be good, some of the amendments that have been tabled on specifics, such as an annual review of capital regulation requirements, are really great additions—I hope the amendment on that will go through. I also think that we need to ensure that the regulators are given the right direction for financial services, which is why I would also welcome the amendment that was put to us about this Government’s strategy for financial services. As I said, we are at a kind of crossroads, and understanding what direction the Government want to take it in is critical for the regulators. I support a lot of the amendments that have been put forward.”
“The direction of the financial services sector is fundamental to the direction of the UK. We are really at a crossroads. We have been a large financial sector in the world, and generally the Treasury would say that it has prioritised the international competitiveness of our financial sector in the global market. It has held that in greater reverence than domestic competition that serves the needs of the people—your constituents, your businesses and the productive UK economy. I think it is in Parliament’s interests to think about how we set up processes for greater scrutiny and about engaging civil society actors in that as well. I would have thought that quite a few people sitting within those regulatory bodies would welcome that. They are under immense stress from the last 10 years of post-crash change.”
“If we are giving the regulators these big new responsibilities, both at the prudential and the conduct level, how would a more active role for Parliament work? We have one Select Committee that is active in this area, which already has a really broad agenda of work—the Treasury Committee. We have members of it on this Bill Committee, and they all do a great job, but things are pretty thinly stretched. Could you tell us more about how you think Parliament could have a more active role after the onshoring of all this regulatory responsibility? Again, I will start with you, Fran. Fran Boait: I think we agree that this is the critical part of the Bill. That is why I mentioned the suggestion that has been put forward of a new potential Joint Committee between the Commons and the Lords. That would be absolutely right.”
“Q Thank you, both. The second thing that I want to ask you about is accountability. It is true that proper scrutiny of all this requires resources, but that is a question not just for Parliament but for the regulators, which are being given big additional tasks. You have indicated that you are in favour of a more active ongoing role for Parliament, and I would like to give you the chance to tell us a bit more about that. Obviously, the regulators have to have day-to-day freedom to apply regulation at the level of the individual firm, but you are absolutely right, Fran, that in the financial crisis capital was at the heart of this and how we regard that level of resilience for firms.”
“So it helps to create a better balance of lobbying, if you like, or of advocacy in this area.”
“You are right to say that it is not an easy thing to do, nor is it something that can be done in addition to what is already being done by the Treasury Committee, for example. Resources is a key point. The second key point, of course, is that such a Committee, and potentially the Bill and some of the amendments that have been referenced, can allow the regulators to report and explain more clearly why they are making certain changes, so that is a useful transparency and information point. The third point is that, without such parliamentary oversight, it becomes extremely difficult for civil society organisations such as ours, which are trying to ensure that the voice of the environment and social issues are raised in financial sector regulation, to be heard as effectively as other voices that are trying to influence that regulation.”
“That could be operationalised in a number of different ways, but it should be done in a way that makes sure that consideration is given to the way the Bill and, I presume, future legislation delegate a lot of power to the Treasury and the regulators to change, through secondary legislation, regulations that were previously agreed jointly between the European Parliament and the European Council. Some kind of check that that has been done in the correct way, and that it has been done with regard to the fundamental purposes of that legislation, is the role that the Committee would fulfil. Obviously it would need more resources, which is a key lesson from the European experience.”
“Q Jesse, you have experience of this at EU level where they have the ECON Committee, which looks at things before they are implemented. We have also had a suggestion from the hon. Member for Hitchin and Harpenden (Bim Afolami) for some kind of specific financial services Committee in Parliament. Would you think of that suggestion? Jesse Griffiths: I think it is extremely important that there should be some Committee, whether it is a financial services Committee or some other way of doing it, that gives Parliament that role.”
“As you have rightly pointed out, we lose single market access to the remainder of the European Union with the United Kingdom on 1 January, and this is where we will look for our future. If I can put it a slightly different way, some 90% of our financial services business before Brexit was with the United Kingdom, so that puts in focus how important this legislation is for all of us here. In each of the different areas in which we have worked, we have developed a niche—an area of specialisation and expertise—that has served those who work here with us well. We very much hope that that will continue into the future.”
“Q Minister, thank you for giving us your time this afternoon. There is a long-standing and warm relationship between the UK and Gibraltar that informs the measures in the Bill. The Government are trying to create a sort of mini-single market in financial services between the UK and Gibraltar to ensure your continued market access to the UK in future. I am sorry we cannot do much about your market access to the other 27 states to which you currently have market access, but sadly that is beyond the powers of the Committee. Can I ask you, in simple terms, are you happy with the Gibraltar provisions in the Bill as they stand? Albert Isola: The fundamental question for us is, do we continue to have market access? The answer to that, of course, as you know, is yes.”
“The reason that we have been successful in motor insurance is because we have developed expertise and specialisations in the firms that have come here. It is not that we switched on one morning and had 20% of the United Kingdom motor market; that has grown over a 15-year period. As they have grown, so have we, in terms of the business we do with the UK. There are a number of other businesses that have tried in other areas of insurance, and they do well, but with nothing like the success that the motor insurers have enjoyed in working with the UK.”
“Q We have heard quite a lot of references today to the proportion of motor insurance policies in the UK that are sourced out of Gibraltar. I think it is roughly 20%. Looking at the market access regime established by the Bill, is it Gibraltar’s ambition to grow the proportion of UK-purchased financial products from Gibraltar—for example, in other areas of insurance, other savings products, or other parts of financial services? Is it a platform on which you want to grow? Albert Isola: As the Minister with responsibility for financial services, I would love to see our businesses grow —of course I would—but responsibly and in a manner that matches the standards that we have with the United Kingdom in terms of the regulatory approach.”
“The sun shines here for a little longer than it does in the City of London, and I think that is important too.”
“It is far more about our agility as a jurisdiction and the accessibility of the regulator. I can arrange to meet every single insurance company in Gibraltar in two weeks if there is something that I would like them to do or be more conscious of. That is just not possible in the United Kingdom. The accessibility of our regulator for all our insurance firms is the No. 1 point that they measure as to why Gibraltar has been so good to them. They have that access and they have that contact. Then you have the expertise we have developed: the lawyers, the accountants, the insurance managers, who are able to provide the services that they need. These are far more important to the firms than the corporate tax. I have to say, if I may—allow me this plug—the quality of life is obviously important too.”
“Q My final question is one that I touched on with the Association of British Insurers in its evidence earlier this afternoon. Given the platform that is being created by the Bill, do you see any potential for attracting businesses currently in the UK to relocate to Gibraltar? Would there be any corporation tax advantage for them in doing so, for example? Albert Isola: My experience, put quite simply, is that of all the firms that have come and set up here in the last seven years while I have been in this job, not one of them has ever said they are coming for tax purposes. There is a tax differential—I think the rate of the UK’s corporate tax, or profit tax, is 19%; in Gibraltar, it is 10%—but that has never been cited as one of the reasons for setting up in Gibraltar.”
“I know the difference between the two processes, but why are there different approaches to some types of onshoring?”
“The Minister said that “the full cost of any fees and charges” must now be explicit and cannot be hidden in interest rates that are obscure to the person purchasing the service. My final question is, again, more about the process. What is the relationship between this onshoring process through these statutory instruments and what we are doing in the Financial Services Bill, which is currently in Committee? That, too, contains a lot of onshoring, so why are some things being onshored through statutory instruments, which are debated in this forum with all its constraints and lack of amendments, yet the ones in the Bill are going through the full legislative process, with a Committee stage at which amendments can be tabled and matters can be dived into more deeply and a Report stage and so on?”
“My third question for the Minister relates to the draft Securities Financing Transactions, Securitisation and Miscellaneous Amendments (EU Exit) Regulations 2020, and I refer him to regulation 72 on cross-border payments. He will be aware of the long-standing problem of hidden charges in remittances, which can end up costing people a lot of money and depriving those to whom the money is intended of the full value of the transfer. This is a multibillion-pound industry, and many people living in the UK send remittances home to families in other countries every year. Will the Minister clarify that this instrument does what he said was the Government’s intention in a written answer released on 3 July to a question from the hon. Member for Altrincham and Sale West (Sir Graham Brady)?”
“When times are good and markets are very liquid, there may be circumstances where that is true, but we discovered to our cost that, when times are not good, taking the view that a bank does not need any capital can have horrendous consequences. To quote perhaps the most obvious UK example, RBS was leveraged to a ratio of around 50:1 just before the financial crash. Again, I ask the Minister: in what way will this capital buffers instrument make any difference to how we approach the crucial issue of what is, in the end, public insurance against bearing the costs of failure? That is really the question we could ask about all these instruments: do they make any difference one way or the other to the degree of public security against the failure of financial institutions?”
“That experience produced this debate and this legislation about capital levels, leverage ratios and bail-in debt, which could be transferrable into equity if a bank got into trouble. The question really is: to what degree do the instruments before us herald any change from the approach that has been developed over the past decade or so since the financial crisis? The same question applies to the capital requirements instruments. Over-leveraging was at the heart of the financial crisis. The esteemed former Governor of the Federal Reserve, Paul Volcker, gave evidence to a Committee in this House some years ago. He quoted a leading banker as saying that his bank did not need any capital at all—money could always be borrowed on the wholesale markets.”
“Presenting a volume of legislation such as this is Potemkin scrutiny. I repeat: I make no criticism of the Minister personally, and I am not having a go at him, but this is not the best way to debate and handle things, and doing so does not reflect well on Parliament. However, I have a few questions for him on the content. Bank resolution and recovery became very important after the financial crisis. When banks failed, there was no adequate living will; there was no means of recovery that did not involve either desperate mergers and shotgun weddings between institutions or the state stepping in to bail institutions out. Where they were allowed to fail, the long tail of consequences often proved disastrous for the rest of the financial system, for contracts that had previously been agreed and so on.”
“If we are honest, it certainly does not make for a sensible scrutiny process, given that we are expected to debate and scrutinise all these instruments, relating to complex issues such as bank recovery and resolution, capital requirements, holding companies and securitisation, within a short time. We have four instruments before us, although the bearer one is perhaps a bit different. However, we could almost pose the question: if we are going to do it like this, why not 40 or 400? It would make as much sense as doing these four together. The truth is that there may be items in these instruments that prove to be significant further down the line, but the manner in which they have been presented for debate makes that difficult to judge. If we are honest, this is the appearance of proper parliamentary scrutiny; it is not the reality.”
“It is a pleasure to serve under your chairmanship, Sir David. We have a lot before us this afternoon. These statutory instruments are the latest in a large-scale exercise on the part of the Treasury, and indeed other Departments, to onshore various parts of EU legislation. I make no criticism of the Minister personally; I am sure it was not his decision that that should all be done in this way, and he has been very straight with me in everything we have debated in the six months or so that we have been opposite each other. However, the volume of the provisions before us, which on a quick count amount to around 130 pages of complex legislation, and which we have to go through in a 90-minute process, creates the impression of a Department shovelling legislation out the door before the end of the year.”
“No, I am grateful to the Minister for giving way. I would be grateful if he clarified the point. Let me be clear why. A clarification from him that the intention is to make transparent the full cost of fees and charges will help the regulators to police the charging of the instruments. If the Minister clarifies the matter in that way, that might help stop some of the practices that we have seen in the past whereby charges are hidden, to consumers’ cost. Clarification would therefore be helpful.”
“Pre the treaty of Lisbon and before the single market rulebook, this was the way that regulation was done in the UK through the Financial Services and Markets Act 2000. Primary legislation set out the objectives, framework and constraints through which regulators would operate and the regulators would then go about implementing the rules for the purpose, so that they could achieve the objectives that Parliament would have set for them. Traditionally, UK regulators have done that in the prudential sphere, which is my current sphere. To preserve safety and soundness and contribute to financial stability, the PRA currently has a secondary objective of facilitating competition, but with the remit that the Government give them and always with an eye to preserving responsible openness and dynamism.”
“Essentially the Commission proposes very technical regulations, which in banking are often agreed by technocrats in the Basel environment—in the Basel committee—and then these are debated in the European Parliament and the Council of Ministers, and become directly-applicable law. The reason for that way of doing it relates to the single market, so that every EU member state has exactly the same regulations. As I said, that is very unique. Every other member of the Basel committee, for example—all the G20 jurisdictions with the exception of Switzerland, which is another federal democracy—would have its regulators applying these technical rules that they have themselves negotiated internationally.”
“Q Thank you. I would like to begin with you, Vicky. The Bill goes through a process of onshoring a number of EU directives that are concerned with financial services. Can you tell us conceptually whether there is a difference between the way the UK regulators tend to go about their business or think about these things, compared with the way the various EU directives have been drawn up, debated and discussed in the EU institutions until now? Victoria Saporta: Yes, I am happy to do so. The way the EU tends to function in terms of regulations—particularly banking regulations, which are part of the provisions of the Bill that relate to the PRA—tends to be quite unique relative to other non-EU regulators.”
“One of the reasons for that is because regulators—at least in theory, but I happen to believe from my experience that that is the practice—potentially have longer horizons than Governments, and therefore regulatory independence tends to be more robust to such lobbying in the longer term, subject, of course, to accountability and objectives set by Parliament.”
“Q If you are a bank that wants to lobby about the rules or a trade body representing financial institutions, do you think there is any advantage in your lobbying in one of these systems or the other—the more rule-based one or the more flexible one that you have outlined? Which is the more open to lobbying? Victoria Saporta: There is a considerable body of empirical research that suggests that regulatory independence is strongly correlated with stronger financial stability. Particularly in the banking system, there are lower losses under stress.”
“In a sense, we have little choice but to consider and be cognisant of Government’s aims in relation to net zero, because if we are not thinking about those climate risks and challenges, which our firms face, we would not be doing our job and serving our statutory objectives. Quite often, you find that the aims of Government are merely looking at some of the risks that are impacting markets, impacting the firms, and therefore it is right and proper that we have work in relation to those areas, and we do have work in relation to net zero and climate change.”
“We set our priorities for the year and also over three years on the basis of our statutory objectives, which are consumer protection, competition and market integrity. We then work out whether, serving those objectives, certain types of activities will help protect consumers, and help us ensure market integrity or further competition. If you take the example of net zero, it is quite clear, regardless of where Government’s ambitions are in relation to net zero, that the move towards net zero forms a part of the issues that we face globally in terms of climate change. Those are risks in the economy and therefore impact the firms that we regulate and in turn may impact the consumers that we seek to protect.”
“Q Thank you. Sheldon, I want to ask you about the accountability framework in the Bill. It asks you and the PRA to take account of various things. In going about your work in the FCA of regulating conduct, products and so on that financial bodies distribute, what account is taken of wider Government objectives? I am thinking most obviously of things such as the net zero commitment and the legislation that has been passed for that. Do you consider those things or do you say: “Look, our day job is the fairness and stability of financial products and it’s somebody else’s job to worry about that”? Sheldon Mills: It is a good question. The starting point is our statutory objectives.”
“I think that there are some areas, for example in the MiFID regime, where we could look at an approach that was better calibrated to the UK’s capital market infrastructure, but areas where we would diverge are the exception rather than the rule.”
“Q Thank you very much. My final question is to Mr Latter. In the onshoring of all these EU directives, where do you see, if you like, the main opportunities not to do things that the directives currently mandate us to do? Where are the divergence opportunities for the UK financial services sector? Edwin Schooling Latter: In answering that question, I think that an important starting point is to recognise that the UK regulators, including the FCA, played a very large role in designing a lot of that EU regulatory framework. So the overall picture is definitely one where we support the nature of that framework and the provisions within it. There are a few areas where compromises to span 28 countries perhaps do not suit as well as they might the particular circumstances of UK markets.”
“That said, from the way in which the Commission has implemented previous iterations of Basel, I would expect it to stick quite closely to that Basel 3.1 framework, for the same reasons I have mentioned: international coherence and harmonisation, and easing the comparison of different banks and jurisdictions.”