The Financial Services and Markets Bill is the biggest shake up of financial services in a generation. It is making its way steadily through the legislative process and has on 23rd March 2023, completed Committee Stage in the House of Lords. Report Stage is yet to be scheduled.

It is a huge Bill which will make wide-ranging changes to the regulation of financial services in the UK. It will implement the outcomes of the Future Regulatory Framework review by repealing retained EU law relating to financial services. The Bill will transfer responsibility for these areas of regulation to the financial services regulators and contains provisions to enable the establishment of a regime to regulate stablecoins and protect access to cash.

I have written about the Bill before in Finextra: when it arrived in the House of Commons (July last year), when it received second reading in the Commons (September last year) and most recently, in January this year, detailing how I think we could optimise the great potential of the Bill.

Throughout the Committee Stage, I proposed several amendments covering various aspects of financial services – including better and fairer access to funding for SMEs, ensuring financial services are accessible and inclusive, as well as the importance of engaging with digital IDs and ethical AI.

A particularly important part of the Bill is the proposed transfer of responsibility for financial services regulation to the FCA and the PRA, an issue that prompted much debate at Committee Stage. Whilst it is essential that we ensure the independence of our regulators, independence must not be conflated with accountability.

The famous question, Quis custodiet Ipsos custodes? reminds us that we need oversight and accountability for our “watchdogs”. As well as accountability we must consider whether the regulators are functioning as efficiently as possible and if there is scope for adding a proportionality element to the regulatory principle.

The cross-party House of Lords Regulators and Industry Committee reported: 

“It is vital that the concerns regarding the inflexible and sometimes unnecessarily complex processes require a broader reassessment of regulatory culture. There is a need for current rules to be applied more proportionately and efficiently, and objective-setting for staff at all levels to support this…reviews should focus on the scope for more efficient and proportionate as well as less cumbersome and mechanistic engagement.”

My proposals aimed to enable just that. I put forward four amendments – all with the intention of improving transparency, accountability, efficiency, and proportionality for the regulators.

The first would require both regulators to publish regular reports to Parliament on their regulatory performance for new applicants for regulation. The second would require the FCA to publish regular reports to Parliament on their regulatory performance for existing authorised entities and persons, and the third would add to the regulators’ authorisation KPIs within the Financial Services and Markets Act 2000 and require them to publish monitoring data related to the determination of authorisations. The final of my four proposals would amend the existing regulatory principle for both regulators and require that the service or product being delivered, along with the nature of and risk to the consumer, must be considered when imposing a new burden or restriction.

My colleague, Lord Bridges, was concerned with the same questions of scrutiny and accountability for the FCA and PRA and suggested the creation of “an office for financial regulatory accountability, a specialist, independent, statutory advisory body, which would work to a charter set by the Government and laid before Parliament.” The Government rejected all our proposals at Committee, but this is not an issue that will go away quietly, and it will certainly be one to watch when we get to Report stage after the Easter break.

The Financial Services and Markets Bill is also the first step in the UK towards regulating cryptoassets. Compared to the slightly more developed European approach, we are looking to extend our existing financial services regime and structures. In Europe, they are establishing a separate cryptoasset regulatory regime through the markets in cryptoassets (MiCA) legislation which has been agreed in principle by the European Commission with formal approval by the European Parliament expected in April 2023.

In comparison, the addition of fiat backed stablecoins used as a means of payment to this Financial Services and Markets Bill is a cautious first step. The uncontroversial nature of this element in the Bill is underlined by the fact that stablecoins were mentioned only once throughout the entirety of the Committee Stage debates in the House of Lords.

The much more significant second phase of UK regulation of cryptoassets will develop in response to the launch on the 1st February 2023 of HM Treasury’s consultation on the ‘future financial services regulatory regime for cryptoassets. The focus on activities and extending authorisation largely through the designated activities regime means that a broad range of activities is covered – currently slightly broader than what is covered in MiCA (which exempts NFTs for example) – although greater clarity on the detail of such differences will only become clear as we get further along the process.

The HMT consultation welcomes contributions from industry, and I would encourage everyone to get involved. One thing the consultation does explicitly state is that cryptoassets will not be treated as financial instruments.

The Government has been clear that another key objective of the Bill is to protect access to cash; the complexity of this aim was highlighted at Committee Stage.  Preserving a right to cash alone will not address related issues with access to banking services or even the ability to spend your cash should you be able to access it. I tabled several amendments, one in which I suggested that all high streets of a specific size should have banking services which include deposits.

If we are to seriously address the question of cash and ensure we are preserving the right to use cash, then one of the major issues with acceptance of cash, specifically for small businesses, is what they do with that cash once they have it. I also proposed that we classify the cash network as critical national infrastructure. This seems sensible on the basis of the current geopolitical situation as well as for the arguments about financial inclusion.

The next two amendments I put forward in this group were all about financial inclusion and designed to address “accessibility of financial services and financial products” and the requirement of “access to digital financial services review.” The current and future direction is digital, and that future and  the transition to that future must be inclusive. 

This has been a lengthy and detailed Committee Stage for this important and substantial Bill and I look forward to a return to the discussion when Report stage is scheduled after the Easter break.