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General Committees

Debated on Tuesday 2 May 2023

Delegated Legislation Committee

Draft Flags (Northern Ireland) (Amendment) Regulations 2023

The Committee consisted of the following Members:

Chair: Caroline Nokes

† Afriyie, Adam (Windsor) (Con)

† Antoniazzi, Tonia (Gower) (Lab)

† Atherton, Sarah (Wrexham) (Con)

† Baker, Mr Steve (Minister of State, Northern Ireland Office)

† Blunt, Crispin (Reigate) (Con)

† Collins, Damian (Folkestone and Hythe) (Con)

Creasy, Stella (Walthamstow) (Lab/Co-op)

† David, Wayne (Caerphilly) (Lab)

† Elmore, Chris (Ogmore) (Lab)

† Henderson, Gordon (Sittingbourne and Sheppey) (Con)

† Hunt, Tom (Ipswich) (Con)

† Largan, Robert (High Peak) (Con)

† Longhi, Marco (Dudley North) (Con)

Osamor, Kate (Edmonton) (Lab/Co-op)

† Poulter, Dr Dan (Central Suffolk and North Ipswich) (Con)

† Winter, Beth (Cynon Valley) (Lab)

Yasin, Mohammad (Bedford) (Lab)

Zereena Arshad, Bethan Harding, Committee Clerks

† attended the Committee

First Delegated Legislation Committee

Tuesday 2 May 2023

[Caroline Nokes in the Chair]

Draft Flags (Northern Ireland) (Amendment) Regulations 2023

I beg to move,

That the Committee has considered the draft Flags (Northern Ireland) (Amendment) Regulations.

I am most grateful to you, Ms Nokes, and to all members of the Committee for being here today. The draft regulations seek to align flag flying days in Northern Ireland with the rest of the UK, as agreed in the New Decade, New Approach agreement. Following the sad passing of Her late Majesty Queen Elizabeth II last year, a number of changes have been made to flag flying days in the UK.

The updated list of designated days for 2023 was published by the Department for Culture, Media and Sport on 9 February and states that all dates related to Her late Majesty the Queen are removed and several new entries relating to His Majesty the King are added, including the coronation day. A new flag flying day will also be added for the birthday of the Queen Consort, and the date of the Prince of Wales’s birthday will be amended.

The Flags Regulations (Northern Ireland) 2000 provided that on certain designated days the Union flag, and in certain circumstances other flags, must be flown on Government buildings. For the purposes of the regulations, a Northern Ireland Government building is a building wholly or mainly occupied by members of the Northern Ireland civil service. The 2000 regulations also set out a number of so-called specified buildings at which the Union flag must be flown on the designated days in question. Those buildings were chosen as they are the headquarters of the Northern Ireland Government Departments. In 2002, the provisions of the regulations were extended to court buildings in Northern Ireland.

In January 2020, New Decade, New Approach saw the restoration of devolved government in Northern Ireland after an almost three-year impasse. That agreement contained a UK commitment to update

“the Flags Regulations (Northern Ireland) 2000 to bring the list of designated flag flying days from Northern Ireland government buildings and court-houses into line with the DCMS designated days, meaning the same designated days will be observed in Northern Ireland as in the rest of the UK.”

The draft regulations will align flag flying in Northern Ireland with the 2023 DCMS guidance and the policy followed across the rest of the UK. Prior to publishing the list of designated days, DCMS consulted a range of stakeholders, and the updated designated days reflect the wishes of the palace.

The Government’s approach to flag flying in Northern Ireland through the flags regulations has consistently sought to reflect Northern Ireland’s clear constitutional status as an integral part of the United Kingdom, as well as the reality of the different political aspirations and sensitivities across society in Northern Ireland.

The Flags (Northern Ireland) Order 2000 also requires that consideration be given by the Secretary of State for Northern Ireland to the Belfast/Good Friday agreement when making or amending flags regulations. I can confirm that the Secretary of State is satisfied that the draft regulations have regard to that agreement and treat flags and emblems in a manner that is respectful of Northern Ireland’s particular circumstances.

Our approach to flag flying in Northern Ireland through the flags regulations has consistently sought to reflect Northern Ireland’s clear constitutional status as part of the United Kingdom, as well as the reality of the Belfast/Good Friday agreement and the different political ambitions within society in Northern Ireland. The draft regulations align flag flying in Northern Ireland with the rest of the UK while ensuring that the Government continue to meet their commitments in New Decade, New Approach.

It is an honour to serve under your chairship, Ms Nokes. I thank the Minister for bringing the regulations forward and I shall keep my remarks short.

This statutory instrument is pursuant to the accession to the throne of King Charles III and makes provisions for the flying of the Union flag over Government buildings in Northern Ireland on key days in his life and that of the Queen Consort. The sad passing of Queen Elizabeth II after 70 years of rule laid the foundations for these changes and I would like to take this opportunity to once again pay tribute to her for her lifetime of service. On visits to Northern Ireland, particularly in the later years of her reign, she advocated for the endurance of peace and reconciliation. That message still stands today.

The passing of a monarch invites a period of flux, which is felt keenly as we look to the coronation of King Charles III this weekend. It is vital that communities in Northern Ireland feel represented during these huge changes to our country. The regulations represent sad but necessary changes that need to be made, and we will support them. Going forward, it is important that communication with the parties in Northern Ireland remains strong. It is vital that we work in the best interests of the people of Northern Ireland in the absence of an Executive. I thank the Minister once again for bringing the regulations forward and ensuring that Northern Ireland continues to be a valued part of the United Kingdom.

I would be very grateful if the Minister could respond to a quick question about the language in the draft regulations, which refer to the Queen Consort. I thought that Her Majesty was now Queen Camilla, Her Majesty the Queen, and that the term Queen Consort was now otiose.

I confess that my hon. Friend has me at a disadvantage and I cannot give him an authoritative answer today. I believe that Her Majesty will become the Queen after the coronation; that is my understanding and I will write to him to confirm the correct position.

I am most grateful to the Opposition and to all Members who have attended the Committee today. As I have said, the regulations seek to align flag flying days in Northern Ireland with those in the rest of the UK and we believe that they meet with general consent.

Question put and agreed to.

Committee rose.

Draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023 Draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023

The Committee consisted of the following Members:

Chair: James Gray

† Aiken, Nickie (Cities of London and Westminster) (Con)

Brennan, Kevin (Cardiff West) (Lab)

† Cruddas, Jon (Dagenham and Rainham) (Lab)

Foster, Kevin (Torbay) (Con)

† Gardiner, Barry (Brent North) (Lab)

† Grant, Peter (Glenrothes) (SNP)

† Griffith, Andrew (Economic Secretary to the Treasury)

† Howell, Paul (Sedgefield) (Con)

† Lewis, Brandon (Great Yarmouth) (Con)

† Lopresti, Jack (Filton and Bradley Stoke) (Con)

† Malthouse, Kit (North West Hampshire) (Con)

† Offord, Dr Matthew (Hendon) (Con)

† Penning, Sir Mike (Hemel Hempstead) (Con)

Ribeiro-Addy, Bell (Streatham) (Lab)

† Siddiq, Tulip (Hampstead and Kilburn) (Lab)

† Stephenson, Andrew (Lord Commissioner of His Majestys Treasury)

† Twist, Liz (Blaydon) (Lab)

Sara Elkhawad, Susie Smith, Committee Clerks

† attended the Committee

The following also attended, pursuant to Standing Order No. 118(2):

Crosbie, Virginia (Ynys Môn) (Con)

Second Delegated Legislation Committee

Tuesday 2 May 2023

[James Gray in the Chair]

Draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023

There are two statutory instruments before the Committee. Is it the wish of the Committee that they be taken together?

On a point of order, Mr Gray. In recent months, I have been a member of several Delegated Legislation Committees for which the Government have put two instruments together to try to rush them through, or get them through. In some cases, the two have been connected in some way, not just because they are from the same Department but because they are thematically connected. Although that is not entirely desirable, we can see the rationale for it.

In this instance, however, we have two statutory instruments that are completely unconnected, besides their departmental interests. The first deals with the consequences of leaving the EU and the regulation of commodity groups; the second deals with consumer exposure to financial instruments. They are not the same thing. Taking them together necessarily means that hon. Members have to digest two quite complicated bits of legislation at the same time. I realise that for a lot of colleagues, holding more than one idea in their head is possible, but for a number of us, particularly given the complexity of cryptocurrency and its implications, that is a huge imposition. Putting the two instruments together will not, in my view, give us a coherent debate on what are two quite important bits of legislation.

I am most grateful to the right hon. Gentleman for his point of order. If he wishes to do so, he can simply object to the two instruments being taken together, in which case they will be heard separately. My question to the Committee is therefore whether it is content that both statutory instruments be heard together.

Objection taken. We will therefore consider the two statutory instruments separately—the first one being the draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023.

I beg to move that the Committee has considered the draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023.

It is a pleasure to serve under your chairmanship, Mr Gray. The Government have a clear vision for financial services: an open, sustainable and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens across all four nations of the UK.

Order. I introduced the incorrect statutory instrument. We are actually debating the draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023. I think the Minister was quite correctly addressing it, but I wanted to point out that I got it wrong in my introductory remarks.

Thank you, Mr Gray. Two excellent proposals remain in front of the Committee.

I beg to move,

That the Committee has considered the draft Financial Services and Markets Act 2000 (Financial Promotion) (Amendment) Order 2023.

Over recent years, multiple reports by the cryptoassets taskforce and the Financial Conduct Authority have identified misleading advertising and a lack of suitable information as a key consumer protection issue in cryptoasset markets. The statutory instrument seeks to address those issues by ensuring that cryptoasset promotions are held to the same standards as broader financial services products carrying similar risks. The statutory instrument therefore proposes to expand the scope of the restrictions provided for by the Financial Services and Markets Act 2000 by amending the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 to include financial promotions in respect of in-scope cryptoassets.

Firms that are not authorised by the FCA will be required to have promotions of qualifying cryptoassets approved by an authorised firm unless an exemption applies. To avoid the unintended consequence of an effective ban on such promotions, the intention is to have a temporary exemption for firms registered with the FCA under its anti-money laundering regime. The intention is that promotions made under that exemption would still have to comply with the same rules set by the FCA for equivalent promotions made by authorised firms. When in force, the SI and the FCA rules will apply to all businesses making cryptoasset promotions to UK-based consumers, whether from the UK or abroad, so it is a valuable protection for UK consumers.

In order that firms have suitable time to understand and prepare for the regime, the SI proposes a four-month implementation period, which is intended to commence on publication of the FCA’s detailed rules, subsequent to the SI being made. That will reduce a key risk to consumers of suffering unexpected or large losses without regulatory protection as a result of buying cryptoasset products while unaware of the associated risks. That complements, and forms part of, our wider proportionate approach to regulation, harnessing the advantages of distributed ledger and crypto technologies while mitigating the most significant risks for consumers.

It is a pleasure to see you in the Chair, Mr Gray. The Opposition will support the SI. In recent months, we have seen major scandals in the crypto sector, including the concerning activities of FTX; the collapse of so-called stablecoins, which saw the savings of millions of British people put at risk; and a surge in crypto-related crime and scams. It is therefore right that consumers are made aware of the significant dangers of purchasing cryptoassets, and that the companies promoting such assets are properly regulated.

I have a few questions that I wish the Minister to address. I am particularly concerned about the temporary exemption to allow cryptoasset businesses that are not authorised by the FCA but that are registered under anti-money laundering rules to communicate their own financial promotions. I know that the Minister will agree that the risks posed by the cryptoasset sector extend far beyond money laundering and include other forms of crime, such as many scams targeting the public, but how will the Government ensure that they have made it absolutely clear to the public that those firms are not authorised by the FCA, and that consumers are fully aware of the associated risks?

The organisation Positive Money, which the Minister will probably know, has made the case that if the Government are serious about an approach of “same risk, same regulatory outcome”, stablecoins should be regulated in a similar way to bank deposits. Has the Minister made an assessment of that proposal? If the Government plan to regulate stablecoins as e-money rather than as akin to bank deposits, how will the Treasury ensure that consumers are made fully aware that their funds are not covered by the financial services compensation scheme?

What work is the Minister doing to develop additional protections for consumers in this high-risk and volatile space? For example, has he considered requiring crypto firms to include risk warnings that make clear to investors the percentage of retail investor accounts that have lost money when trading cryptoassets, as is the case for firms offering spread betting and contracts for difference?

Finally, it is noticeable that the Government are making the distinction that non-fungible tokens are collectibles rather than financial investments. Does that mean that NFTs are not considered cryptoassets under the draft order? The Government recently U-turned on their instruction to the Royal Mint to issue an NFT as part of plans

“to make the UK a global hub for crypto asset technology and investment”.

Does the distinction made in the SI signal that the Government’s NFT offer has finally been abandoned?

I call Kevin Brennan. Will Members stand up if they wish to speak? It is hard to see people.

Thank you, Mr Gray —it is Peter Grant, by the way, not Kevin Brennan. I am sure that Kevin will be more insulted than I am if you mistake him for me.

I can assure you I have been called worse, Mr Gray.

The Scottish National party, like the official Opposition, will not be opposing the draft order today, but I want to raise one or two points. I am concerned not about the way in which these transactions will be regulated, but about just how effective the arrangements will be. My concern is that the financial promotion regulation that we have for more traditional forms of financial products is not working. It is not protecting consumers. Too many of my constituents have lost a lot of money. I do not remember whether I have had discussions with the Minister about Blackmore Bond, which I have certainly discussed with a lot of his colleagues.

I see from the Minister’s nodding that he knows what I am referring to. The Financial Conduct Authority just never got ahead of the chancers in the way that those bonds were being sold and promoted to innocent members of the public in my constituency and elsewhere. There is still an issue as to whether the Financial Conduct Authority takes seriously enough potential scams that may not break the economy, but will certainly cause untold harm to sometimes quite significant numbers of our constituents.

Will the Minister indicate what the Government are doing to make sure that the Financial Conduct Authority and others who are trying to regulate the crypto market have got the resources and expertise to do the job? If we are giving them more and more responsibilities and they are already saying that they do not have the resources they need to regulate as firmly as we would like, that means that significant additional resources will have to be put in. Will the Minister confirm whether, on the back of this order, there is an intention to increase the resourcing of the Financial Conduct Authority?

What are we going to do to make sure that where there are breaches, those who are in breach are brought to book much more quickly than often happens with more traditional promotions? One of the problems with any kind of e-commerce is that if things start to go wrong, they can go very wrong very quickly indeed. We need to make sure that the regulatory process can be speeded up.

Finally—this may be beyond the remit of the Minister today—what are the Government doing to make sure that when cases come to court, those hearing the cases understand what they are dealing with? A judge and jury trial in relation to these matters might not work, for example: where are we going to find a jury that understands the very fine points of technical detail that may be critical in deciding whether something is permitted or not permitted and therefore in deciding whether somebody is innocent or guilty?

My primary concern is whether those who will be asked to regulate under this new order will have the resources and the expertise necessary to make sure that they can do the job effectively.

It is a pleasure to appear before you, Mr Gray. There are many reasons for not just consumers, but Governments, to fear cryptocurrency. The growth in cryptocurrency effectively represents a loss of control in nation states of our money supply, and a loss of control by co-ordinating nations across the world of the global money supply.

At the moment, cryptocurrency capitalisation, if you like, or gross valuation is anywhere between $1.2 trillion and $1.5 trillion, against a global liquid money supply of about $50 trillion, so it is not a huge percentage. Nevertheless, it could have an impact at the margin, and it is only going to grow. The Government should be careful about seeking to legitimise the use of cryptocurrency, not just among individual retail investors and users but among businesses. When I see this kind of legislation coming forward, I am not necessarily convinced that the full implication of the journey on which we are heading with cryptocurrency has been appreciated.

You will recall from your history studies, Mr Gray, the Dutch tulip bulb madness of, I think, the 18th century. Tulip bulbs became a form of currency, many a family were bankrupted to purchase one or two bulbs, and thereafter the market crashed. It was based on an imputed value of something that had no connection to reality. I am afraid that the same is true with bitcoin.

While bitcoin, ethereum and others—there are now hundreds, if not thousands, of these cryptocurrencies out there—are supposedly fungible and exchangeable, they effectively rely on trust between individuals as to the value, and an opinion of the value, unlike normal cash and assets such as the pound sterling or the dollar, which rely on the Government or the central bank standing behind the value of the currency. That makes them very different; it also makes them very volatile. There have been massive plunges in the value of bitcoin, for example, over the past few months: I think it is down something like 36% in just the past three to six months. That makes me wonder whether we want our constituents to be exposed to this currency—if it is one—at all.

In seeking to regulate the promotion of cryptocurrencies, the Government are, I am afraid, unwittingly giving them an element of legitimacy and bringing them into the same fold of investment as stocks and shares, bonds or anything that someone might put in their individual savings account. They will be promoted with a big banner headline, but at the bottom, tiny type that nobody reads will say, “The value of investments can go down as well as up. You could lose the farm, your house—everything—on this investment.”

I put it to the right hon. Gentleman that the self-same weaknesses in the current system apply already to investment bonds and property development bonds. The issue is not the kind of scam asset that is being sold, but the fact that they are not being properly regulated, regardless of whether they are traditional investments or crypto investments.

The hon. Gentleman raises an interesting point. Of course, traditional investments very often have some foundation in reality. A stock or share very often has a company behind it that is producing revenue or otherwise. A bond will have the same thing. With bitcoin, all that is being sold is the assumption that somebody else will pay for that asset, even though there is no asset whatever that sits behind it. That is where it is subtly and importantly different.

The other thing to bear in mind is that cryptoassets are being overwhelmingly used in international organised crime. They have become the equivalent of the £50 note, in that they are being used by large international crime syndicates to move money around the world, largely undetected and unmolested by Governments. That is another major problem and a reason to be wary. As the Government regulates—and therefore brings into the fold and adds a veneer of legitimacy to—this form of exchange, they are effectively facilitating transfers between the illegitimate and criminal market and the legitimate market.

An individual will never know from whom or where their bitcoin is coming when they buy it from their investment adviser. It may well have been through the hands of several organised criminals before it gets to them, and unlike many £50 notes it will not bear traces of cocaine or heroin. We have seen the scale of the problem with cash in this country. The Bank of England has about £70 billion-worth of cash in notes and coins in circulation. Only about £20 billion is seen through the tills, so £50 billion is somewhere else. The Bank reckons that about £1.5 billion is in suitcases under the bed, held in cash savings or otherwise. The rest, I am pretty certain, is involved in crime. The same will be true, I am afraid, of so many of these cryptoassets.

I will not necessarily vote against the draft order, but the Government have to ask themselves whether they are legitimising a form of exchange that in the long term is likely to be damaging to the country’s economy and the global economy, and to those individuals who invest in it. For all the warnings that we put on things, once this sits alongside all the other investments that an independent financial adviser will offer, it becomes a legitimate option. At the moment, it is an esoteric investment available only to the most sophisticated of those looking to invest. I realise that that is growing every day, but when it gets a stamp of respectability I worry that it will become like the economic equivalent of cigarettes, which were out there for years causing millions of people to die of lung cancer before we stamped a health warning on them all. By then, they were just too legitimised for us to do anything about them. I worry about that in particular.

My second major point is about fraud and money laundering. I understand that one reason the Government want to bring cryptoassets into the fold is to give fraud and money laundering legislation greater purchase. However, we have to reflect on the fact that over the past 30 years we have had ever greater attempts by Governments of all stripes to introduce legislation to deal with fraud and money laundering yet it is worse than it ever was. Strangely, criminals worked out that they too had a passport and a utility bill and therefore found it fairly easy to open a bank account. We are certainly seeing much higher levels of money laundering, particularly around drugs, than there used to be, and that is now very much enabled by cryptocurrencies. Given how much more susceptible such currencies are to being used in money laundering, fraud and crime in general, because they are much less trackable and traceable, I would be interested to know from the Minister why the existing rules will make any difference at all.

My final point is about the exclusion of NFTs. As the hon. Member for Hampstead and Kilburn said, although NFTs are carved out in this legislation and are deemed to be different because, thus far, they have largely been used as collectibles because they are supposedly digital works of art, there is growing evidence that they are being used as a means of exchange and that, slowly over time, they will become fungible. It will not be long before there will be—in fact, there already are—central exchanges of NFTs that mark a price on them. We will have classes of price for different NFTs that will make them, in effect, the same as bitcoin. If the Government aspire to bring in this regulation, they really ought to include NFTs. Two students in a back room with a bit of sophisticated computer programming knowledge can create a class of NFTs and sell them—and people do buy them, sometimes for thousands of pounds. The idea that they should be excluded from the regulation seems to me to be a bit strange.

To conclude, I am concerned that a Government running helter-skelter towards cryptocurrency are not looking far enough ahead at the consequences. I realise that there is now a global consensus that crypto is a good thing, and we cannot be like King Canute and stick our finger in the dam, but cryptocurrencies present questions about the controllability of economies in the future. No one has yet come up with a solution to the significant and escalating crime problem that cryptocurrencies represent. No one has actually answered the question, before we bring in this regulation, of whether we think retail consumers should have access to this asset class at all.

I pay tribute to you in the Chair, Mr Gray, and look forward to contributing to this debate, but only to say this: King Canute would be horrified to find out that he was a Dutchman. King Canute was not a Dutchman and did not stick his finger in the dam. King Canute was the chap who tried to stop the tides from coming in and failed to do so. I just wanted to correct the right hon. Member for North West Hampshire on his metaphor.

It is a pleasure to follow the hon. Member for Brent North. I will attempt briefly to address Members’ concerns.

The fact that there is an exemption process is something that came out of the consultation, to which we responded. It is the way in which we can encompass regulation around what is currently an unregulated sector. It still requires the relevant firms to act as if and to comply with the FCA requirements in this area. It is not a bug; it is a feature. I hope the hon. Member for Hampstead and Kilburn will accept that.

We did not talk too much about the specific regulations with which we expect the FCA to come forward. It is right that the purpose of this SI is to set out the overall structure, on the bones of which the FCA will put some flesh. Members will be interested to know, though, that the regulations will certainly encompass, for example, a 24-hour cooling-off period.

I will try to address the points of my right hon. Friend the Member for North West Hampshire separately—he gave an interesting tour around this space—but he is wrong to assert that the regulation for cryptoassets would be the same as that for stocks and shares or for bonds. Cryptoassets would form part of a high-risk group that required, for example, a 24-hour cooling-off period, which we do not apply to those other assets. They are therefore being regulated as high-risk assets.

The hon. Member for Hampstead and Kilburn mentioned stablecoins. The detailed regulations for them have yet to be seen. There are stablecoins backed by fiat currency, and the thrust of the regulations will ensure that people can have the highest level of trust that they are properly backed. As ever, I am happy to write to the hon. Lady.

I think that I wrote to the hon. Lady about the decision on NFTs—I certainly wrote to the Chair of the Treasury Committee, my hon. Friend the Member for West Worcestershire (Harriett Baldwin). We have clearly delineated that because NFTs are—as in their name—non-fungible and we do not wish investors and consumers to confuse them with instruments of investment. That is important because the counterfactual that Members should consider is not that consumers are not exposed to promotions of cryptoassets. One does not have to go far—we have only to venture down into London’s fine underground—to find currently unregulated promotions, which expose consumers to all the risks without any of the protections. The statutory instrument seeks to rectify that.

My right hon. Friend the Member for North West Hampshire gave quite a tour around the sector. He talked about money supply and cash fraud, on which he is obviously an expert. I would argue that by bringing cryptoasset promotions within the perimeter, we are not making the existing situation worse. Arguably, by imposing the FCA’s rigorous anti-money laundering measures and providing a greater incentive for more firms to come within them, we potentially add a clearly difficult task, on which I will not expand.

I just want to take the Minister back to his point about NFTs. He said that they are not a form of investment, but I am afraid that they are. People are investing thousands of dollars in NFTs, and particular groups of NFTs, and effectively holding them as a collection as they would fine wine or art. They are certainly not a consumable. They are designed to hold value and to be disposed of at a future date, which is why NFT exchanges exist.

Secondly, does my hon. Friend accept that bringing NFTs into the investment fold grants them an air of legitimacy? We are saying, “This is a legitimate investment, notwithstanding the risk. We’ll give you some protections and the FCA will provide investment advice.” It makes such investment more legitimate than it otherwise would be.

My right hon. Friend has not been dabbling in either tulips or NFTs, but just like, for example, the art market, they are not within the scope of financial regulations. We can revisit the subject. The purpose of today is to address the clear challenge before us: the number of unprotected consumers, whom all the evidence suggests are being exposed to the promotions. If my right hon. Friend wants to continue to engage in the debate, we shall do so, and I am sure that the Treasury Committee will keep a close eye on that. However, there are markets or perceived investments, whether they be tulips, art or NFTs, that do not fall within the scope of financial regulations and therefore we are not addressing them today.

The hon. Member for Glenrothes made points, which he has made directly to me in the past, that pertain to the regulations but are a bit more general and relate to the FCA’s conduct and effectiveness. He and I served on the Committee that considered the Financial Services and Markets Bill, which seeks to place greater duties and accountability on the FCA. I hope that he will continue to work on that, but will let the matter rest for today.

Question put and agreed to.

Draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023

I beg to move,

That the Committee has considered the draft Financial Services and Markets Act 2000 (Commodity Derivatives and Emission Allowances) Order 2023.

This is like the main feature after the short film, for those of us who are old enough to remember that. The second instrument reduces the burdens that firms face when determining whether their trading in commodity derivatives or emission allowances require them to be authorised as an investment firm. Effective commodities markets regulation is key to ensuring that market speculation does not lead to economic harm. The regulator should be able to effectively regulate and supervise firms that trade commodity derivatives for investment purposes as their main role. However, as well as financial services firms, a number of businesses trade on commodity markets to protect their business from market fluctuations. In regulation that is referred to as trading that is ancillary to their main business.

We have inherited a regime from the EU that uses something called the ancillary activities test, which determines whether activities are primarily for investment purposes or support only the firm’s commercial business. That ancillary activities test requires firms to undertake complex calculations. They are also required to notify the FCA about the outcome of the calculations on an annual basis. Taken together, the regime is overly burdensome for firms. Prior to the implementation of the EU ancillary activities test, the UK had a simpler test for determining whether firms were trading in commodity derivatives or emission allowances as an ancillary activity. It was cheaper for firms to comply with and resulted in the same outcomes as the current regime.

In 2021, as part of the wholesale markets review, the Government consulted on reverting to that simpler regime, which maintains the same regulatory outcome. The proposal was to remove the annual notification requirement and revert to a principles-based approach. Respondents to that consultation agreed with the proposed changes, stating that the current regime was onerous and complicated. Consequently, the Government committed to bringing forward those changes when we responded to the consultation in 2022. Today’s SI delivers that. It will pave the way for the FCA to adopt a simpler and more streamlined approach to determining whether firms need to be authorised, alongside this SI.

To reflect the FCA’s adoption of that simpler approach, the instrument also amends part of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001, which exempts firms from having to perform the current calculation. As the FCA’s new approach will be based on different information, that exemption is no longer relevant. The SI will not come into force until 1 January 2025, to ensure that industry has sufficient time to reflect on the changes that the FCA will make, and to make the necessary system changes. I understand that the FCA plans to consult on its changes later this year.

The measure will reduce costs for firms and make the UK a more attractive place to do business, with no detriment to our high regulatory standards. I therefore commend it to the Committee.

The Opposition support the SI, and recognise that the current ancillary activities test, onshored into UK legislation from the EU rulebook, is too complicated. My only question for the Minister is how the Government will work with the FCA to ensure that relevant stakeholders are consulted on a new test.

I am grateful for your indulgence a second time, Mr Gray. Again, in delving into the details of the legislation, I wish to urge a little caution about this regulatory approach. The trading of commodities and, in particular, commodities futures can have a huge impact on the price our constituents pay for ordinary goods in their everyday lives. In history, attempts have been made to manipulate those prices. In the 1950s, two traders attempted to corner the onion futures market in the United States. That resulted in the Onion Futures Act, which is still extant in the US and forbids the trading of onion futures. Similarly, we saw—in the 1980s, I believe—a 10-year project by a trader at Sumitomo bank to corner the copper market, which eventually collapsed and failed. The trading of commodities and commodities futures, particularly at a time when there is more and more algorithmic trading and artificial intelligence being used in trading, means that we should take care in this complicated area of regulation and legislation.

One thing I could not find in the information given to us on this SI was why the current rules were introduced. What problem were they trying to solve? I acknowledge the supposed cost of these calculations, while being a little sceptical about them, given the amount of automation that so many of these traders use. Nevertheless, that rationale has not been offered to us, so I would be grateful if the Minister explained why the original rules were devised as they were and what problem they were deemed to be solving. In the past few months, we have learned that we need to take care because our regulatory organisations are not always watertight on looking at systemic and structural risk in financial markets, commodities or otherwise.

I was listening to the right hon. Gentleman’s argument on onion futures trading. How does he reconcile that? Does it not give the lie to his argument about NFTs? It shows precisely that anything can be traded as a derivative in that way and therefore there would be no specific reason—he previously outlined this—to put NFTs into the other regulation. I find that his arguments conflict.

I call Kit Malthouse, to respond specifically on the SI that we are considering.

No, no. You do not need to respond to it all, just specifically to points that relate to the instrument.

Okay. Well, in all circumstances my view is that we need to take care about the extent of regulation, and whether and how we include things within a regulatory envelope. I just ask that people take care. My first question to the Minister was: why were the previous rules adopted as they were? What problem were they deemed to be solving? Why will that problem not reoccur with these rules? Paragraph 7.7 of the explanatory notes to this SI states that

“since the test and annual notification was introduced in 2018, no UK firms have exceeded the threshold of speculative trading activity and therefore the requirement to inform the FCA about the outcome of the ATT every year was particularly burdensome.”

That is a cause-and-effect argument. The fact that no firm has exceeded the limits for speculative trading may be because the limits were in place and there was a notification requirement. Obviously those limits for speculative trading were there for a reason: some kind of systemic threat was deemed to be posed, either to the individual organisation or to the market as a whole. I guess I am asking: what problem are we solving here, other than cost to these firms, and are we exposing ourselves to future problems?

The Minister will know that part of the calculation is the market share test, which does what it says on the tin: it works out who is trading the largest part of any particular market and therefore whether their trading is likely to present any kind of risk, either to other participants in the market or to the market as a whole. With the abandonment of this test for a number of organisations that, in effect, do not have to record that their trading is only ancillary, the calculation that they are doing, which they now do not have to do, is not revealing how much of the market they either individually or collectively make up. Given the example of the Bank of England and the structural problem that liability-driven investment phenomenon in pension funds caused us, I am concerned that we may be exposing ourselves to a structural problem here, without knowing.

My final point is about the dynamics of the market. As the Minister will know, when trading in commodity futures, whether on one’s own account or speculatively as a hedge fund, one is relying on one’s counterparty in that trade being good for the money or the commodity—whichever comes to fruition. When we remove regulation from a section of the market, we are not necessarily providing the kind of reassurance that others might need when they look to their counterparty risk in futures trading in particular.

When I contemplate trading in whatever it might be, whether it be in copper futures or something else, and I am trading with counterparties in that market, some will be FCA regulated and others will not be. How will that be reflected in the market, as I necessarily trade in the commodities that I have, and therefore what greater risk is being presented to me as a trader within the market? While I understand the Minister’s admirable desire to deregulate where he can and save money for firms—although as I said, I would be interested, given the level of automation, in understanding exactly what cost is required—I am concerned that we are unwittingly creating further problems for ourselves. What risk assessment has the Minister done of those problems occurring?

I shall be brief. I am happy to be guided by the hon. Member for Hampstead and Kilburn; she should let me know if there is anyone she would particularly like to be consulted as the FCA brings forward rules. This is the third consultation in the process, so it will be fairly well sighted on the interested parties, but, as ever, one would encourage the widest range of participants. That is certainly the way that we seek to make and inform policy, and I know that the FCA will also seek to do so.

My right hon. Friend the Member for North West Hampshire will forgive me; he used the word “trading” repeatedly, so let me be very clear that this is not the regulation of those who are trading in commodities. By their very definition, they would not be able to take advantage of this measure. This is for the manufacturer of an engine who seeks to place their order for copper some months in advance—those who are using a commodities market, but not for the purpose of trading. With this measure, we are reverting to the situation prior to 2018, when a piece of European legislation came into a regulatory environment that was working perfectly well, in which no one had diagnosed any problem. There was a pragmatic way for businesses to operate and then the bar was raised. We now have the opportunity simply to revert to the situation prior to the introduction of that legislation.

I understand the Minister’s point. I am aware of the fact that it is perfectly possible for a company that is trading in a commodity to have futures trading, which is what we are talking about here—commodity derivatives trading—as an ancillary function of its overall business. For example, the Man Group, of which I am sure the Minister is aware, started as a cocoa and sugar ordinary trader. It had a small derivatives department, which was actually algorithmic black box trading—commodity trading adviser trading—which grew and grew. In the early days of the Man Group, under the test, that would have been ancillary to their trading. Nevertheless, it would have been a reasonably big part of the market.

I suspect that neither my right hon. Friend nor I would know the exact application of that test. Clearly, the Man Group would look very much like a very large trading outfit, with all its revenue derived from a source of trading, rather than the purchase of being an end user. However, we are reverting to the original position. Let us be clear: whether it is onions or the Man Group, it would have fallen within the scope of this test in 2018 and we seek to simply revert to that.

Question put and agreed to.

Committee rose.

Draft Environmental Permitting (England and Wales) (Amendment) (England) Regulations 2023

The Committee consisted of the following Members:

Chair: Martin Vickers

† Churchill, Jo (Vice-Chamberlain of His Majesty's Household)

Courts, Robert (Witney) (Con)

† Eustice, George (Camborne and Redruth) (Con)

† Glindon, Mary (North Tyneside) (Lab)

† Graham, Richard (Gloucester) (Con)

Hardy, Emma (Kingston upon Hull West and Hessle) (Lab)

† Hart, Sally-Ann (Hastings and Rye) (Con)

† Holmes, Paul (Eastleigh) (Con)

Johnson, Kim (Liverpool, Riverside) (Lab)

† Jones, Ruth (Newport West) (Lab)

† McDonnell, John (Hayes and Harlington) (Lab)

† Mayhew, Jerome (Broadland) (Con)

† Mills, Nigel (Amber Valley) (Con)

† Pow, Rebecca (Parliamentary Under-Secretary of State for Environment, Food and Rural Affairs)

† Spellar, John (Warley) (Lab)

Tarry, Sam (Ilford South) (Lab)

† Wheeler, Mrs Heather (South Derbyshire) (Con)

Jonathan Finlay, Committee Clerk

† attended the Committee

Third Delegated Legislation Committee

Tuesday 2 May 2023

[Martin Vickers in the Chair]

Draft Environmental Permitting (England and Wales) (Amendment) (England) Regulations 2023

I beg to move,

That the Committee has considered the draft Environmental Permitting (England and Wales) (Amendment) (England) Regulations 2023.

It is a pleasure to have you in the Chair this evening, Mr Vickers. The draft regulations were laid before the House on 23 March. The purpose of the statutory instrument is to make nine minor amendments to the Environmental Permitting (England and Wales) Regulations 2016 as applied to groundwater activities.

Groundwater is a critical national resource. It provides a clean and reliable source of drinking water, plays a vital role across many industry sectors and supports our ecosystems. The Government are committed to ensuring that the quality of our groundwater resources is protected. In the face of growing pressures from climate change and population growth, it is important to optimise the regulatory tools available for managing and protecting groundwater.

The Environmental Permitting (England and Wales) Regulations 2016 are an effective tool for managing groundwater activities. However, several limitations with the way the regulations implement groundwater protections have been identified, and that has led to inconsistencies in approach in the wider environmental permitting regulations regime. Those limitations can be resolved by the nine amendments, which will support many industries by reducing regulatory burden and costs; facilitating green energy production from, for example, geothermal and ground source heat pumps; and promoting growth, and so they will accelerate permit delivery.

I stress in particular that the statutory instrument aims to provide the Environment Agency with what is really an improved hierarchy of regulatory controls for groundwater activities. It in no way reduces protection of groundwater. These amendments create the right regulatory conditions to promote and allow innovation in the wider circular economy, allowing the appropriate and safe re-use of materials where it is environmentally acceptable.

The Minister will know that in former mining areas, we still have lots of former mine workings where mine water interacts with groundwater. Could she reassure us that there is no loosening of the controls here, and that stuff cannot be done to move that water around and risk having dirty water put where we do not want it? There is nothing here that changes that protection at all, is there?

I thank my hon. Friend for that really important point. I stress that we are not changing the permits that are already in place and that, critically, must be in place; in fact, we are opening up the opportunity to have a better look at how the whole system works. Indeed, some things will now need to be permitted that were previously not looked at as closely as the mines, for example, so I can give my hon. Friend that reassurance.

Currently, groundwater activities can be permitted only through the use of bespoke environmental permits, which are the highest level of permits—they would relate to coal mines and so forth. My hon. Friend the Member for Amber Valley raised a good point, and that will not change. However, in many cases it can result in unnecessary costs and, in some cases, unnecessary regulatory burden to business. The statutory instrument will give the regulators the ability to grant other types of permits, such as standard rules permits and mobile plant permits. These non-bespoke permits are significantly less costly and will reduce the administrative burden on businesses while, importantly, maintaining environmental standards. The statutory instrument will also introduce exemptions from the requirement to have an environmental permit for new cemeteries that pose a low risk of pollution to the groundwater environment. 

The public consultation that we conducted on all the measures that I am describing received 264 responses, and almost all the proposals received majority support. The only exception was the proposal on cemeteries, which received some significant opposition. I have engaged with our all-party parliamentary group for funerals and bereavement, and I met them to listen to all their views. The APPG, too, consulted widely in the industry, so following the feedback and further discussion with key stakeholders, adjustments have been made to the cemetery-specific amendments to enable greater clarity and ease of implementation.

Clarity has been added to the draft statutory instrument so that existing cemeteries will be exempt automatically from permitting, unless the regulators are made aware of proven groundwater pollution. The adjustments have been tested in targeted engagement with stakeholders. Controls will be applied to prevent groundwater pollution by currently uncontrolled pollutants such as heat and micro-organisms.

If I understand paragraph 7.15 of the explanatory notes correctly—that is the one about exemptions for cemeteries from the requirement for an environmental permit—the draft regulations will mean that existing cemeteries do not need an environmental permit, and new cemeteries will be exempt if their risk of pollution is calculated as being low, but there will be some further explanation of that definition of low risk. Is that correct?

I thank my hon. Friend for being so clear, because that is exactly what is stated. If a cemetery is in an area where there might be some implications for the groundwater, the Environment Agency will become involved and permits might be needed. I will get some clearer detail in a minute, but with particular procedures in some burials—potentially involving certain chemicals—one might want permits to be involved. I can get more clarity on that for my closing speech, if that is all right with him.

Heat is now being added as a pollutant. The majority of closed-loop ground heat pump activities will be exempt from the requirement to have an environmental permit. That is to deal with the growth in the ground source heat pump industry. The fact is that they are closed-loop systems—the water is not going into the ground, because it is in a closed loop—so they are considered to be suitable for exemption from requirements unless they are near a protected site or ancient woodland, in which case they would need a permit, just to be super-sure that there is no potential impact from any heat on the flora.

The draft statutory instrument will also help to fix a loophole in the general binding rules for small sewage discharges, which are being exploited, resulting in harm to nearby environmental habitats and local water quality. Thus, the new rules will reduce the risk of groundwater pollution. An example of that is caravan sites, where landowners might be escaping the need for any kind of regulation because each caravan gets rid of its own sewage, instead of it all coming into one area. The measure is considered necessary and was raised in the consultation.

The existing wording of the Environmental Permitting (England and Wales) Regulations 2016 is unclear about the defence that applies to the breach of permit conditions. The draft statutory instrument will help to bring clarity around the liability of sewerage undertakers for breaches of permit conditions that are due to specific circumstances beyond their control. One example of such a breach is an unlawful discharge of waste water into the sewer that breaches the chemical limits of the water company’s permit. The statutory instrument clarifies all that. It does not reduce any protections; in a way, it strengthens them.

The current list of exemptions from the prohibition on direct discharges to groundwater needs to be updated to bring regulations in line with current operational practices and facilitate energy recovery and the latest green technology. The instrument updates that list. There will be a requirement for operators of onshore oil and gas facilities to apply to surrender their groundwater activity permits. They will need to satisfy the regulators that any pollution issues are remediated and that there are no ongoing risks to the groundwater environment at the point of decommissioning or that may arise in future. This measure will ensure that the environment is better protected.

The draft regulations will bring about benefits for groundwater quality, reduce unnecessary costs to businesses and help to ensure that Government resources are being used most effectively to protect and preserve groundwater quality for future generations.

It is good to see you in the Chair, Mr Vickers; I think this is the first time that I have served under your chairmanship. It is good to join with the Minister and colleagues from around the House this evening. I suspect that colleagues of all parties would probably prefer to be out knocking doors as we approach Thursday, but there is no better place to be discussing the policy of the Department for Environment, Food and Rural Affairs than with you, Mr Vickers, and the Minister.

The proposed changes contained in the statutory instrument seek to improve the regulatory tools available to the Environment Agency. We therefore have no plans to oppose the legislation this evening, but before anyone rushes to the door, there are a number of outstanding questions that I want the Minister to address now or in writing after the sitting. As colleagues will know, the regulations make amendments to the Environmental Permitting (England and Wales) Regulations 2016 in relation to the management and protection of groundwater quality in England. I note that regulation 3 makes amendments to definitions in regulation 2 of the 2016 regulations and inserts several new definitions in that provision, for example a definition of groundwater mobile plant. Will the Minister outline what engagement took place with stakeholders and experts in the drafting of those new definitions?

Regulation 4 makes amendments to regulation 24 of the 2016 regulations, to the effect that environmental permits for activities relating to hydrocarbon exploration or extraction, or that intersect a hydrocarbon formation, may be surrendered by notifying the Environment Agency. The hon. Member for Amber Valley raised that point earlier. It would be helpful to know exactly what that notification process looks like, and what discussions have taken place with the Environment Agency to ensure that there is a speedy process for receiving said notifications.

Regulation 5 makes amendments to parts 2 and 3 of schedule 3 to the 2016 regulations, which deals with exempt facilities and waste operations to which section 33(1)(a) of the Environmental Protection Act 1990 does not apply. The amendments have the effect that certain closed-loop ground source heating and cooling systems and low environmental risk burials at new cemeteries or new extensions of cemeteries are exempt, so long as the conditions set out in the new provision are met. I am grateful to the hon. Member for Gloucester for asking a question about that and to the Minister for clarifying the situation. The Committee knows why cemeteries are exempt, but it would be helpful to know what the monitoring process is for those conditions and what enforcement there will be if they are not met.

Regulation 6 makes amendments to paragraph 6 of schedule 21 to the 2016 regulations, which deals with liability resulting from the discharge of sewage effluent from public sewers. The Minister will not be surprised to know that that part of the draft regulations has raised questions, not least with our constituents, who are concerned about the waste in their waters. It would be helpful to hear what recent engagement there has been between her Department and the leadership of Britain’s water companies. Will she also set out what further powers the Government plan to give the Environment Agency to ensure that we can finally clean our water, as Labour will when we are in government?

The draft regulations are broadly technical, so I hope that my questions will allow for a greater dive into the detail. I look forward to a clear, detailed response from the Minister and her officials.

I see no one else indicating that they wish to speak, so I call the Minister.

Thank you, Mr Vickers; that gives me no time to get my answers together. I thought that perhaps our former Secretary of State, my right hon. Friend the Member for Camborne and Redruth, would contribute.

Shall I begin, and then I will be delighted to answer the right hon. Member’s question? I am very grateful to the shadow Minister for her comments, and for being helpful and constructive in allowing me to say a bit more about one or two of the items that I mentioned.

The measure will optimise the regulatory tools available to us for managing and protecting groundwater quality. It will not reduce protections; indeed, it will strengthen them, giving the EA a greater range of tools. That is something that business and industry have come to us about in many different areas. The new tools will be more proportionate to the risk. If matters are deemed to be very low risk, the EA will be more generic in its approach. Other more complex areas will continue to be bespoke, as at present with the mines and so forth. Some responses will therefore be less costly, and potentially more speedily delivered. For example, if the EA has to react to a discharge, it might speed up its response. There are an awful lot of positives in improving the hierarchy of regulatory controls for groundwater. Including extra pollutants such as heat will be of great benefit.

On the mobile plant question, again, this is something that business and industry asked for particularly in the consultation. It is a well-recognised term used for waste activities. It is long established, and a lot of discussion went on with industry about it.

Reference was also made to cemeteries. Exactly as my hon. Friend the Member for Gloucester described, a new cemetery will not need to get a permit unless there are deemed to be specific reasons for one, in which case the Environment Agency will work with the cemetery operator to ensure that the right conditions are met. A permit might be needed if the cemetery were near a vulnerable aquifer, or if there were a significant number of burials. Say there was a terrible incident, or something like that—no, I will not say that. Also, if a cemetery were in close proximity to vulnerable water users, public water suppliers, private water suppliers or chalk streams, a permit would be considered. I hope that that gives a bit more clarity.

I am grateful to the Minister for describing and outlining examples, but the question was more about the monitoring process. How is this going to be monitored and what will the enforcement process be?

We have a well-established process for the regional monitoring of groundwater. Any long-term trends in quality and in what is found in the groundwater are monitored, and we have research programmes looking into the impact at regulated facilities. I hope that helps to clarify that that is an important part of checking that what is in place is doing the right thing. Just out of interest, areas that might not need a permit are clay areas or areas where there are very small numbers of burials. I hope that that has dealt with the death section of this SI.

The shadow Minister asked about the onshore oil and gas industry’s surrendering of permits. An oil and gas operator can send a notification to the Environment Agency stating that it no longer requires a permit for its discharge. An application to surrender the environmental permit will require evidence to demonstrate that there has been no impact on the environment from that discharge at the onshore oil and gas site. This amendment will ensure that there are no ongoing risks to the groundwater environment at the point of decommissioning, or any future likelihood of pollution occurring. I hope that that answers the question.

Before I vote on these things, I do occasionally try to understand them. Paragraph 7.22 of the explanatory notes clarifies the defence of sewerage undertakers who are in breach of permit conditions. That relates to regulation 7(c), which inserts new sub-paragraph (5A) into schedule 22 to the 2016 regulations. New sub-paragraph (5A) states that a sewerage undertaker is not guilty of an offence, first, if it did not do it —understood—and, secondly, if it

“could not reasonably have been expected to prevent the discharge into the sewer or works.”

Understood. But sub-paragraph (5A)(b) states that the undertaker is not in breach if it

“was not bound to receive the discharge into the sewer or works or was bound to receive it there subject to conditions which were not observed”.

That seems to be a huge blanket exemption from the sewerage undertaker’s responsibility for ensuring that discharge is leaked properly and complies with any conditions attached. If the Minister wants to clarify the answer to that question in writing, I am happy for her to do so.

I thank the right hon. Gentleman for that, and he is absolutely right that it is important to understand what we are talking about. This is very detailed. I do have some notes here, but if it suits him, I will put the answer to his question in writing, and I will share it with the shadow Minister as well, because I think it is important to clarify that. We have done so, because we have updated that particular section of the explanatory notes, but I will get back to him on that.

I think that brings me to the end of my points. I thank the shadow Minister for supporting this SI, albeit with some testy questions, and I commend it to the Committee.

Question put and agreed to.

Committee rose.