My Lords, in moving Amendment 112 I shall speak also to the following 10 amendments in the group, through to Amendment 136E, which is also in my name. I declare my interests as set out in the register and thank other noble Lords who have signed up to speak.
There are 11 amendments in the group and I should like to begin by making some broad comments about the overall theme. The group’s headline is fintech, financial technology, which covers a number of areas in and around that subject and demonstrates the connectivity between all the elements of 4IR, the fourth industrial revolution, including new technologies, and how they interact with one another in the context of financial services. They include AI—artificial intelligence —DLT or distributed ledger technology and blockchain, just to mention some that I will be coming on to discuss as we reach the amendments.
The Government have had a good story to tell on fintech since 2010—and indeed before: the Blair Administration were very positive around the UK’s opportunity and the potential that we have in this area of fintech. Perhaps the best example to date is the FCA’s sandbox, the measure of its success being its replication in more than 50 jurisdictions around the world. It was ground-breaking in its time; certainly, we find ourselves now, if not at a crossroads, certainly at a point where we need to consider everything across the fintech landscape and truly reflect on whether we are doing enough, or anywhere near enough, to ensure that the benefits are maximised for individuals, companies, all corporate entities and the UK as a whole.
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Fintech is pervasive; it cuts across all sectors. In previous debates in Committee we ran through several incredibly important groups around financial inclusion. To flip that coin, financial exclusion has dogged the UK for decades, blighting lives, ruining opportunities and putting potential down. Fintech has a new lens to
offer on the whole question of financial inclusion, not least in giving us the ability to reimagine and reconsider credit scoring in real time. I would put it to the Committee that, if we had had fully understood and deeply deployed fintech and indeed allied regtech throughout our financial services sector, we might have had a different set of circumstances in 2008-09.
The questions around fintech go to the questions of competitiveness. Brexit and Covid have put the country in a particular situation, and there could be no better opportunity or more pressing time to consider all the underpins and accelerators that exist across the fintech landscape. Fintech is the future, but it is the future now. There is no greater example than the fintech strategic review, to which I will come in more detail.
Before I move to the amendments, I have one final point to really drive home. The start-ups, scale-ups and sales of fintechs are going to be not just an element of financial services—they will be our financial services sector, and it is a competition. China understands that and has a particular approach, and the EU understands it and has one; we also need to understand it. In many ways, the debate gets somewhat caricatured by people who potentially see our approach being “Singapore-on-Thames”. Personally, I think that is extraordinarily disingenuous and disrespectful to Singapore, which operates an incredibly impressive financial services market. If correctly deployed and understood, fintech will transform financial services in the UK and will have standards and rules shot right through, not holding back but enabling and drawing into investments international interests and companies.
On the crypto element of this, we see Facebook’s Libra, now Diem, and we see the activities of the People’s Bank of China. What is the Government’s view on these two approaches? Do we want to find ourselves as crypto takers or, potentially, collaborative crypto makers—makers of the standards and, through that, makers of the markets?
I shall take the amendments in logical rather than numeric order and begin with Amendment 112. In it, I seek to probe the potential utility of having an AI officer in financial services businesses that use and deploy AI. We have seen the well-established concept of the anti-money laundering officer, or AMLO, and quite right too. We similarly see chief data, digital and information officers coming on to the scene. Considering the pervasive nature of AI and the fact that it could be extraordinarily positive or, potentially, precarious, would the Government consider looking into the AIO role within FS organisations?
AI is already deeply embedded in FS. The whole of our financial selves could very soon be at the will of AI. We need to ensure that it is safe, unbiased and non-discriminatory. One example—not from FS, but to make the point—is an AI soap dispenser in the United States that was trained just using data from Caucasian hands. The soap dispenser then would dispense soap only to hands which fitted the data on which it had been trained: horrific, extraordinary, shocking—but it happened. That is dispensing soap; what about when we are talking about people’s livelihoods or the financial selves of all of us?
I move to Amendment 118, which builds on this and seeks to probe the whole nature of the deployment of ethical AI. I believe that in the UK we have a competitive advantage in such deployment which is tied to our underpinning standards and the rule of law. This is set out in greater detail in the report of the Lords AI Select Committee, which I was lucky enough to serve on. We set out five rules for the deployment and understanding of ethical AI. Again, this would not hold business back; it would actually be a competitive advantage. To this end, I ask my noble friend whether the Government would consider changing, extending or expanding the role of the Centre for Data Ethics and Innovation. It is an excellent creation, and the fact that it combines innovation and ethics in its title is quite right. But is there a potential role where the CDEI takes on some regulatory functions rather than just advisory ones? Similarly, I ask my noble friend the Minister what the Government’s view is on XAI—explainable AI—and the pros and cons of having that concept deployed throughout our financial services sector.
Moving to Amendment 115 on distributed digital ID, I have been in enough debates in your Lordships’ House to understand all of the issues around ID, how it soon falls into potentially being seen as ID cards on one side and all of the issues around freedom, trust and privacy. But the reality is, we need to really grapple with, deploy and deliver a distributed digital ID system, not just as individuals but as corporate entities and as a nation. There have been what can probably be best described as a number of false starts when it comes to digital ID, but this is such an underpin to so much of the potential which fintech can deliver, and it is vital that we start to move at pace on it. It is as important to corporate entities as individuals and is not just about security—important though that is—and privacy. It can and would be a driver of growth. It is critical that it is built on a distributed, not centralising, model. I ask my noble friend, in terms of the work I think is going on within DCMS right now, what approach is being considered around this distributed model.
I have an example of how digital ID—and, indeed, ID—right now is sub-optimal. The first question should always be, “What do you want? You asked for my date of birth, but do you want my date of birth, do you need my date of birth, or do you just need to know that I am over 18? Do you just need to know that I am over 18 in a certain circumstance for a certain period?” Similarly, asking for an address or a utility bill is almost quaint in its antiquity, as if somehow to gain a utility service you have gone through some sophisticated KYC process.
Just this morning, while I was preparing for this debate, I received an email saying that there had been a problem with the renewal of my driving licence, and I needed to give various credentials that were set out. Noble Lords who know me will know, for obvious reasons, that this was clearly a scam. They will be delighted to know that I do not have a driving licence, nor do I drive, but, in so many ways, this simple, single example demonstrates many of the shortcomings and difficulties that we currently face without having a distributed digital ID.
My amendment suggests that the digital ID needs to be scalable; it needs to be flexible so that it can evolve—when and if quantum computing comes in, there will be a need to rehash all the keys for identity through quantum rather than current means. Crucially, it needs to be inclusive, not just in respect of all the protected characteristics but inclusive in its broadest, brightest, brilliant sense.
Finally, the Government would be advised to undertake a large piece of public engagement around digital ID. For understandable reasons, there is extraordinary fear and uncertainty about the concept. That is not unfounded; if it is got wrong, it goes badly wrong. We need to get the public engagement right, as was the case with Lady Warnock’s commission on fertility treatment —at first blush, nothing could be seen as more alien than test-tube babies, but it became incredibly well understood and popular through that public engagement. If we get that engagement right with distributed ID, I believe that there will be similar support for it across the nation. Does my noble friend the Minister agree?
On Amendment 119, on digital operational resilience, does my noble friend believe that the Government and the regulators currently have the grip that they would want across the FS sector to understand what the consequences are without the level of digital operational resilience which is required? Will she also comment on potential standards that could be drawn out in this area of DOR?
On Amendment 128, on transaction reporting requirements under MiFID and EMIR, will my noble friend comment on the existing operational burdens currently evident as a result of these requirements and whether the Government would consider looking at transaction ledgers, potentially built on a blockchain, to ease such burdens? As I have said since writing my 2017 report, Distributed Ledger Technologies for Public Good, I would never claim that DLT is the silver bullet; I would not even say that is necessarily a silver bullet, but I would say that it is surely worth a shot.
On Amendment 130, mandating a regime for open finance, noble Lords will be aware of the large success that open banking has been. We need urgently to extend this into open finance. It could cover various areas, not least mortgages and insurance, across the whole FS sector. Currently, we have what I can best describe as PSD 2 suboptimalities. What is the plan to amend PSD 2, not least in relation to an open finance regime? If the plan is not to use this current Financial Services Bill, then which Bill? If we truly had an open finance regime, we as individuals could have our data in our hands—we decide, we choose. If we do it, it will be a boon for fintech, a boon for individuals and a boon for the UK.
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Amendment 133 looks at financial market infrastructure and the potential use of distributed ledger technology—DLT. Again, would my noble friend the Minister agree that there is a real opportunity to experiment and to play, to see what can be achieved through having DLT-enabled FMI? Would she further agree that a potential sandbox at the Bank of England could be of use in this area, as well as potentially with the work on central bank digital currency and other elements which come under the Bank of England’s remit?
Amendment 136B is on the report on the fintech strategic review. Ron Kalifa’s review is a fine piece of work. It had excellent chapter heads, and hundreds across the sector helped. It is packed full of detail and realistic, achievable and doable recommendations. Many of the recommendations do not require primary legislation or regulation. Does my noble friend the Minister agree that the Government should crack on with delivering those that do not? For those that do, I ask her: what is the plan? In many ways, this goes to a number of issues that have been discussed in previous groups. An elephant has been wandering around our Grand Committee, and it is the question: if not this Financial Services Bill, then which financial services Bill? If not now, when?
On Amendment 136D, on a scale-up review, does my noble friend the Minister agree that this is an opportune moment to look at this area? It has been a problem in the UK for decades. It should have been addressed decades ago and now, with Covid and Brexit, the time must be right to bring a report to Parliament which sets out the barriers, looks at all the issues around patient capital, and identifies all the gaps and the issues to scale up. There are some good examples to look at from other jurisdictions, not least the approach in Germany, and to consider all the issues around place-based growth. Does my noble friend the Minister agree that the comments in the fintech strategic review on scale-up and the need for a scale box to build on the sandbox also make sense, also tied to the fintech clusters around the country? Would she further agree that this ties into what was mentioned in the previous group of amendments: building back better and the whole levelling-up agenda?
Amendment 136E is on the modernisation of UK law to allow FMI to process digital instruments. Again, it would seem opportune to look at how we can transform our markets and bring in all the powers, with many of which we have a competitive advantage within the UK. In the previous group I mentioned the big bang in the City in the mid-1980s. If we get all these fintech changes right, we truly could have big bang 2—I do not even need to mention that it will be 2.0—for the benefit of the entire UK, not just the square mile.
Will the Minister comment on the dematerialisation of securities? Does she agree that we need to move at least at the same pace as the EU? Similar to my earlier comments, whether we like it or not this is a race, and we have the opportunity to compete and be successful in that race. Similarly, will she comment on digital opportunities with the settlement finality directive and how we could transform our approach there, and indeed the trading of tokenised securities—again, looking at how blockchain could underpin that? Lastly, what could be done in terms of post-trade processes?
Finally—I put it in this order for a reason—I come to Amendment 125 on a UK centre for applied innovation in financial services. I propose a centre at the centre, to make all this whole. I have been pushing this idea since 2015 and it is great to see that the concept of a centre is also in Ron Kalifa’s fintech strategic review. I envisage that, in such a centre, public policy issues could meet
private sector solutions and academia. In an environment away from other approaches, verticals and silos, we could come up with solutions. Will the Minister comment on whether a report to Parliament on such a centre would be a good idea at this time? I believe that we need such a centre to drive across government if we are to achieve not only all the elements in the FSR, but all the potential benefits from fintech and all the new technologies from the fourth industrial revolution.
I have been involved on two occasions when cross-Whitehall working has truly come to life, and the results were sensational. The first was the 2012 Olympic and Paralympic Games. We were able to get 18 government departments to work together on a horizontal to deliver a pretty sensational summer of sport and a legacy which still beats, not just in the heart of east London but right across the country, as a result of staging those Games. It happened because the departments wanted to be involved. Similarly, over the last year, we have seen a fabulous cross-Whitehall effort on the Covid crisis. We had to, but we absolutely did. We need to reimagine the whole timetable for policy and consultation and an approach—which the centre would lead on—which put much more data and insight into decisions.
If we do not look at such a centre, and if we do not use the Bill to put into practice many of the recommendations from the fintech strategic review, when will we bring them into play? At the beginning of the Covid crisis, fintechs—often at weekends and in a short number of hours—came up with potential solutions for the effective, efficient and largely fraud-free distribution of CLBILS, CBILS, BBLS and self-employment payments. HMRC was unable to engage with them or port them into their systems. We now have an extraordinary toxic tail of fraud which will run long into the years ahead. We still have fintechs which, right now, could look back over time and solve those issues. Will the Minister comment on what the Government’s approach will be, across all departments, to engage with fintechs better? This is really a larger question: how can the Government engage with firms of all shapes and sizes, with SMEs obviously being critical to that?
I have spoken at length; I hope I have brought a picture of how these individual amendments add up to a potential transformation that we could have if we truly embraced the opportunity that fintech presents. We have the talent; we have the technology. Does the Minister agree that the time is now, and that we must act? I beg to move Amendment 112.