My Lords, I am grateful for this opportunity to discuss the important issue of the use of technology in financial services and how technological developments will continue to impact the sector. The UK has been independently ranked as one of the best places in the world to start and grow a financial technology, or fintech, firm. I reassure my noble friend Lady McIntosh of Pickering that, as the Chancellor set out in his November speech on the future of financial services, we are not complacent. We want to build on this strength and use technology to deliver better outcomes for consumers and businesses and make the most of the job opportunities that this sector presents.
Many of the questions raised by the adoption of cutting-edge technology apply across the whole economy, not just to financial services, so although I am sympathetic to the purpose behind a number of the amendments—ensuring that the UK embraces the opportunities that new technology can bring—I am not convinced that they are the best route forward at this time.
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The Government and the financial services regulators are taking a number of actions in this area, including the ongoing development of open banking and open finance, and a significant piece of work on crypto assets and distributed ledger technologies. I shall speak about those when considering the amendments.
Amendment 112 seeks to require financial services firms that use AI technology to appoint a designated AI officer to have oversight of their use of that technology. As I said, this question goes far beyond financial services firms, which is why the Government have established an Office for Artificial Intelligence. We have also established the Centre for Data Ethics and Innovation, to provide independent expert advice on the measures needed to enable and ensure safe, ethical and innovative uses of AI and data-driven technologies.
Amendment 115 seeks to require the Government to publish their plans for digital identity in financial services. I reassure my noble friend Lady Neville-Rolfe that the Government recognise the value of making it quicker and easier for people to verify their identity using modern technology. That is why, following a call for evidence in 2019, the Government committed to developing a legal framework to enable the adoption of secure digital identities that can be used in the greatest number of circumstances.
As my noble friend has noted, as an important first step, DCMS recently published the prototype of a trust framework for UK digital identity, for organisations that want to provide or consume digital identity and attribute products and services. The Treasury will continue to work with industry and DCMS to ensure that the Government’s approach to digital identity reflects the needs of financial services businesses and customers.
Amendment 118 would introduce an obligation on the financial services sector to follow guidelines published by the Centre for Data Ethics and Innovation, a body that I have already mentioned. This is an independent body made up of industry experts in data and technology. It draws on evidence and insights from regulators, academia, the public and business. The CDEI does not, however, act as a regulatory body, but instead acts to provide independent expert advice on the measures needed to enable and ensure safe, ethical and innovative uses of AI and data-driven technologies. It is therefore not within its remit to mandate industry, including the financial services sector, to abide by any guidance it may publish. However, its future role is being consulted on as part of the Government’s national data strategy.
Amendment 119 calls for a review of the digital operational resilience of the financial sector. I reassure the Committee that there are already robust obligations on firms and regulators to ensure their digital operational resilience. This issue is at the forefront of the regulators’ minds in the Bank of England, the PRA and the FCA. For example, threat-led penetration testing—CBEST—is regularly used to identify vulnerabilities and strengthen finance firms’ cyber defences.
Amendment 125 seeks to require a detailed plan to establish a UK centre for applied innovation that would have responsibility for developing standards for data sharing. Amendment 130 would require the laying of draft regulations requiring financial services data providers to make data available to third-party providers. Data sharing in the financial services sector is a key priority for the Government, as is demonstrated by our progress in developing the use of open banking and open finance. The UK’s open banking standard has been widely recognised as world-leading in enabling consumers to share their data with third-party providers
to increase access to products and services that better suit their needs. There is an active programme of work on open finance, which would extend the benefits of open banking to a wider range of financial products.
However, the Government recognise that increased data sharing must be balanced by the appropriate management of any associated risks. That is why the FCA recently published a call for input on open finance, to understand what role regulation should play. It will respond by the end of this month to address next steps for the delivery of open finance. On Amendment 130 in particular, BEIS has already announced plans to bring forward legislation that will give the Government powers to mandate data sharing across sectors.
Amendment 128 would require the Government to produce a report relating to the impact of transaction reporting requirements in the UK, and whether those impacts could be alleviated through the use of blockchain technology. Amendment 133 would require the Government to consider options for a pilot scheme for market infrastructures based on distributed ledger technology. Amendment 136E calls for the Government to report on legislative and regulatory changes required to enable the UK’s financial market infrastructure to process digital instruments.
The Government are keen to explore the application of distributed ledger technology in financial services. It is hugely important that the financial sector grasps the potential opportunities presented by new technologies. This technology could have a transformative effect on markets, fundamentally altering the current market ecosystem and delivering more efficiency, improved liquidity, enhanced transparency and greater security. However, this is also a new and quickly developing area and it is important that innovation does not come at the cost of financial stability.
That is why, in January, the Treasury published a consultation on crypto assets and stablecoins and, as part of this, included a call for evidence on the use of distributed ledger technology in financial market infrastructures. The call for evidence asks for industry views on what the Government should be doing, including whether initiatives could be taken forward for trialling or testing this proposal—for example, by making use of existing schemes such as the FCA sandbox. The consultation closes this month and the Government are committed to exploring how best to proceed on this important agenda.
Amendment 136B would require a report on the implications of the financial technology strategic review on financial services regulation. The Kalifa review was published last month. It set out key actions to ensure that the UK’s world-leading fintech sector continues to go from strength to strength, and makes recommendations across a number of priority areas, of which regulation is one. The UK has long been a global leader in fintech, thanks in no small part to our forward-leaning approach to regulation. For example, the FCA was the first regulator to globally implement a regulatory sandbox, which has been key to fostering innovation, by providing a safe space for firms to test new ideas. This approach has been emulated by many of our international competitors. As I have said, the Government are committed to maintaining our lead,
so we strongly welcome the review and are carefully considering its recommendations before setting out our next steps in due course.
I conclude by considering Amendment 136D, which would require the Government to report on what action they intend to take to reduce scale-up gaps in the UK financial services sector. The Government already have an extensive programme of work to tackle the scale-up gap across all sectors of the economy, not just financial services. The Government have supported thousands of innovative businesses in their early stages to scale and grow, through tax incentives, grants and loans, as well as through support in accessing finance, notably though the British Business Bank’s lending and equity programmes.
I applaud my noble friend Lord Holmes for bringing this important topic to the attention of the Committee. It is an area within which the Government, as well as the financial regulators, are very active. We intend to remain a world leader in this area. This has been a wide-ranging debate and I am conscious that we are limited in time. If there are any questions that I have failed to address in detail I will write to noble Lords. In the meantime, I hope that the work I have described will mean that my noble friend feels able to withdraw his amendment.