That the Grand Committee takes note of the Report from the European Affairs Committee The UK– EU relationship in financial services (1st Report, HL Paper 21).
My Lords, on 23 June last year the European Affairs Committee published our report, The UK-EU Relationship in Financial Services. The Government responded in August and we are debating this important subject nine months later. I regret this structural time lag for committee reports, but warmly thank the Senior Deputy Speaker and the Chief Whip for their efforts in trying to address this and in getting our debate today.
Before I begin in earnest, I thank our staff Nick Boorer, Dominic Walsh, Tim Mitchell, Kutumya Kibedi, Sid Gurung and Louise Shewey, as well as the committee’s specialist adviser on this report, Professor Sarah Hall. We are lucky in this House with our committee staff in particular and on the EAC especially. I know that the whole committee felt that they were hugely hard-working and skilful in everything they did to help to settle this report and in the evidence process that underpins it.
We took evidence between February and March last year on the state of the UK-EU relationship in financial services, covering four main areas in the sector: first, the impact to date of the UK’s exit from the single market; secondly, the impact of the absence of a framework for UK-EU regulatory co-operation; thirdly, equivalence; and, fourthly, regulatory form and divergence, and agreements with third countries. I am going to focus on a few themes that the committee felt were especially salient, starting with the impact of Brexit on the UK financial services sector, as we then found it.
The sector employs 2.3 million people and makes up 10% of total UK tax receipts. It comprised 19.1% of all UK services exports. The EU is a very significant trading partner in this sector, making up 37% of total UK financial services exports in 2019. I note that, in the latest ONS “Pink Book”, those numbers are broadly similar. We are all reminded that the sector, although it is traditionally associated closely with the City of London, is well established across the UK. In fact, two-thirds of those employed in the sector are outside London. Our witnesses were generally optimistic about the sector’s future, with many fewer job moves to the EU than anticipated—the EY Brexit tracker, which has now ceased, recorded just 7,000—but we warned against complacency, as it is not clear whether the full impact has yet played out.
The Government’s response provided further details on the steps they were taking on the future of financial services, with reference to the Financial Services and Markets Bill and the State of the Sector 2022 report, both of which were published in July last year, a month after our report. The interesting State of the Sector report provided scant detail about how the Government intend to support financial services outside London, however.
In addition, neither the Government’s response nor the inaugural State of the Sector report engaged with the committee’s recommendation that the report include
My Lords, I congratulate the noble Earl, Lord Kinnoull, on his expert introduction of this debate and on securing the time for it today. It was my privilege to serve under his chairmanship as a member of the committee that produced the report. However, it is a pity that we are debating it only now, 11 months after publication. Instead of debating this report, we should be debating our recently published report on the wider future UK-EU relationship, which your Lordships may have seen has been published.
Nevertheless, financial services are an important sector of our economy—one in which the UK’s global position is very strong. I will not repeat the statistics that the noble Earl has already provided but, for the EU, the financial services sector is only partially a Union competence, with member states retaining considerable freedom of action, particularly in the retail sector.
As we reported, there has not been much concern in the City about the lack of equivalence decisions by the EU. However, we noted that the agreement within the TCA that we would enter into a memorandum of understanding on regulatory co-operation has still not been realised. It was believed that the EU deliberately blocked progress on this. Indeed, there was a broad consensus among the witnesses who gave evidence to our inquiry that the approach adopted by the EU towards equivalence decisions has been political rather than technical, as the noble Earl mentioned. Our report urged the Government to step up political and diplomatic financial services engagement with the EU and we noted that both the EU and the UK have mechanisms for regulatory co-operation with the USA that they do not yet have with each other.
The adoption of the Windsor Framework was supposed to end the standoff with regard to signing the MoU, the content of which was agreed two years ago, and permit the parties to agree a date for signature. The Financial Times, no less, reported in March that the European Commission was then ready to sign it. Can my noble friend the Minister tell the House whether a signing date has now been agreed? If not, when does she expect that one will be agreed?
My Lords, I agree with the noble Viscount, Lord Trenchard on this. It has been a privilege to be a member of the European Affairs Committee and to work with him on many of the issues that we have addressed. Although we disagree on some things, I have always found his views to be of value and have learned something from them. That is important in any parliamentary system.
It has also been a very great privilege to work on this committee under the chairmanship of the noble Earl, Lord Kinnoull. I have the greatest regard for him. This is now one of the swansongs of his period as chair of the committee, but he has been a very good chair indeed. I have known the last four chairs of the European committee of this House very well. I met Lord Grenfell when I worked in government; Lord Roper was a very close personal friend; and I came to have enormous affection for the noble Lord, Lord Boswell. The noble Earl, Lord Kinnoull, however, has I think been the best of the lot. His ability to bring together the disparate views on that committee and to arrive at rational and sensible conclusions is something to be praised. Although the House gains from him becoming the Convenor of the Cross Benches, the cause of a sensible debate about Britain’s relationship with the European Union has suffered something of a loss.
As with all the outputs of this committee, this is a good report. It is a pity that we are debating it nine months after it was concluded, because a lot is changing in this world all the time. We have seen growing concern about the position of the City of London, with the feeling that it is losing out to New York and that Asian financial centres are rising up. The City is a huge national asset. I am not anti the City of London—I am a strong supporter of it and believe that it is one of the things that Britain is really good at. We have to try to build on its strengths.
It is a concern that people are worried about the problems facing the City, but we have also learned in the last year that there are grave risks in financial regulation. In the autumn, we had the confidence crisis in the bond markets, which was stimulated by the Truss Administration and required a huge rescue mission by the Bank of England to stabilise our pension funds. That is a matter a great concern to ordinary people, and we should be conscious of those risks.
My Lords, it is seven years since we voted as a country to leave the European Union. I often ask, in the speeches I give to international audiences, what the world thinks of this decision. Last month, I spoke to a group of 100 business leaders from around the world, and 99% of them thought that it was a big mistake for the UK to leave the European Union. Yesterday, I spoke at a conference here in London of international businesspeople. I asked the question again, and well over 80% of them said that it was a big mistake for the UK to have left the European Union. This, whether we like it or not, is what the world thinks of our decision.
That said, the UK-EU Relationship in Financial Services report concludes that overall, the outlook for financial services after Brexit seems relatively positive, in contrast to some other sectors of the economy. However, the report says that the UK
“is at an early stage of the adjustment to life outside the EU and there is no room for complacency, particularly as the impact of Brexit on the sector has not yet fully played out. We therefore urge the Government not to disregard the importance of a cooperative and constructive UK-EU relationship in financial services”.
That is why it is absolutely key that the Northern Ireland situation is sorted out, that the Windsor Framework is accepted and implemented, and that the Northern Ireland Parliament resumes as soon as possible. We will then be able to address the TCA, because the basic EU deal is basic. It could be far more comprehensive, particularly in financial services, where we could strengthen our co-operation and agreement.
I thank the noble Earl, Lord Kinnoull, and the European Affairs Committee, for the UK-EU Relationship in Financial Services report, although as the noble Lord, Lord Liddle, mentioned, it is already a year out of date. The noble Earl mentioned some statistics in his excellent opening speech. I will go even further and highlight some of these statistics, which show the strength of the sector in this country: 2.3 million jobs, £100 billion in tax contributions, a financial services trade surplus of £63 billion in 2020, and £11 trillion of assets under management in 2020. The UK is the second-largest asset management centre globally, it is the world’s largest centre for international debt issuance and it has the highest financial services trade surplus.
My Lords, I hope noble Lords will forgive this intrusion into their counsels; I am not a full member of the European Affairs Committee, although I have read this excellent report cover to cover. I am a member only of one its sub-committees—a lowly member of the Sub-Committee on the Protocol on Ireland/Northern Ireland—so I feel rather like a fourth-former who has wandered into the prefects’ lounge. I will try to squeak out my message as briefly as possible. I have just three points to make.
The first is a warm endorsement of what the noble Lord, Lord Bilimoria, just said about visas, and specifically work-related visas—the ability for people to come and do business. It is a completely separate issue from inward migration, and I would very much like Ministers to consider a Commonwealth business visa. By all means, make it difficult to qualify, have a high threshold for the turnover of a company and so on, but once you have qualified and get it, you should be allowed to travel to all participating Commonwealth states that have opted into the scheme.
My second point follows on from what my noble friend Lord Trenchard said about the alternative investment fund managers directive. I was a Member of the European Parliament when the AIFMD was produced, and it was one of those occasions when the UK was strongly against. The noble Lord, Lord Liddle, pointed out that we often supported these regulations; not on this occasion. There was almost unanimous opposition to it, not only across the industry but across the City more widely. It was seen as a needless burden. Why has it not been repealed?
Here we come across an interesting dynamic in the nature of regulation, which is that once companies have assimilated the compliance costs, they lose all interest in repeal. In fact, it is worse than that: they see no reason why a competitor company should come and outcompete them by not having to jump through all the hoops that they did. The field of the AIFMD is good example: the people most strongly against the regulation when it was proposed have now become its advocates and defenders, because they see it as a way of raising barriers to entry.
My Lords, it is a pleasure to take part in this debate. I very much welcome this report, which is important and timely—well, a bit out of time, one might say. It deals with the aftermath of Brexit and, of course, an important part of our economy. I will resist the temptation to go down the Brexit rabbit hole, but I will return to the issue at the end.
Before making my main contribution, I will express my credentials for taking part in this debate. I have worked in the financial services industry for the whole of my working life.
I question the premise on which this debate is taking place, and on which I think the report is based. I may be wrong, and I will be happy to be corrected, but the implied premise is that the bigger the financial services industry, the better. I question that. It strikes me that, in a phrase that is familiar to me, it is akin to making ourselves rich by taking in each other’s washing.
What does the financial services industry contribute to the real economy—the production of goods and services that go towards serving individual and societal wants? My view is that the financial services industry contributes far less than is typically assumed, particularly by the financial services industry itself, and that it is in a sense a millstone around our economy’s neck. It strikes me that it is akin to the resource curse, which is typically talked about in terms of mineral and fuel abundance in less-developed countries and which tends to generate negative developmental outcomes, including poor economic performance, collapsing growth, higher levels of corruption and greater political violence. Well, leaving the political violence and maybe the corruption aside, it is a fact that we are experiencing poor economic performance and have done for a decade and, in my view, one of the contributing factors to that is the overreliance on financial services that contribute nothing to human welfare.
My Lords, I thank the noble Earl, Lord Kinnoull, for raising this debate. I also highlight my interest, as noted in the register, as an employee of Birchstone Markets.
The UK holds a unique global position in financial services due to its time zone. Sitting in London, it is possible to capture the end of the Asian trading day, all of the European trading day and most of the American trading day. Notwithstanding an early start and a late finish to one’s work, no other financial centre in the world has the ability to provide that with relative ease. This puts the UK in pole position to help clients and win business on the global stage. It is an enviable position, which we need to do everything we can to maintain.
It is, of course, fair to say that far fewer jobs have moved to Europe from the UK than was envisaged in a worst-case scenario for the sector. However, it is important to note that the job transfer may not be over yet and to remind ourselves that, simply because the numbers are much lower than the worst-case estimates suggested, that is no reason to think that everything is fine and that we do not need to be vigilant. We should still be trying to maximize every opportunity available to us to ensure that the UK financial services sector remains competitive and attracts world-class talent and business, as it always has.
Indeed, when you look at the types of roles that have moved, it can be the sales and trading roles, or the client-facing banking roles, which are regarded as important within the sector and are one of the many types of roles that we would ideally like to keep here in the UK as part of our talent pool.
In a post-Brexit world, where banks and financial services firms were required in some cases to materially bolster their European operations from what may have previously been a small operation to a European hub, the ongoing movement of staff from the UK to Europe is likely to be required. The ECB has made it clear that it expects the highest levels of governance and risk management in third-country subsidiaries and that operations cannot and should not work on insufficient staffing levels. A little over a year ago, the ECB announced that 21% of the firms assessed by it in this category warranted targeted supervisory action. The ECB will continue to monitor the way that banks operate post Brexit and will require a strong local presence. This will continue to impact operating models and maintain the pressure to have key staff based locally, not in the UK.
My Lords, I used to belong to a committee which dealt with these financial matters before we Brexited. It was always obvious that, if we did Brexit, we would have some loss of business to Frankfurt and other centres in Europe; after all, that was the whole scene. We somehow convinced ourselves that by breaking free of Europe, the entire rest of the world was suddenly going to congratulate us and come to do business with us, and all sorts of things. The surprising thing is that we are still not finished with the Brexit business.
Seven years later, we are still debating the protocol and all sorts of other legislative things are going on—about cutting European legislation from us, and so on. So it does not look like we are free of Brexit yet, but we have suffered all the disadvantages of it. We are neither free of the EU nor friendly with it, so we are paying a big cost. This is not relevant to our debate, but on the television today two big car factories have been complaining about the fact that they are losing out from Brexit and they are going to have to stop operating in the UK.
One of the surprising things is the slowness with which the party in power has dealt with its great dream. It dreamed about Brexit and said, “Get Brexit done”. Okay, you got Brexit done—but you have not got Brexit done because it is still a problem in the economy. This very nice report valiantly tries to deal with all the problems which are going on. But ultimately, the fact remains that we have not explained to ourselves that the City is losing out. It may still be very big and very profitable, but it is no longer as big as it used to be and it is losing out as much to the US as to the smaller centres in the EU.
The problem we really have to face is how quickly and how soon we can get over this barrier. Having decided to Brexit, let us Brexit, but let us have speedy and neat arrangements whereby we can organise our own affairs. The impression that I get from this report is that, somehow, there is a failure on the part of the Government—I am sorry to say this—to get their act together and decide what it was that they wanted to do, what they expected and how they decided that it was not going to happen because what they expected was far too optimistic and they had not actually calculated the problems of the real world.
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“for at least the next five years a section dealing expressly with the UK-EU relationship in financial services”.
My first questions are to ask the Minister to provide further details on how the Government intend to support financial services outside London, when this year’s State of the Sector report will be published and whether it will contain the information that we requested, specific to the UK-EU relationship on financial services.
Moving on to regulatory co-operation, our report also examined the fate of the UK-EU memorandum of understanding, or MoU, for regulatory co-operation on financial services. The UK and the EU concluded technical negotiations on that MoU almost two years ago, yet it has still not been signed or entered into force. We noted
“the widespread view that the MoU has become a casualty of”
wider difficulties in the UK-EU relationship and concluded that, although the non-finalisation was not causing major problems, it
“would still have value as a mechanism for strategic dialogue”.
That is, I am afraid, committee code for conferring a mutual benefit on both the UK and the EU. Following the surfacing of the Windsor Framework, a European Commission spokesman indicated that the Commission was ready to start work on the so-called finalisation of the MoU on financial services. Two and a half months on, what discussions have the Government had recently with the EU on that MoU?
I turn to equivalence. As highlighted in our report, the UK
“has issued positive determinations for EU … states in 28 of the 32 areas identified for the equivalence process”,
whereas
“the UK holds just one, time-limited equivalence decision from the EU”,
on central counterparties. This contrasts with the multiple equivalencies that other jurisdictions, including the US and China, enjoy from the EU. Witnesses to our inquiry suggested that the decision by the EU to withhold equivalence from the UK
“is political rather than technical”.
However, although we expressed regret at the state of affairs, we concluded that this a unilateral decision for the EU and that
“it would be misguided to base the UK’s future strategy for the sector on something that is not in the Government’s gift and that currently seems unlikely to be forthcoming”.
We also concluded that
“the low number of equivalence decisions is not seen within the sector as a matter of fundamental concern”.
The Government’s response indicated some agreement with this analysis, although it provided little detail in respect of the committee’s request to
“set out the extent to which it believes there to be a competitive disadvantage as a result of the imbalance in equivalence decisions”
from the EU for the UK compared with other countries. Have there been any further discussions between the Government and the EU on equivalence in the past six months, in particular in the period since 27 February and the surfacing of the Windsor Framework agreement?
I come to regulatory reform and divergence. I noted at the start of my remarks the size and importance of the sector. In essence, during our inquiry, the Government and the Bank of England were finishing a thorough and sensible analysis of the regulatory environments; it was sensible because the UK had moved from a one- size-fits-28 environment to a one-size-fits-one environment. The analysis involved a substantial number of reviews and consultations; its key elements are set out in table 1 on pages 42 and 43 of our report. The analysis was to lead to legislative change. The largest part of that—the Financial Services and Markets Bill—is before us in this House now. The final stage will be the implementation of the whole new environment.
Although the Government’s response provided, as requested, some further details on their plans for regulatory reform, it was clearer on regulatory changes that were already planned or under way—particularly those included in the Financial Services and Markets Bill—than it was on the future direction and regulatory plans for UK financial services. Our report noted that, under the Government’s plans, greater powers will be moved downwards towards the regulators, in particular the Financial Conduct Authority and the Prudential Regulation Authority. Although we are supportive of this, we emphasised absolutely the need to establish “appropriate mechanisms” for parliamentary scrutiny and accountability of regulators and recommended that the Government facilitate this. Their response was non-committal in this regard; indeed, this has been much debated during the passage of the Bill and will, I suspect, be voted on when we come to Report stage.
Another controversial proposal was the new secondary competitiveness objective, which will be included in the financial services regulators’ remit. The Government are now taking this forward; it is another thing that has been much debated during the passage of the Bill and one that the committee was keen should include regulators being “responsive, consistent, and proportionate”. Indeed, this was covered in one of the amendments to the Bill that I put down.
Divergence will also be driven by changes in the EU, as well as in the UK. In the context of possible changes to EU legislation, the committee raised concerns about the Government’s apparent unwillingness, as we saw it, to actively seek to influence the EU in the UK’s interest and request clarification. The Government’s response described a
“proactive strategy of engagement with the EU institutions and Member States”.
Naturally, that will continue to interest the committee.
Can the Minister provide further details on the specific steps that the Government intend to take to support greater parliamentary scrutiny of the regulators, in recognition of their increased powers? Does she feel that regulators should be responsive, consistent and proportionate?
In closing, I come to the opportunities. Our report also examined areas of opportunity for the financial sector, particularly in novel areas where there is little regulation in place, such as fintech and green finance. We welcomed the Government’s approach to regulatory innovation and the Government have since announced that they plan to publish an updated green finance strategy this year. The committee also welcomed the Government’s pursuit of a mutual recognition agreement with Switzerland. Since then, the Swiss Government have said that the two parties expect this to be concluded by the summer of 2023. Finally, the committee welcomed the Government’s general approach of openness to the outside world and non-reciprocity in our financial services sector. Can we expect publication of the UK’s updated green finance strategy shortly and, if so, when? Do the Government still expect the mutual recognition agreement with Switzerland to be concluded by this summer?
I lived with this report for several months and it was an exceptionally interesting time; we met many very able people in our financial services sector. I very much look forward to the debate that we are about to have. I beg to move.
The Government’s response to our report highlighted the Financial Services and Markets Bill, awaiting Report stage in your Lordships’ House, and suggested that the Bill would
“deliver on the Government’s ambitious vision for the financial services sector to promote and enhance the UK’s position as a global leader”.
However, as several noble Lords and I argued throughout the Committee stage, it is somewhat under- whelming in its effect. Seven years on from the Brexit vote, we still have substantially all the cumbersome EU financial services legislation on the statute book. The future regulatory framework review was welcomed by the Government, who confirmed their view that the detailed regulatory requirements should be in the regulators’ rules and not in legislation. Parliament is not equipped to monitor and update large numbers of highly technical provisions in a flexible, market-responsive manner. As an example of this, the Treasury observed that the markets in financial instruments regulation sets percentage caps on how much trading volume can happen outside recognised trading venues.
As the City Corporation observed in its briefing provided by the Remembrancer’s Office, since the end of the transition period the Treasury has used its powers to onshore EU equivalence regimes in many areas. Nevertheless, the Government should continue to use these powers to find third-country services and persons equivalent, using a more outcomes-based approach, rather than the EU rules-based approach. The ongoing negotiations with Switzerland are also a good example of how we should pursue bilateral mutual recognition. I think that the corporation is right in its argument that the Government should seek, wherever possible, to embed the G20 endorsed deference model into its domestic regime and bilateral agreements, emphasising consumer choice and competition.
The Bill makes some much-needed changes, such as the Solvency II changes, to financial regulation straight- away, but it is disappointing that it is limited in scope. I have suggested that the Government should use the Bill at least to abolish the cumbersome and unnecessary alternative investment fund managers directive and all its derived legislation within two months of the passage of the Bill. When I worked in Brussels for EFAMA, my French and German colleagues thought that the EU should leave that market to London and not try to regulate it. It was one major piece of European legislation introduced in 2014 for political reasons, which was universally opposed by all British stakeholders, including industry, the regulators and the Government. We do not need to ask the regulators to consult on what might replace it. That would cost money and take time that we do not have. Does my noble friend not recognise that she needs to act fast and with more determination to achieve the Government’s aim to secure the City’s position as the leading global financial services market?
I am glad to note that the City also supports the views of many noble Lords that we need a Joint Committee of both Houses to provide oversight of what the regulators are doing with their new powers. Where I differ from the corporation’s view is that I think that this would be far more effective than enhancing the role of the Treasury Select Committee’s sub-committee, which has been set up for this purpose. To have one Joint Committee doing this work would avoid the duplication of time and effort that the regulators would have to spend if they were required to work with two different committees doing much the same thing. In any case, the oversight and supervision procedures contained in the Bill are unsatisfactory, especially from the point of view of your Lordships’ House.
I also ask my noble friend to look again at the sensible proposal by my noble friend Lord Bridges to establish an independent office for financial regulation, which would ensure that a new Joint Committee would be well equipped and informed to carry out its role efficiently. This would I believe be better than what the current Bill provides for. It requires the regulators to consult their own cost-benefit panels—it gives them a statutory duty to consult their own panels. If the panels are a part of each regulator, it is rather strange to legislate that they must consult a part of themselves. Again, a single, truly independent body, as proposed by my noble friend Lord Bridges, would surely work better than the two duplicated panels doing the same work. Indeed, the Bill is much longer than it would have been if we still had a single regulator, as provided for by FSMA 2000. That is because there are many sections which are repeated so as to place identical, or near identical, obligations on the FCA and PRA separately. It might have made sense, given that we are once again free to determine our own regulatory regime, to merge the two regulators back into a single FSA.
I worry that the new competitiveness objectives given to the regulators will not provide the needed growth and innovation because they are only secondary, and will not, in effect, be very different from matters to which they should “have regard” in forming that policy —but I hope that I shall be proved wrong.
I know that the senior leadership of the FCA is aware of the perception that much of the industry holds about it. I trust that its new chairman, Mr Ashley Alder, will be successful in beginning to change this perception. His experience as chief executive of the Hong Kong SFC and chairman of IOSCO will stand him in good stead.
The UK Listings Review, chaired by my noble friend Lord Hill of Oareford, identified several steps that the Government should take in order to arrest and reverse the recent decline of the competitive position of the London Stock Exchange. Our report endorsed the recommendation that the Treasury should make an annual “state of the City” report to Parliament. It is encouraging that the Chancellor, together with the City Corporation, has followed up on that. I look forward to other noble Lords’ contributions and the Minister’s reply.
Furthermore, we have also seen an outbreak of financial instability, with bank failures in the United States. We do not know what impact this might have on Europe in the future—who knows? As a social democrat, I have become a great believer in the workings of the market economy. Capitalism is the most dynamic way of getting economic growth, but I believe in the warnings of Keynes about the tendency to instability in capitalism and for there to be episodes of great banking collapse, which cause huge problems for ordinary people. With very little growth in our living standards, as we have seen since 2008—and we have not really recovered from that—it is very important that, as far as possible, we do not risk any further episode of financial crisis and uncertainty.
The paradox about the recent position of the concerns about the City of London is that it has all happened since Brexit but very few people think it has anything to do with Brexit. At least, that is what they claim. I have a certain question about that. The fact is that no one wants to challenge the reality of Brexit, because we know it is there. It is no good complaining about it—we have to do something about it. We have to make the existing arrangements work.
Although the evidence in our report is that Brexit has not caused the anticipated damage in terms of job losses in London, as far as we know, the unanswered question is: is business shifting elsewhere without us even realising it? When new business opportunities are created, are they created in the United Kingdom? This is a difficult thing to judge, because it is not as though there is a single continental financial centre which is taking over from London. There are signs of things going to Dublin, Paris or the Netherlands. To what extent Brexit is contributing to the relative decline of the City is, for me at any rate, an unanswered question.
A lot of people, such as my colleague on the committee, the noble Viscount, Lord Trenchard, think that Brexit provides huge opportunities for the financial sector. There have been calls for a new big bang and a decisive break with what is characterised as stifling European regulation. I have to say that I do not buy into this argument at all. My views are that, while it is sensible for Britain to steer its own course on financial regulation now that we are out of the EU—to be prepared to diverge, particularly as we are the leading financial sector player in Europe—I am not persuaded that the opportunities for divergence are massive or that they would bring great economic opportunities, without also creating great risks.
The reason for that is simple. Although Brexiteers think that these financial rules were imposed on us, they were not. We negotiated most of these rules at the Council of Ministers and it was the British position that was dominant in framing them. It would be surprising if there were to be lots of benefits from breaking with those rules, because they were framed with the interests of the City of London in mind. I know that from personal experience in government.
This Government have talked big about the opportunities of Brexit in financial reform and all that. What is actually proposed is reasonably modest; I read Jeremy Hunt’s speech on the Edinburgh reforms and it did not seem to be that great a shift. I am glad that the Government have abandoned the proposals that were canvassed at one stage for them to be able to override the judgment of regulators—although I do support the need for there to be parliamentary scrutiny of the actions of regulators.
One of the worries I have is this business about changing regulators’ objectives to include competitiveness. At a time when financial markets are extremely fragile, that could be a mistake. Our objective should be a strong City, perhaps with more of a focus on domestic growth—including how to get pension funds investing more in infrastructure and have more of a market for growing British companies, enabling them to access equity—so we do need reforms there, but we must put first and foremost the need to avoid financial crises such as another banking crisis. The national interest would best be served by a close relationship of dialogue and co-operation with the European Union. That is why I reiterate the calls made by the noble Earl, Lord Kinnoull, about the need to get on with signing the memorandum of understanding, which will lead to a structured relationship of co-operation with our European friends.
Some 117 companies chose to list on the London Stock Exchange in 2021, with £37.5 billion of PE and VC funding, yet sadly Arm, a company that is Cambridge born and raised, has chosen to list in the United States. That is not a good sign, because the United States remains the leading market for IPOs, whether we like it or not. The UK is the world’s largest centre for OTC derivatives trading. The UK’s insurance sector is relatively more important than those of other major European economies. The UK remains the world’s preferred regulatory regime for financial services. The UK is the leading hub for fintech investment in Europe. The UK is one of the most international fintech markets. Green tech investment in the UK is growing. These are fantastic statistics that we are all very proud of.
However, to strengthen the UK in this area, we must address the lack of skills and availability in the workforce in the City. We must be able to expand the immigration routes. The debate at the moment is whether immigration is too high. I pointed out in another debate recently that one reason why immigration is high is that we have an increased number of international students, which is really good—but they are included in the net immigration figures when they should be excluded. If you exclude the international students, you see that you need to get the workforce that the economy needs, sector by sector, including in the financial services sector. I have said time and again that we need to revamp and reconstitute the Migration Advisory Committee so that, in the same way that the Low Pay Commission sets the minimum wage every year, and the independent Monetary Policy Committee sets the interest rates on a regular basis, the Migration Advisory Committee should be able to say, sector by sector, including for financial services, so many thousand people for a one- year, two-year or three-year visa should be allowed in.
Dublin has been the winner when companies and firms have chosen to relocate. That is no surprise when corporation tax there is 12.5%. I will come on to that later.
The City of London has said that the committee’s report recognised that:
“The City of London and the financial services … sector based in the Square Mile … is a national, European and global asset, which helps fuel business development, infrastructure, jobs and growth across the UK, Europe and the world.”
We have the largest financial services cluster in the world, but here is the point: two-thirds of the sector is based outside London, so maintaining and further developing global trade investment and retaining the City of London’s position as a global financial services hub are also key to the future of the industry.
At the end of the transition period, the UK had onshored EU equivalence regimes in many areas. The Government and regulators should adapt the EU approach and determine third countries’ and firms’ equivalence using an outcomes-based approach, ensuring that the openness of the UK is not restricted by this equivalence overlay. Does the Minister agree with this?
The UK regulatory regime for financial services is one of the most robust. Our high standards are an asset and should be maintained. We should continue to be a global leader in regulation, promoting open global markets and high standards. We need to be an attractive location for financial services talent and— I addressed this earlier—we need to allow the best talent to come here. We saw the huge difference that the big bang made, when we opened up to competition and new technology. The Treasury is now implementing a programme of building a smarter financial services framework for the UK, which repeals retained EU law and transfers 43 core financial services powers to the regulators’ rulebook. This is a good opportunity for the UK.
What about the FCA and the PRA? They need to facilitate growth and international competitiveness. When implemented by the regulators, this can help ensure that the UK remains an attractive and competitive location for financial services. The international regulatory strategy practitioner-led group of senior leaders from around the UK, which is sponsored by the City of London Corporation and TheCityUK, has advised that there are several ways in which oversight can be conducted, one of which is to establish a new financial services Joint Committee. Another is to enhance the role of the House of Commons Treasury Select Committee and the House of Lords Economic Affairs Committee. Does the Minister agree with those points? Another was to establish a technical sub-committee of the Treasury Select Committee, focused solely on financial service regulation, but that committee is already doing good work.
Many people talk about equivalence. The UK has onshored EU equivalence regimes in many areas, but the EU equivalence-based framework is suboptimal compared to the previous UK national regime, which had a mix of approaches. We are now free to redesign this approach to oversee services and improve the EU model. The UK should not adopt a reciprocal or “fortress UK” approach. Looking ahead, the City of London Corporation encourages the EU and the UK to continue to make equivalence assessments pragmatically, with the interest of end-users foremost in mind, and to maintain existing equivalence in CCPs and on data.
The TCA excludes financial services, on the basis that we will have an MoU. I hope that, once we have sorted out the Windsor Framework, we get to a stage where we can have this MoU and strengthen our relationship.
The European Securities and Markets Authority, which previously traded in the UK, has largely shifted to EU venues in Amsterdam. This is worrying. The share of UK-based liquidity dropped from 25% pre-Brexit to 3%.
Another bit of good news is that there were forecasts of 70,000 jobs going to the EU as a result of Brexit, but only 7,400 jobs have been lost. We need to remain attractive. It does not help that we have the highest tax burden in 70 years or to put up corporation tax from 19% to 25%. The loss of passporting rights affects EU firms as well.
I conclude with this. Julia Hoggett, the chief executive of the London Stock Exchange, says that the UK needs to be “young, scrappy and hungry” to compete as a global financial centre, especially now that it can no longer rely on its position as the
“dominant centre for financial markets in the EU”.
The head of financial services at EY, Omar Ali—I qualified as a chartered accountant at EY—says that
“I have no doubt that both the UK and EU will continue to be world leading markets, driving innovation, progress and growth”.
Those of us in this House, or in government in any sense, should not be thinking only of the established producers; we need to think about the start-ups, the companies that do not exist yet and the consumers. We need to think about the overall competitiveness of the City, rather than the convenience of some established players. I pick AIFMD simply because my noble friend Lord Trenchard mentioned it but this pertains in a number of areas, not least in the field of financial services. We are having a lengthy debate in another part of our building about the retained EU law legislation, but we will have a real problem repealing anything—never mind the source—if we begin from the point of view that if the industry is in favour of a regulation, that is the beginning and end of the argument. We need to raise our eyes to more distant horizons.
My third and main point is about chapter 2 of the committee’s excellent report. I add my congratulations to those of the noble Lord, Lord Liddle, to the chairman, the noble Earl, Lord Kinnoull, who has done an extraordinarily good job as far as I can see, albeit from the outside. On equivalence, the EU has every right to behave as a sovereign entity and choose to prioritise politics over economics. In other words—to put this at its most brutal—if it chooses to make itself slightly poorer in order to teach us a lesson, and to inconvenience its own companies and deny them unfettered access to the world’s deepest and cheapest money markets to make a point, that is absolutely its right. It is not for us to cavil or quarrel, but it is vital that we do not fall into the trap of thinking the same way. The prosperity of the City of London survived the decline of sterling as an international currency in the early 20th century because it remained open, we had a light-touch attitude to regulation and we did not discriminate on grounds of nationality against companies from other countries and, indeed, continents.
By the way, I would extend this argument about non-retaliation to almost all the fields where we see some asymmetry between EU and UK policy. For example, as I am sure most of us have noticed by now, EU citizens are free to use our e-gates when they enter the United Kingdom but the EU has chosen not to return the favour, so we have to queue up and get our passports stamped. That is fine; that is the EU’s right. If it wants to make things more difficult for every other non-EU national—Indians, Americans and so on—that is, in the end, its own loss and will be at its own expense. It would be crazy for us not to remain open and welcoming, including to our friends from Europe.
I make the same point about goods traffic. The sub-committee of which I am a member has spent a lot of time looking at the EU’s claim that it has to have these checks in Ireland. It is striking that there has never been an equivalent argument from the UK. At no stage have the British Government said, “We need checks in Northern Ireland in order the preserve the integrity of our market”. By the way, we have not even imposed such checks on EU goods coming in through other routes—quite rightly, because we should trust EU regulators. We have been importing stuff from our European allies and neighbours for decades; it would be crazy for us to have a panoply of expensive regulation purely with the effect of slowing things down and making things harder for our importers of, especially, component parts. Take the great argument used by an economist in this country 100 years ago: if others choose to put rocks in their harbours, we should not retaliate by putting rocks in ours.
The asymmetry on equivalence discussed in this report is based on a widespread fallacy; let us call it the mercantilist fallacy. An awful lot of people—including, I have to say, a lot of my former colleagues in the European Parliament—believe that the strength of an economy depends on exports and that there is some virility in having a big trade surplus. This argument was debunked by Adam Smith two and a half centuries ago. There is no point in amassing a big surplus for no reason; the real drive to economic growth comes from cheaper imports that both free up people’s time and resources to do other things and drive domestic growth.
However, it is always difficult to make that argument as an elected politician because it is counterintuitive and people tend to think that the success of another is at their own expense. In fact, the great 18th-century philosopher David Hume put it beautifully, if noble Lords will allow me to quote him, when he said:
“Nothing is more usual, among states which have made some advances in commerce, than to look on the progress of their neighbours with a suspicious eye, to consider all trading states as their rivals, and to suppose that it is impossible for any of them to flourish, but at their expence. In opposition to this narrow and malignant opinion, I will venture to assert, that the encrease of riches and commerce in any one nation, instead of hurting, commonly promotes the riches and commerce of all its neighbours”.
That is why we should want the EU to flourish and should never make the mistake of raising barriers, whether in financial services or in other forms of trade. We have an obligation to the EU as our long-standing friend and ally, of course, but even if we were to look at this issue in a narrow, selfish way and be without a drop of altruism it would be crazy for us to impoverish our neighbours. We want our neighbours to be as rich as possible because that makes them better customers, which then spills over into our own prosperity. If they cannot see that, we can only lead by example and hope that they eventually understand what is to their own advantage. However, as I say, the EU is a sovereign union.
Our country was raised to the highest opulence simply by the expediency of dropping its barriers, from the 1830s and 1840s onwards, and inviting the traffic and commerce of the world without obstacles. It led to an improvement in living standards, especially for the poorest people, which every foreign visitor to Victorian Britain was struck by. Now, we again live in a world that is turning towards protectionism—in the United States, in the European Union, in China and almost everywhere else. Once again, I think that it falls to this country to be the apostle of unrestricted commerce and to tell the story of free trade as the great liberator and the most effective means there is for conflict resolution, social justice and poverty alleviation.
Clearly, we need financial services. We need to facilitate payments between people and organisations. We need to match borrowers and investors. We need to facilitate saving, not least for retirement and the passing of wealth between generations. But is what we have at the moment in the industry commensurate with those needs?
In expressing these views, I take inspiration—although he is not in any way to blame—from Sir John Kay, the eminent economist, and Andy Haldane, who, when he was the economic adviser to the Bank of England, said that
“the past few decades have seen a sea-change in the functioning, and hence perception, of the financial sector. Latterly, that sea-change has at times risked flooding the entire economic and social waterfront. In a nutshell, finance has moved away from serving the economy and towards serving itself—and indeed remunerating itself”.
Any debate about the relationship between the UK and the European economy in financial services should have these views in mind. We should not be promoting a financial services industry that fails to deliver services to individuals.
To quote some figures from Sir John Kay, he points out:
“Lending to firms and individuals engaged in the production of goods and services—which most people would imagine was the principal business of a bank—amounts to about 3 per cent of that total … The value of daily foreign exchange transactions is almost a hundred times the value of daily international trade in goods and services … Trade in securities has grown rapidly, but the explosion in the volume of financial activity is largely attributable to the development of markets in derivatives”,
and derivatives based on derivatives, and no doubt derivatives based on derivatives that are based on derivatives.
They contribute nothing to the proper functioning of a financial economy, as I described earlier. The profitability of this sector is vastly overstated. The value of its activities is poorly reported in the economic statistics, and it is very difficult to say what the productivity of these services is and what, if anything, they actually contribute to the betterment of lives and the efficiency of businesses. The true value of the financial sector to the community is the value of the services that it provides, not the returns recouped by those who work within it.
There is no doubt that a modern economy requires finance: a country can prosper only if it has a well-functioning financial system. But that does not imply that the bigger your financial system, the better it will be and the more prosperous the country will be. In fact, there is a point at which it becomes counterproductive, and we are well past that point. All the industry does is pass around bits of paper, leading to a net benefit for no one.
This is not an attack on the individuals involved in the industry: they have bought the rhetoric and are doing a good job in terms of the way the industry has developed. But, if you step back and question what the industry is doing for us, I believe that it is well beyond the profitable sector. We need to have that in mind when we discuss these issues. The question should be, “Do we need this work being done?” I look forward to returning to the discussions on the Financial Services and Markets Bill, where we will be able to explore these issues in more detail.
There is a specific problem here: I return to Brexit. Discussing the financial services industry totally in terms of Brexit, which we tend to do, is getting it wrong. We should be looking at the financial services themselves and what value they give, and then ask the second question: how does that fit with our relationship with the European Union?
It will also come as no surprise to your Lordships that many support jobs in banking and finance have already been transferred out of the UK and into Europe. This had already happened prior to 2016 as a result of companies being able to employ qualified professionals in Hungary, Poland and other European countries at a more competitive cost than in the UK. However, we could now well find ourselves in a situation where support jobs that may have also been destined for the UK find themselves being allocated to the centres in Europe. This will have a detrimental effect on our world-class financial services support businesses, which are located all around the country, be it Bournemouth, Birmingham or Glasgow, to name but a few places.
ESG is an area where there is a great opportunity for the UK to lead the way. Given the nascent rise of the sector and industry, the regulatory framework is constantly evolving and the UK can play a key role in shaping its future. We have all read with great interest the work being done to agree a mutual recognition arrangement for financial services with Switzerland. This could be the first of many and I hope that the Government can use it as a benchmark for agreements with other European states.
I believe the UK financial services sector is one we should all be proud of. I look forward to working with noble Lords on this important area.
One very useful thing that this report says is that there are more financial centres in this country that just the City of London. We must be absolutely careful that these centres thrive. We must do things so that they thrive and do not suffer any disadvantages as against London.
I do not want to go on for very long because people have said what it is worth saying. However, I feel that, at some stage, we ought to know—perhaps from the Minister—how soon we can expect to wrap up all the adjustments and restrictions and get on to a real, normal, post-Brexit UK economy. We are still swimming around in the muddy waters and, until we get out of those muddy waters, we will not know whether we have gained or lost. So far, I think that we are losing but, if we are to gain from Brexit, we had better get Brexit done—and quickly.