(8 years, 3 months ago)
Commons ChamberRead Hansard Text Read Debate Ministerial Extracts
Chris Leslie (Nottingham East) (Lab/Co-op)
Twelve per cent. of our country’s economic output derives from financial services. We have over 2 million jobs in the financial services sector, mostly outside the capital city. In Nottingham alone, companies such as Experian, Capital One and Ikano, and over 500 other firms, operate in the financial services sector. Crucially, it generates £60 billion of revenue for the Treasury—money that, in turn, pays for schools, policing, and the NHS. We have more exports of financial services, and more financial services headquarters, than any other country. In short, Britain excels at financial and related professional services: not just banking but insurance, accountancy, legal services, asset management, and much more besides. We all rely on the future success of this sector.
We cannot forget, of course, that the banking crisis shook confidence in the sector—not just among traders and businesses themselves but among the public—and taxpayers were left to pick up the pieces. Since 2008, the UK has seen its markets hit, with fewer IPOs—initial public offerings—and stiff competition internationally. This is far from a static sector, and there are so many opportunities for the UK in a positive sense, from fintech and from innovation flowing from sharing economy developments. Yet the competitors are circling, with big growth in Asian financial centres and New York expanding very quickly into investment management. Now the sector faces a virtually existential challenge: how to exit from the European Union without undermining this important cornerstone of our economy.
Some parts of the financial services sector will be more affected than others. Domestic retail banking may be marginally affected, but for some in the wholesale sector, leaving the single market would not mean tariffs rising by 10% or 40%, but ending their right to sell products in such markets completely. I wanted to raise this issue with Treasury Ministers, and I wrote to them in advance of this debate to ask specifically about five points of particular concern.
The first point, which may seem blindingly obvious, is that we need to retain the UK as the global financial centre. It is essential that we do nothing to undermine the UK in that leading role. That may seem an obvious request to make to Ministers, but it is worth getting them to put on the record a commitment to maintaining our country’s front-runner status. Will the Government commit to maintaining our breadth of specialisation in this unique cluster of services? An erosion in the economies of scale or in our concentration of skills and services would be detrimental to the wider economy at large. That is the first commitment I am looking for from the Government.
The second point it is vital to talk about is alignment. Are the Government aiming to maintain as much of our existing access to the single market and European economic area as possible, or will they look to adopt a lower regulation, lower tax approach relative to the countries in the rest of the European Union? This is a crucial point because maintaining an equivalent and comparable regulatory framework with the rest of the EU will help us to retain crucial access to those markets. If Britain takes the divergent path, we not only risk having market access restricted, but increase the hazard for our taxpayers, who need robust regulation to protect them from any future financial disaster. I therefore urge the Minister not to listen to, for example, the noble Lord Lawson, who wrote in the Financial Times—last week, I think—that
“the benefit of intelligent deregulation…which we demonstrated in the 1980s…offers the prospect of the greatest economic gain.”
I do not believe that the Government should follow that path, and I hope the Minister will resist such siren voices.
If we allow Brexit to cloud our judgment or take it as a chance to forget the catastrophic impact of excessive risk taking, opaque products and reckless behaviour, we will be taking a big step backwards and unlearning the lessons of the financial crisis. Britain was the driving force behind the creation of the global Financial Stability Board after the G20 in 2009, after the financial crisis hit, and Ministers should reiterate a commitment to linking in to its principles and ensuring worldwide compliance for those transacting business in the UK. I believe this is a crucial political choice, as well as one about access to markets. There is a happy coincidence in that choosing the right path for robust regulation will help to maintain the best access for trade. Maintaining rights to passported sales depends on retaining equivalent standards, so I want the Minister to recommit to this broad set of standards, which exist for a reason, and which Britain was at the forefront of creating.
The third question on which I want to press the Minister is about stability. Keeping rights to trade must be a permanent situation. Some people just shrug and say that there are lots of directives—MiFID 2, CRD4—and other EU rules, such as AIFMD, meaning that third countries outside the European Union have rights to trade if they have “equivalent” regulation. However, not all parts of the sector have equivalent rights, so such directives do not cover all parts of the sector; many of the rights are still quite theoretical, because they have not yet been put into practice in lots of cases; and what the European Commission grants, it can very easily take away.
Will the Minister therefore acknowledge that a stable, long-term settlement for access to EU markets is essential, and that leaving others the power unilaterally to disallow equivalence, perhaps with only a few weeks’ notice, would represent a great risk for business? The Treasury should ensure that the passporting of financial services or equivalence arrangements cannot be terminated without consultation and several years’ notice. Our membership of the European Economic Area or a bilateral treaty between the UK and the EU must be based on a long-term commitment to mutual recognition. Ministers should acknowledge the reciprocal nature of these markets. Just as we seek long-term commitments from the EU, many European organisations are looking for long-term access to the UK because of our position as a financial centre of excellence right on the doorstep of the rest of the EU.
My fourth question relates to sectors in which we currently excel, such as clearing and settlement—an area that is crucial to the fabric of connectivity in the networks of financial transactions across the world. I urge the Minister to acknowledge that it is essential that the UK continues to have rights for euro-denominated clearing, because of its importance in creating the wider environment and infrastructure that are so valuable to other financial services, be they underwriting, syndicating, trading, execution venues or banking.
Last year, the Treasury successfully fought off the attempt by the European Central Bank at the European Court of Justice to limit rights in the clearing of euros outside the eurozone, but I suspect that that issue will rear its head again. There is a danger that the UK and the EU will lose out entirely if the wholesale market decides to up sticks and go to New York, which has the right infrastructure to present a competitive opportunity for many in that sector. Maintaining the UK’s rights to euro-denominated clearing is therefore important.
My fifth question is about the orderly transition that we need to have whatever the new arrangements are. I have raised this with the Secretary of State for Exiting the European Union and it is important that the Treasury commits to it again. I hope the Government will agree that we must have parallel negotiations on our new trading and regulatory relationships during the Brexit process and reject the notion of sequential dialogue. The need for an orderly transition to new arrangements means that although we have to talk about the divorce process—Brexit—and how we leave, we must simultaneously talk about what our new relationships and rules will be. There is a case for making it clear that if we are to trigger article 50, there should be a condition on the concept of parallelism to ensure that we can have the discussions simultaneously.
Tulip Siddiq (Hampstead and Kilburn) (Lab)
My hon. Friend is outlining a lot of concerns that have been raised by my constituents in Hampstead and Kilburn. The Office for National Statistics found that 1,000 of my constituents are employed in financial and insurance services. During this divorce, as he puts it, their daily commute is riddled with uncertainty, because of the possibility of relocation or, much worse, redundancy. Does he agree that securing our vital passporting rights is crucial in ensuring that my constituents gain back control of their own future?
Chris Leslie
Absolutely. My hon. Friend represents many people who work in this sector, as do all right hon. and hon. Members in the Chamber, because this is something that affects not just the City of London, but all parts of the country.
In respect of transition, I worry very much about what some people call the “boiling the frog” syndrome. After the referendum, people said, “There wasn’t a cliff edge. What’s the problem?” This is a process that will take many years and we might see a steady decline in our opportunities and our economy; it will not necessarily happen in one go overnight. However, there are serious cliff-edge worries, particularly if we do not have parallel discussions during the transition. I hope that we can secure regulatory co-operation with countries in the EU and continue with the current arrangements, as far as is possible, during the transition. That should be the Government’s objective.
There are other issues that I would have raised with the Minister if there had been time. For example, the UK is a centre for investment management activities, which require worldwide access and, crucially, regulatory co-operation. Many funds are located in jurisdictions around the world, but at present they can delegate many of the actual tasks of fund management into the UK. Continuing those rights to delegation is very important in an area where long-term guarantees are needed.
There is also a very big question regarding what would happen if those who work in the sector and are currently able to move to and work in the UK, which is part of our appeal, faced restricted access. A conclusion needs to be reached soon on the rules for skilled employment movement between the UK and the rest of the EU. That is an important piece of that jigsaw. Other EU countries also face reform of the general concept of free movement, and a skills-based approach may be an option for common agreement.
Britain must not fashion itself as a new, low regulation, offshore haven. Our history—trust, the rule of law, the perfect location, our word is our bond, specialist services and professionalism—is our best selling point. We need to opt for the path that wins businesses through high-skilled, high-calibre and well-regulated products, and not be tempted by diluting important protections and chasing the mirage of undercutting.
Ministers have a crucial choice to make, and it will certainly divide those on the right of the political spectrum. That is one of the key issues on which I want to press Ministers. I urge the Treasury to choose the path that remembers the lessons of the financial crisis and that, as a happy consequence, also gives us access to EU markets and business opportunities, in the best interests of jobs and growth across the UK, not only in the City of London, but in other great cities, such as Nottingham.
The Economic Secretary to the Treasury (Simon Kirby)
May I start by thanking the hon. Member for Nottingham East (Chris Leslie) for highlighting the importance of passporting in financial services and for securing this debate? He has made a reasonable case and I thank him for his thoughtful and vital questions. He will not be disappointed to hear that I fully attend to answer all of them, although not necessarily in the order that he asked them. Indeed, if he wishes to raise any other issues, I am always willing to sit down and discuss them with him.
This is a very important issue, not just for the City, but for ordinary people who work in the sector and its related professions up and down the country. Many of those services are provided by more than 2 million people in this country, and they pay a lot of tax. I am very happy to commit to doing all I can to maintain the UK’s global financial status. That is clearly very important. The issue also matters to many more of the British electorate who benefit from the £66 billion of tax revenues that financial services provide each year, and the role that they play in financing businesses up and down the UK and around the world.
I share the hon. Gentleman’s view that the financial services industry brings considerable benefits to the UK economy as a whole, and we want to retain them as we forge our new relationship with the EU. In general terms, the financial services passport means that firms authorised in one member state or in part of the European economic area are able freely to passport their services across the whole of the EU. Alongside the passport, other rules affect how firms operate outside the EU, interact with it and have access to the European market. Those are collectively called equivalence regimes, whereby the EU assesses whether foreign rules are broadly compatible with its own and can be used instead as the basis to provide services to and across the EU.
I make those points as part of achieving a shared understanding of what matters when we talk about passporting and access to the single market, whether on the basis of a pure passport or an equivalent mechanism, to ensure market access to the EU. That is necessary for us to consider together the options available to the UK when it enters its negotiations, and to recognise that there are various precedents for accessing the EU market on which we can and should draw.
It is worth dwelling on why we shall seek the best possible deal for financial services in the EU negotiations. Under current arrangements, based on the UK’s membership of the EU, UK firms hold over 5,000 different financial services passports across various sectors and activities. They are not all actively used, but it is clear that a significant number of UK-based firms depend on access to the European market today, offering global services to a global client base at least in part via the EU passport. Around a third of UK services’ exports are in financial services, of which about a third are to the EU—about 11%.
For larger internationally active financial institutions, access to the EU is critical to their business model. I have certainly met a few of them in my new role to date. Even those with a large UK client base might find themselves needing to offer a European and a global service to their UK clients. Many of these are major employers across the UK as a whole. For them, the whole of the UK is important; the City is important, but financial services span the length and breadth of the country.
The UK is home to a genuinely international financial centre, resulting in a £55 billion trade surplus in financial services last year. This global hub means that the City is, put simply, greater than the sum of its individual parts. It has a critical mass. It relies substantially on the clustering of expertise in one place and the presence of a number of firms that are highly dependent on one another and inter-connected. Financial services provide capital-efficiency to the real economy because of this market concentration.
To illustrate my point, I note here the concern raised by the right hon. Gentleman about euro-denominated clearing—the ability to net very complex networks of trades in different currencies against one another saves the market billions in capital each year. The London stock exchange believes it has saved global clients around $25 billion-worth of regulatory capital. That is not a small sum. In short, European firms looking to raise finance for investment and growth rely on the UK’s deep capital markets. If this market is allowed or encouraged to fragment, the result is likely to be a reduction in businesses’ ability to secure investment right across the spectrum.
It is also important to financial stability to ensure that we and our European partners understand the effects of possible business restructurings, so we can continue to ensure that the sector is properly regulated and supervised. Getting this wrong is in the interest neither of the UK nor the EU. I hope that that reassures the right hon. Gentleman, who raised the importance of the UK’s specialist cluster. There are benefits—not only to the UK, but to Europe—of the City remaining a cluster of expertise that can serve the EU. Financial services is highly interconnected activity that depends on economies of scale.
I agree with the right hon. Gentleman—actually, I am not sure whether the hon. Member for Nottingham East is honourable or right honourable.
Simon Kirby
It is only a matter of time, I am sure.
I agree with the hon. Gentleman that we will need to look carefully at the structures needed to ensure regulatory cohesion and stable, long-term access to EU markets, which I believe is in both the UK’s and the EU’s interests. The EU benefits from the deep pockets of the UK’s financial centre status, and the UK benefits from access to the EU in acting as its financial centre. High quality and consistent regulation is an essential underpinning of a stable, competitive, global financial sector.
In conclusion, I want to reassure the House that we are working as hard as we can to consider the opportunities ahead, to safeguard UK financial services for the long term not just the short term. We understand the importance of market access, transition and continuity—points that the hon. Gentleman raised—and we also understand that access to skilled workers internationally will be essential to this sector.
Lastly, I want to reassure those looking perhaps from around the world that we are the same outward-looking, globally minded, big-thinking country we always have been.
Question put and agreed to.