Brexit: Financial Services (European Union Committee Report)
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The Commercial Secretary to the Treasury (Baroness Neville-Rolfe) (Con)
My Lords, the noble Baroness, Lady Falkner of Margravine, and her committee have produced an excellent, clear report. I thank her, and others, for the warm welcome they have given me in my challenging new role. I join others in thanking her and members of the committee—some of whom, along with others, have spoken with great clarity today—for their work. I especially thank the clerks, who have done a really good job at great speed.
It is obvious that financial services will be an important component of the EU exit discussions and it is helpful to have a comprehensive document covering all the issues at this exact stage—as well as to have this debate before we submit our government response to the committee. This debate is especially useful to me, as only last week I was given responsibility within the Treasury for EU exit on financial services. I can reassure noble Lords that I have a long history of working with, and operating in, the EU and I believe that we can build a strong new partnership on financial and economic matters.
The links between the UK and our nearest neighbours in Europe are numerous and long-standing, as the Prime Minister said when she highlighted financial services as a priority. Above all, it is in our interest for the EU to flourish and we will be aiming for the freest possible trade in financial services between the UK and the 27 member states.
I am especially grateful to my noble friend Lord Caithness, who gave us the benefit of his experience at the Treasury and an insight into the global future. This underlined to me the importance of maintaining the UK’s pre-eminence in financial services. Having, like him, operated for many years in the EU, working with EU partners, I very much agree about the importance of language. Notions such as seeking common ground are good concepts in negotiation.
The noble Earl asked about the risk of currency devaluations. He will remember that Treasury Ministers have to be very careful about what they say regarding currency. However, since the financial crisis, the Government have strengthened the domestic financial stability policy framework and, as the Governor of the Bank of England noted, the UK financial system has passed several tests over the past year. The Treasury, the Bank, the Prudential Regulation Authority and the Financial Conduct Authority will continue to monitor any risks closely. That is very important and reassuring.
As a glass-half-full person, I was glad to hear the noble Lord, Lord Butler of Brockwell, sound more optimistic than he did at the time the committee produced its report. My noble friend Lord Eccles and the noble Earl, Lord Kinnoull, felt the same. The noble Lord, Lord Butler, is right about the interest that the EU has in a sensible outcome. He may well know that four-fifths of EU 27 capital market business is conducted through the UK, and he is also right to say that we need to keep close to each other.
One key issue that the report discusses is that of access to EU markets. I listened with great interest to the noble Lord, Lord Dykes, who said how important it was to remain a confident country in this time of change. The Prime Minister helped us here with her speech at Lancaster House, in which she made it clear that we would not seek membership of the single market. Instead, we are seeking a new strategic partnership with the EU that complements the needs of our industries, including the needs of financial services companies and their customers.
That means that we are working closely with firms to understand what issues Brexit raises for them and what a good outcome might look like. Our work so far shows that the answer to that question varies enormously according to whom you ask. Many firms, for example, across banking, asset management, insurance and payment services, which currently trade across borders, benefit from passporting rights, but that is less true of firms that provide retail financial services chiefly within the UK, such as domestic insurance firms and high street retail banks.
We are working to understand the needs of the wide spectrum of financial services interests in the UK. That includes, for example, the car companies, which provide lease financing for most new cars bought in Britain today. It means understanding the interests of the wider financial and related professional ecosystem—a word that others have used—including accountants and lawyers, as well as thinking about the interests of consumers of financial services, including the less well-off or those who might be misled. I liked the example given by the noble Lord, Lord Butler, about car insurance for travellers in Europe.
As the report rightly notes, various elements of EU financial services legislation contain equivalence provisions, some of which can offer a basis for firms from third countries to provide services across the EU. We have heard calls from our stakeholders on this and studied the industry analysis proposing these equivalence regimes as the basis for future market access.
The noble Lord, Lord Tunnicliffe, asked about the depth of discussion on passporting rights. The simple answer is that at nearly every meeting on financial services interests there is a discussion of passporting rights—but, as with equivalence, different people are talking about different things. We need some flexibility in our negotiations, but I reassure this House that in our new strategic partnership we will seek the freest possible trade in financial services between the UK and the EU. In the Prime Minister’s words, it will be on the basis of a “bold and ambitious” free trade agreement.
As the committee’s report noted and our debate today has illustrated, this is an exceptionally complex set of issues. For this reason, I am determined that consultation with our industries and stakeholders should continue throughout the negotiating process, which will enable us to improve our evidence base and understand the impact of different scenarios. Those themes from the report were picked up by the noble Lord, Lord Tunnicliffe. The noble Lord also asked about Dodd-Frank. It is frankly early days on that. Our simple aim is to secure the future of a sector responsible for 7% of GDP and over 1 million jobs.
A second area of enormous significance to the sector is to avoid a so-called “cliff edge”. As the report highlights, this will be important to a large number of industries across the entire EU. For financial services firms, this is of particular importance because of the deeply integrated market for financial services and long-established regulatory coherence. To pick up on the points made by the noble Baroness, Lady Falkner, we want to give businesses enough time to plan and prepare for the new arrangements that will be in place. We want the change from where we are now as EU members to our new relationship with the rest of the EU to be as smooth and orderly as possible. It is in recognition of this that the Prime Minister has made it clear since the committee reported that a phased process of implementation will be sought.
I understand the noble Baroness’s point about the need for an early agreement on phasing to help allay the concerns of the financial services industries. We also believe that such a phased process of implementation can be in the mutual interest of the UK and the EU. Inevitably, the details of the timing of the implementation period will have to be discussed through the process of negotiation with our EU partners.
A third priority that many noble Lords touched on, including the noble Lord, Lord Desai, and the noble Earl, Lord Kinnoull, and which I think is extremely important, is access to talent. The noble Earl, Lord Kinnoull, warned that capital follows talent. I certainly remember that from my time in business. For some, it is the overriding issue. Fintech firms, for example, tell us they rely on drawing from an international talent pool. Europe leads on fintech, much of it here in London, and we are committed to staying at the cutting edge of financial innovation. Let me highlight the statistic from the report that is so telling on talent: of the 1 million or so people who work directly in our financial services, 60,000 are EU nationals and 100,000 are non-EU nationals. To respond to the noble Earl, we recognise that the ability to attract and look after highly qualified staff and transfer them easily between the UK and the EU is a key issue, including for insurance.
In future we must ensure that we can control the number of people coming to the UK from the EU. We are considering the options for our future immigration system very carefully. As part of that it is important that we understand the impacts of different options on different sectors of the economy and on the labour market. Companies are not only discussing with us how we keep attracting new talent; they want to know what it means for the international staff they already have and value. It is a priority for the UK to be able to guarantee the rights of EU citizens already living in Britain, and the rights of British nationals living in other member states, as soon as possible. That must be agreed on a reciprocal basis and we stand ready to sign up to this and to do so soon if it can be agreed with our EU partners.
I turn now to the international dimension. My noble friend Lord Caithness asked about the Prime Minister’s meeting with President Trump in the United States. The trip in January was very positive. I felt very proud of the Prime Minister. Obviously I cannot comment on the private detail of the conversation but the Prime Minister set out that there is a shared commitment to economic co-operation and trade between the United States and the UK. The UK has always been a leading voice for free trade in the EU and globally. That will continue. I always say that trade is in our DNA.
The Government agree with the committee’s assessment of the UK as a global financial services hub and the depth of capital market activity it fosters—to the benefit of Europe as a whole, its pensioners, its businesses and its public sector bodies and their customers. The UK and the EU have a mutual interest in ensuring that specialist activities, such as clearing do not end up in New York. The noble Lord, Lord Shutt, talked about possible job implications. I will say two things. First, I saw Mr Xavier Rolet today. He is one of the first experienced leaders in this industry that I have had the pleasure to consult. He gave me a copy of the EY report.
Secondly, as the committee’s report identifies, many firms in the UK, in the rest of Europe and internationally benefit from London’s multicurrency clearing structure. The Chancellor himself has pointed out that any changes to the structure could force up the cost of clearing, with a substantial cost to the European economy and to firms in the 27 member states—and cost is an important motivator. We will look at the committee’s recommendations on clearing very carefully in responding to the report.
My noble friend Lord Caithness asked about financial services regulatory co-operation in future trade deals, which was a very good question. The Prime Minister has said that the UK will be free to strike trade deals around the world after exit because of the approach that we have taken. That includes financial services. Trade deals involving non-tariff barriers, which have been mentioned, such as regulation, are also important and can be part of discussions on any new trade deal.
As the noble Lord, Lord Desai, said, we have played a major part in the architecture of the international financial system. We agree that we need to ensure that the UK, with its expertise, experience and eye for detail, continues to have influence over international standards with a voice on things such as the Basel Committee, the Financial Stability Board and other international fora such as the International Organization of Securities Commissions and the International Association of Insurance Supervisors. These international bodies could not be more important.
A priority of the Government is to consult external expertise extensively at this time and I am grateful for the vast amount of input that we have already had at every level in the Treasury and in DExEU. We are not talking just to those businesses with whole new Brexit strategy departments and consultants. We are also talking to those with none and to start-ups, supply chains and other stakeholders. We are also engaging outside London, where, as the noble Lord, Lord Shutt, said, we have large numbers of financial services jobs. There are, for example, around 140,000 people in this sector in Scotland, Northern Ireland and Wales—think of Standard Life or Virgin Money in Edinburgh, Legal & General in Cardiff, and Citi in Belfast. Indeed, next week I will visit Wales in my new role and hope to meet some financial services stakeholders.
We will keep up this process of listening to expert views from a range of standpoints as the negotiations kick off and progress. I hope not to be criticised by this House for lack of vigour. I know that many noble Lords have expertise in these areas. I therefore take this opportunity to invite them to contact me if they have advice to proffer.
I have focused my remarks largely today on two things: the needs of our varied financial services sector as we leave the EU, and how we are researching, understanding and analysing those needs. While some are more optimistic than others, there is a wide measure of agreement today that we need to secure the freest possible market access, the smoothest possible transition, and the ability to recruit and retain the best and the brightest. This matters to those people whose jobs depend on this industry—more than 1 million people in this country. It matters to the wider UK economy. Financial services contribute around £66 billion a year in tax and represent a growing percentage of our exports. It matters to our partners across Europe—and, of course, we are a gateway to the world of international finance.
It has been a pleasure to debate this perceptive and timely report. I again express my appreciation to the noble Baroness, Lady Falkner of Margravine, and the team that she chaired so expertly, for their conclusions.