Dame Angela Eagle (Wallasey) (Lab)
It is a pleasure to follow the hon. Member for South Cambridgeshire (Anthony Browne), who has opened this Backbench Business debate and is a fellow member of the Treasury Committee. He has given us a grand tour of a large and diverse sector of the economy that is, as he pointed out, very important. He also pointed out that it is affected by a range of issues at the moment.
The hon. Gentleman gave us some of his ideas on what should be happening post Brexit with some of the more complex of the EU directives that have been onshored—in particular, MiFID—which have been against the grain of how the UK financial services and insurance industries have always tended to work. He hinted at the philosophical difference between EU regulation in these areas and how the UK more traditionally did it; it is the difference between having principles-based regulation, which is not so specific, and the EU way of doing regulation, which tends to be so specific and puts a lot of those specifics in legislation. When I was in the Treasury and in the Department for Work and Pensions as Pensions Minister, it was a battle that we constantly had with the EU in the Council of Ministers and with the Commission.
The Economic Secretary to the Treasury (John Glen)
indicated assent.
Dame Angela Eagle
I can see the Minister is nodding, possibly because he recognises some of those tensions, which always existed when we were in the EU.
When we were in the EU, because of the size of the influence of the UK financial services industry as part of that bloc, we had a very good and effective way of pulling at least a lot of the regulation that went on more towards our way of doing things. One of the worries I have post Brexit, which I suppose is a philosophical and practical worry, is that the EU will now go off and do a lot more of the things that we were able to persuade it not to do when we were a member. The divergence between how EU regulation works and how we may wish our future regulation of financial services to work is likely to grow larger.
It has not been a very friendly divorce to date, and there may well be implications to that, too, in terms of competition for business. We have seen some of that in the wholesale markets for euros and we will doubtless see more of it. The outcome of our way of leaving the EU will challenge some of the agreements that we came to and the influence we were able to have when we were inside the Council chambers, the European Parliament and the European Commission, rather than the situation we find ourselves in now. As the hon. Member for South Cambridgeshire said, that can be an advantage, but it can also be a disadvantage. It is an opportunity, but there are also threats and issues that we have to deal with. We have a sharp disjunction with the recent past, after 40 years of that kind of influence, that we will have to deal with in the coming period. We have the inadequacies of the non-existent deal on financial services, which was part of the EU-UK so-called trade agreement, and those are already having an effect.
The hon. Gentleman was right to say that we are in a period of rapid regulatory change, which would have been the case regardless of whether we left the European Union. The fact that we have, and the fact that we have onshored all this regulatory machinery, means that we now have to start looking at how we wish to change all of it.
Even thinking about the sheer weight of work and oversight that will have to be done by the Treasury Committee is quite overwhelming, as the hon. Gentleman acknowledged in the exchange we had during his speech. The Minister must go weak at the knees when he thinks of the detailed work that he will have to put in to deal with the onshoring in the aftermath of Brexit, and whether we want to move quickly or slowly to adapt the laws and regulations that we have imported.
Members of the Treasury Committee have also gone weak at the knees thinking about how they might have some oversight, because of the highly technical nature of much of that regulation. We certainly need to be significantly more tooled up than we have been if we are to have proper oversight of what the regulators are tasked with doing, what philosophical direction the Government wish to go in, and what the practical aspects of that method will mean for our financial services industry and, of course—they have not been mentioned much—for consumers in the UK and for financial stability.
We should not lose sight of those two basic reasons why we have to get regulation right. Consumer protection is a huge issue in financial services, as the hon. Gentleman touched on when he said that financial services are not always the most popular sector of our economy. Perhaps some of those who supply and form part of the industry ought to stop and think about why that is they case and do some self-reflection about it.
Clearly, financial stability is also crucial in an era when markets are becoming more rapid and more global. In the context of highly rapid technical change, financial stability becomes even more important, because innovation outruns the capacity of many regulators to keep up with what on earth is going on in some markets. Those two important issues have to underpin all regulation; the future of the entire financial services industry rests on them.
Regulatory change in a rapidly evolving situation with a lot of flux is inevitably difficult for those who participate in the market and for those who wish to regulate it. It is also difficult for those such as the Minister who want to see how it can be properly harnessed and allowed to be beneficial to our economy while being safe. It is a period of big uncertainty and flex. New technology has the capacity to change things and lead to innovation, some of which might be fantastic and some of which might be awful. That structural issue has hit us greatly through the innovations of digital currencies.
The systems that control financial services have to deal with the practical and philosophical issues that arise, such as whether digital coins are ever stable, what central banks ought to be doing to deal with that, and whether the wild west of Bitcoin and the rest should be left as a gambling thing on the side. Those markets can be volatile—the wild west—but the capacity of software such as open registers and blockchain, and their potential for transparency and in-time and open trading of all sorts of things, could be harnessed for good purposes as well as for the more nefarious ones that feature on the darker edges of the net. On top of that, the demands of climate change will cause a systemic change in the way that things are valued, priced and assessed for value.
That structural change will completely change the context in which the financial services industry has to exist. In the UK, which is one of the most open economies in the world and always has been, we know how important the financial services sector is, and not only to London as a global centre. In 2020, it was worth £164 billion to the UK economy, which is the third-largest sector by size in the OECD. That is 8.6% of economic output, half of which is generated in London but half of which is generated across our regions. Of the 1.1 million jobs, 91,000 are in my region of the north-west. As the hon. Member for South Cambridgeshire pointed out, it is one of the few sectors where we have a healthy trade surplus—£46 billion in 2020. It is the fifth-largest economic sector in our economy, and all the more important for that.
As the hon. Gentleman also pointed out, the sector is important for taxation, with £28.8 billion in tax taken from it. According to PwC, it makes up £75.6 billion, or 10% of the total receipts. In the face of such change—technological, structural or the disjunction of Brexit—any Government would want to see how they could remake the environment in which the financial sector can operate and flourish to benefit and protect the sector so that it can benefit and protect our economy. We certainly all have a stake in ensuring that that is the case.
In that area of flux, we have to remember that the regulators, although they could be powerful, are struggling with an increasingly complex and fast-moving environment that they are not always geared up to deal with in detail or to keep on top of. We have seen the travails of the Financial Conduct Authority and how it manages the perimeter, and philosophically the view of caveat emptor—that the buyer should beware in all circumstances. When things go wrong, the reputation of the entire financial services sector is at stake, so it is a difficult balance.
The Financial Conduct Authority gave evidence to the Treasury Committee yesterday, some of which reflected how difficult it is to try to remake a regulator after scandals such as London Capital & Finance, at the same time as operating within all the extra complexity and uncertainty. It has a formidable task. I suspect that being chair of the FCA is one of those jobs where people are told that, if they do a stint, they will get the diplomatic equivalent of the Washington embassy as a reward. The current Governor of the Bank of England is one example of that.
The FCA needs to be strengthened. We as policy makers, and the Minister in particular, have to think about how it can practically do the job. The job cannot be so big and complex that it is undoable. Sometimes, the way that the FCA has to cope means it is difficult for it to achieve a balance and be given a job that it can sensibly do. We know there is a big turnover of staff at the FCA at the moment, and that there is workplace stress and unrest. We know that the head of the FCA is trying to transform that organisation into what he calls a lean organisation that can respond very quickly to what is going on in the market and in the areas it has to regulate. I am not convinced that it has that balance right yet, and I am not even convinced that that job can sensibly be done without more support.
I want to deal with a couple of areas that the hon. Member for South Cambridgeshire did not touch on. These are what I would call threats to the reputation of the financial services industry in this country. First, I want to talk about economic crime, which I think poses a threat to the entire sector and its integrity if it is allowed to get out of hand. We know that there are rising levels of economic crime, fraud and scams that have been turbocharged during the lockdown. The sector itself has survived covid and the lockdown pretty well so far, because it could manage remotely—it does a lot of its work remotely in the first place—but one of the things we have all seen, unfortunately, is the rise in fraud and scams. We have also seen, and perhaps it is inevitable when it is one of the biggest global centres of financial services, that London has attracted the attention of international criminals and fraudsters who wish to launder their money through cities like London. We know that, as a major financial centre, it is a target for all of these kinds of people.
The Intelligence and Security Committee, in its Russia report, which was suppressed for far too long and was finally published after the 2019 general election, said that London is considered the “laundromat” for corrupt money. We have seen that kind of magnet effect, which is extremely disturbing, and I do not think that we have yet really got a handle on it. There are regulatory failings, there are legislative failings with the structures we have to try to deal with this, and there are certainly enforcement failings of the laws that we do have.
The Economic Secretary to the Treasury (John Glen)
It is a great pleasure to respond to the debate on behalf of the Government. It has been an extremely well-informed debate, and I have enjoyed listening to all the contributions. I particularly thank my hon. Friend the Member for South Cambridgeshire (Anthony Browne), the hon. Member for Wallasey (Dame Angela Eagle) and the hon. and learned Member for Edinburgh South West (Joanna Cherry) for sponsoring the debate. They were absolutely right to point out that the financial services industry is critically important to the United Kingdom’s economy, and to champion the UK as an environment that ensures that the sector is able to retain its competitiveness on the world stage.
I discerned five themes as I listened to the debate: the response to the pandemic, the issue of levelling up, green finance, the context for our international relationships, and regulation, about which there have been a range of comments across the wholesale and retail sector.
I have been the Economic Secretary for nearly four years, and in that time I have come to recognise the vast economic contribution that the financial services industry makes to this country—we have heard a great deal about that today—but I have also observed the many hidden contributions that it has made, which have been particularly clear during the pandemic. On the frontline, bank staff have kept branches open and supported vulnerable customers at times that have been very worrying for them financially. In the back offices, people have rolled up their shirt sleeves and worked all hours with us and the regulators to deliver tens of billions of pounds of emergency loans. I have already thanked the industry publicly for what it has been doing, and I am delighted to do so again today at the Dispatch Box.
My hon. Friend the Member for Hitchin and Harpenden (Bim Afolami) mentioned the £100 million of loans and other support in his constituency, and that has been replicated across the country. The bounce back loans, the coronavirus business interruption loan scheme and the forbearance measures were critical at what was a critical time for our country.
I recognise and acknowledge the sentiments about the financial services industry not always getting a good press. This is not just about banks, although they are critically important for the underpinning of lending to our economy. However, I think we should also recognise, as the Scottish National party speakers did, that the industry is not just about the square mile but about the whole United Kingdom. I visited the constituency of the hon. Member for Rutherglen and Hamilton West (Margaret Ferrier) a few weeks ago to see the bank hub that is active there and informing the industry’s response to the challenge of access to cash.
In places such as Birmingham, Bristol, Glasgow, Cambridge, Edinburgh and Merseyside, this industry is critical. There is not an equitable distribution across every region, but there are hubs of real significance. Two thirds of people employed in the industry work outside London: 37,000 in Northern Ireland, 69,000 in Wales, and 153,000 in Scotland. I am proud that the Government have used that imperative to headquarter our new national infrastructure bank in Leeds and to establish our new economic campus in Darlington.
The sector has also made significant progress on diversity and inclusion, so that the very best people for the job have an equal opportunity to succeed, no matter what their race, gender or background might be. There is a lot more work to be done in that area, and I commend the incoming Lord Mayor of London for his championing of that agenda during his tenure.
I want to address some of the points raised by Members during the debate. I thank my hon. Friend the Member for Wimbledon (Stephen Hammond) for his kind words, his focus on the importance of the regional agenda, and his challenge to ensure that we have opportunities across the regions. The opportunity to secure high-paid, high-value jobs beyond Wimbledon and across the United Kingdom is a real imperative. I draw his attention to the Kalifa review into FinTech that was published at the beginning of March, and to the money secured and announced in the Budget for the centre for financial innovation and technology, which will be a key driver of that.
My hon. Friend the Member for Hitchin and Harpenden (Bim Afolami) mentioned levelling up and also raised some specific concerns about debt advice. I draw his attention to the work we have done with the breathing space scheme, which went live in May. I recognise the uncertainty around the maps and the reprofiling of face-to-face and online debt advice. I am taking a close interest in that. We are also trying to innovate when it comes to no-interest loan schemes, which are at the proof of concept phase and could make a massive contribution to assisting many vulnerable people.
My hon. Friend the Member for Bromley and Chislehurst (Sir Robert Neill) put a stark statistic before us when he said that more than 36% of his constituents worked in financial services and the broader legal and professional services sector. It is a critical sector for our economy. The financial services sector also has a crucial role to play in our response to climate change. The ambition is clear: we want the UK to be the best place in the world for green and sustainable investment. As a Government we have taken bold action in this area to transform the UK financial sector. That has involved introducing new economy-wide sustainability disclosure requirements for businesses, and the kick-starting of a green financing programme with two record-breaking sovereign green bonds: one for around £10 billion on 21 September and a further £6 billion on 21 October, achieving a “greenium”—a premium on what we would have gained from a non-green bond—of around 2.5 base points. We will not be complacent about this. We also need global action on green finance, and the Chancellor recently hosted the COP26 finance day, which saw financial firms with assets of over £130 trillion committing to net zero.
My hon. Friend the Member for Bromley and Chislehurst also drew attention to the role of the City of London Corporation in green finance, and I absolutely endorse his recognition of its contribution and in particular that of Catherine McGuinness, who has been the policy lead through most of my tenure. She has done an excellent job, and her tenure comes to an end next spring. As I have said, the Lord Mayor is also committed to taking on his predecessor’s leadership in that area.
Looking ahead, it is important that we do not rest on our laurels, as the motion recognises. There are obviously strong competitive pressures in the industry, and it is my mission to help to deliver the Chancellor’s vision for an open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens across the UK. In his speech on 1 July, the Chancellor said that we should be proud that people around the world looked to this country for leadership, and we should be. We have an opportunity and a responsibility to lead the world on international standards, FinTech, green finance and much more.
When I took on this role in January 2018, the nature of the international relationship that the UK would have in financial services was uncertain. We have now left the EU institutional framework and, where it makes sense to do so, we are taking advantage of our new freedoms to refresh the UK’s position as the world’s pre-eminent financial centre. We are not deregulating, but we are looking at those international relationships. We have set out a clear, ambitious programme of work to broaden and deepen those relationships. We have signed trade agreements with Japan, Singapore, the European economic area and the European Free Trade Association, and reached agreements in principle on free trade agreements with Australia and New Zealand.
I recognise that in many of these free trade agreements, financial services will not be as prominent because the regulator-to-regulator dialogues that exist on an ongoing basis are so instrumental in unblocking opportunities on both sides in financial services. The Swiss mutual recognition agreement, which we are negotiating at the moment, will be the most ambitious financial services agreement globally in both breadth and depth.
I recognise the uncertainty of the EU relationship. We have co-operated fully, and it will be for the EU to determine what sort of dynamic it wishes to have. I was pleased to visit my counterparts in Madrid last week, and I met several bank leaders over there. The warmth that exists towards the UK in financial services is clear, and I have recently had conversations with other bilateral partners.
We need a regulatory framework that is more agile, that avoids politicisation and that gives decision making to the independent and expert regulators. I take the point raised by my hon. Friend the Member for Wimbledon on the need to ensure proper scrutiny of that autonomy. I recognise and appreciate the support for the secondary growth and competitiveness objective that we set out in the consultation, and it is now critical that we clarify in legislation how the responsibility of scrutinising those independent regulators will work. It will be for Parliament to determine how to examine the way in which those regulators meet the objectives we will set out in primary regulation.
Members mentioned a number of initiatives concerning the wholesale markets review. I see broad consensus on the vast majority of issues identified in the consultation document. We are talking about incremental changes informed by deep dialogue with industry.
On the prospectus regime review, I am delighted to say there was extensive support for the proposals in our recent consultation, and I look forward to pushing ahead with our reforms. We are taking forward the recommendations of the Kalifa review on FinTech. We must remain at the cutting edge of technology and innovation in financial services. I recognise that its application both to the regulators and to the financial market’s infrastructure will be significant.
We have responded to the call for evidence on insurance and Solvency II, and we are now working closely with the PRA to identify an optimal reform package across both the risk margin and the matching adjustment. This is complex work, but we are taking it forward with enthusiasm.
It seems to me that the House is largely in agreement on two things. The contribution of the financial services sector to the country is critical, but we cannot take it for granted, and I will never do so in my role. I am proud to be delivering on the Government’s vision for an open, green and technologically advanced financial services sector that is globally competitive and acts in the interests of communities and citizens across the United Kingdom.
I welcome the many varied and well-informed contributions this afternoon. I agree with the motion, and I encourage others to do the same. It would be remiss of me not to welcome the hon. Member for Hampstead and Kilburn (Tulip Siddiq) to her place as my shadow, and I look forward to discussing these matters with her in future.