Brexit: The Future of Financial Regulation and Supervision (European Union Committee Report)

Baroness Liddell of Coatdyke Excerpts

Wednesday 6th June 2018 Lords Chamber

[Baroness Liddell of Coatdyke (Lab)]

My Lords, I too pay tribute to the clerks of the committee and to our distinguished policy adviser, who was so good that she was pinched by one of the people giving evidence to us. That is a sign of the excellence of the background briefing we received. I also pay tribute to the noble Baroness, Lady Falkner of Margravine, for her chairmanship of the committee, her great technical knowledge, her commitment and her discipline in getting us through what is a complex and technical piece of work.

As we have heard from the noble Earl, Lord Lindsay, there are a lot of technical conclusions that have come out of our deliberations. However, it is important to stress that there was unanimity on the committee on the conclusions that we arrived at—cross-party, including the Cross-Benchers—and so the committee did not look at these issues in a partisan way.

Although this is very much a technical piece of work, as I have said, we must not lose sight of the fact that some 1 million people in this country work in the financial services industry. Now, lots of people may think of “financial services” as meaning bankers in Mayfair, but that is not the true picture of British financial services. There are financial services companies throughout the country, certainly in the great historic centres such as in the City and in Edinburgh and, more recently, in Canary Wharf, but there are also thriving financial centres in Glasgow, Leeds, Bristol and other places.

What we are talking about here is not just academic issues of regulation but how we create an industry that will protect, and magnify, those jobs into the future. They are good jobs; they are, by and large, well-paid jobs; and they have become very much a cornerstone of our economy, creating a surplus of £60 billion. I cannot think of any other industry that can create a surplus such as that. As the noble Baroness, Lady Falkner, pointed out, our financial services industry is a global asset, which we must be very careful to protect. It has not happened by accident; it has happened because of innovative ideas, sound regulation and ambition, and we must make sure that we do not destroy that.

I am concerned at the extent to which many of our witnesses, especially those from the industry, exhibited real frustration. There was a sense that no one was listening to them or taking them into their counsels. The decisions that are being taken at the moment will have an impact on the industry, and indeed on the country, for generations to come. We cannot allow a situation to continue where such a key industry feels that it is out in the cold. Any well-run business—and there are some very distinguished businesspeople in your Lordships’ House—can cope with change; in fact, they make their money out of the ability to cope with change. What they cannot cope with is uncertainty, and that is what we have seen again and again.

When we began our inquiry, the business leaders were telling us in public and in private that, if they had some idea of what was going to happen by the autumn, they could start planning. Then we were told it would be by Christmas. And then we were told it would be by the end of March. None of that has happened. Instead, the Prudential Regulation Authority has now asked the major businesses to prepare their plans for the worst possible outcome. Those plans are all done now, and increasingly it is becoming obvious to us that businesses are considering what to do with them. Now, regulated businesses do not have a choice. Regulated businesses have to ensure that they are operating within an environment that is regulatorily sound and where they can continue to do business. Here we are with a real global asset, where we have been global rule setters, and we seem to be in a state of stasis. That is not good enough.

As the noble Baroness pointed out, we were expecting a White Paper, but we have been told that it has been delayed yet again. There is a general White Paper due, but there is also supposed to be a financial services White Paper due. People need these answers, not because they just want to make mischief but because they need them to do their day-to-day work. Crucial decisions need to be taken now, and there seems to be little realisation within the Government—and, indeed, within the Commission as well—about the necessity to ensure that these decisions are taken.

Few people realise the scale and complexity of the issues. I commend the report for going into the scale and complexity involved, much of which I did not know—and I have spent a fair amount of my life kicking about in City circles as a Minister and otherwise. This is complex. The Brexiteers may not like it, but the UK has played a key role, in many cases a pivotal role, in establishing the strength of EU regulation and in putting in place the kinds of structures that allowed us to come through the 2008 financial crisis.

As one of our witnesses, Karel Lannoo of the Centre for European Policy Studies—the noble Baroness has already referred to him—said, the growth of the single market is in almost direct correlation with the growth of the City. It is impossible to overstate the need for the UK to ensure that we continue to have pre-eminence in shaping standards. Both the Chancellor of the Exchequer and the Governor of the Bank of England have said that we must be rule makers and not rule takers. I would love the Minister to explain how we can maintain our role as rule makers. Not only has that been for the good of this country but Britain has been in the lead when it comes to the personnel involved in global negotiations. Global negotiations are even more important than EU negotiations because they set the framework and parameters within which UK companies can trade around the world. I have seen some of our negotiators work in intense international situations. One concern I have is that so much is down to the talent of the people who do that negotiation. We must ensure both that their talent continues to be heard and that we grow the next generation, as this is an issue not just for our generation but for the next one as well. The emphasis must be on good standard-setting and we have to ensure robust democratic accountability.

The noble Earl, Lord Lindsay, talked about the urgent need for us to revisit how we deal with the regulatory and legislative framework as a consequence of our exiting the European Union. It will not be simple; it will be extremely complex. We need to ensure that no one drops the ball between the day we leave and the day we start doing it for ourselves again. We must be rigorous; we must also be competitive.

A seat at the table is essential for all that. I see no indicators that a mechanism has been put in place to ensure that we retain that seat. Sir Jon Cunliffe, an outstanding negotiator of ours over many years and now Deputy Governor of the Bank of England, has said that,

“we need the strongest international governance relationships”.

That needs to be a priority. There are those in the industry who are equally concerned about us losing our international clout. We need to give signals as to where our thoughts are and in what direction we are about to move.

I turn to a slightly more contentious issue. In the past few days we have seen business leaders meeting the Prime Minister and saying that they are losing faith in the handling of Brexit. We cannot afford that to continue. The clock is ticking. We have less than a year until exit day. There is a need for us to come together to ensure an open and credible discussion about where we go from here. The situation that we are in at the moment is tantamount to coming to the edge of a cliff and saying, “Let’s take one step forward”. We cannot afford to do that. International business leaders have already made it clear that they will not invest in Britain as long as Brexit-driven uncertainty exists. I cannot put it any more strongly. The clock is ticking, as I say. I ask the Minister to make representations on our behalf in the strongest possible terms. Whenever the Government responded to our paper they did so in a very positive way and the Minister expressed his satisfaction that a transition period had now been agreed. However, as John McFarlane of Barclays pointed out when he met us, a transition period is of value only if you know what you are transitioning to and how long it is going to take to transition there. All that needs to be sorted out.

A lot of people have great hope for a free trade agreement. There was one recently with Canada. There have been three free trade agreements recently: one with South Korea, one with Ukraine and one with Canada. Only one, with Canada, had any element of financial services in it. It was only a very small reference and, frankly, it is not much better than—in fact, it is not even as good as—what WTO rules would be. There is not a history of including financial services in free trade agreements. We find ourselves in a situation where we have to show our interest and our vigour in ensuring that we remain world leaders. There is no short cut to this. If the Government are not prepared to share with your Lordships’ House or with the wider community where their thoughts are going, please share it with the leaders of the industry, take their advice and listen to what is feasible and possible.

I thoroughly enjoyed working on this report. I became depressed on quite a few occasions, as noble Lords may have gathered, but it is an intensely interesting piece of work. We have all seen our financial services industry take a kicking in the past few years, but there is little doubt that we lead the world in our integrity, our sense of responsibility and our regulation. It is the Government’s job—indeed, it is our job—to ensure that we continue that.