UK-EU Relationship in Financial Services (European Affairs Committee Report)

Lord Hannan of Kingsclere Excerpts

Wednesday 17th May 2023 Grand Committee

[Lord Hannan of Kingsclere (Con)]

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 Why has it not been repealed?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.

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.