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

Lord Liddle Excerpts

Wednesday 17th May 2023 Grand Committee

[Lord Liddle (Lab)]

My Lords, I agree with the noble Viscount, Lord Trenchard on this. It has been a privilege to be a member of the European Affairs Committee and to work with him on many of the issues that we have addressed. Although we disagree on some things, I have always found his views to be of value and have learned something from them. That is important in any parliamentary system.

It has also been a very great privilege to work on this committee under the chairmanship of the noble Earl, Lord Kinnoull. I have the greatest regard for him. This is now one of the swansongs of his period as chair of the committee, but he has been a very good chair indeed. I have known the last four chairs of the European committee of this House very well. I met Lord Grenfell when I worked in government; Lord Roper was a very close personal friend; and I came to have enormous affection for the noble Lord, Lord Boswell. The noble Earl, Lord Kinnoull, however, has I think been the best of the lot. His ability to bring together the disparate views on that committee and to arrive at rational and sensible conclusions is something to be praised. Although the House gains from him becoming the Convenor of the Cross Benches, the cause of a sensible debate about Britain’s relationship with the European Union has suffered something of a loss.

As with all the outputs of this committee, this is a good report. It is a pity that we are debating it nine months after it was concluded, because a lot is changing in this world all the time. We have seen growing concern about the position of the City of London, with the feeling that it is losing out to New York and that Asian financial centres are rising up. The City is a huge national asset. I am not anti the City of London—I am a strong supporter of it and believe that it is one of the things that Britain is really good at. We have to try to build on its strengths.

It is a concern that people are worried about the problems facing the City, but we have also learned in the last year that there are grave risks in financial regulation. In the autumn, we had the confidence crisis in the bond markets, which was stimulated by the Truss Administration and required a huge rescue mission by the Bank of England to stabilise our pension funds. That is a matter a great concern to ordinary people, and we should be conscious of those risks.

Furthermore, we have also seen an outbreak of financial instability, with bank failures in the United States. We do not know what impact this might have on Europe in the future—who knows? As a social democrat, I have become a great believer in the workings of the market economy. Capitalism is the most dynamic way of getting economic growth, but I believe in the warnings of Keynes about the tendency to instability in capitalism and for there to be episodes of great banking collapse, which cause huge problems for ordinary people. With very little growth in our living standards, as we have seen since 2008—and we have not really recovered from that—it is very important that, as far as possible, we do not risk any further episode of financial crisis and uncertainty.

The paradox about the recent position of the concerns about the City of London is that it has all happened since Brexit but very few people think it has anything to do with Brexit. At least, that is what they claim. I have a certain question about that. The fact is that no one wants to challenge the reality of Brexit, because we know it is there. It is no good complaining about it—we have to do something about it. We have to make the existing arrangements work.

Although the evidence in our report is that Brexit has not caused the anticipated damage in terms of job losses in London, as far as we know, the unanswered question is: is business shifting elsewhere without us even realising it? When new business opportunities are created, are they created in the United Kingdom? This is a difficult thing to judge, because it is not as though there is a single continental financial centre which is taking over from London. There are signs of things going to Dublin, Paris or the Netherlands. To what extent Brexit is contributing to the relative decline of the City is, for me at any rate, an unanswered question.

A lot of people, such as my colleague on the committee, the noble Viscount, Lord Trenchard, think that Brexit provides huge opportunities for the financial sector. There have been calls for a new big bang and a decisive break with what is characterised as stifling European regulation. I have to say that I do not buy into this argument at all. My views are that, while it is sensible for Britain to steer its own course on financial regulation now that we are out of the EU—to be prepared to diverge, particularly as we are the leading financial sector player in Europe—I am not persuaded that the opportunities for divergence are massive or that they would bring great economic opportunities, without also creating great risks.

The reason for that is simple. Although Brexiteers think that these financial rules were imposed on us, they were not. We negotiated most of these rules at the Council of Ministers and it was the British position that was dominant in framing them. It would be surprising if there were to be lots of benefits from breaking with those rules, because they were framed with the interests of the City of London in mind. I know that from personal experience in government.

This Government have talked big about the opportunities of Brexit in financial reform and all that. What is actually proposed is reasonably modest; I read Jeremy Hunt’s speech on the Edinburgh reforms and it did not seem to be that great a shift. I am glad that the Government have abandoned the proposals that were canvassed at one stage for them to be able to override the judgment of regulators—although I do support the need for there to be parliamentary scrutiny of the actions of regulators.

One of the worries I have is this business about changing regulators’ objectives to include competitiveness. At a time when financial markets are extremely fragile, that could be a mistake. Our objective should be a strong City, perhaps with more of a focus on domestic growth—including how to get pension funds investing more in infrastructure and have more of a market for growing British companies, enabling them to access equity—so we do need reforms there, but we must put first and foremost the need to avoid financial crises such as another banking crisis. The national interest would best be served by a close relationship of dialogue and co-operation with the European Union. That is why I reiterate the calls made by the noble Earl, Lord Kinnoull, about the need to get on with signing the memorandum of understanding, which will lead to a structured relationship of co-operation with our European friends.