Financial Services: UK Economy

Angela Eagle Excerpts

Thursday 9th December 2021 Commons Chamber

[Anthony Browne (South Cambridgeshire) (Con)]

I beg to move,

That this House recognises the importance of financial services to the UK economy; and calls on the Government to provide adequate support to help create the right regulatory and operational environment for that industry to ensure that the UK is able to retain its competitiveness on the world stage.

It is a pleasure to lead this debate on the future of the UK’s leading industry: financial services. The arguments about its importance are well known and well rehearsed. The financial services sector is the UK’s biggest export industry by far, with a £78 billion a year trade surplus. In fact, the UK is the biggest net exporter of financial services in the world; we export more financial services than any other country on the planet, including the US, Singapore and all of the EU combined. That means that, as a country, we can afford to import all the smartphones, flatscreen TVs and other manufactured goods that we are so keen on, particularly at this time of year.

The financial services sector adds £194 billion gross value added—that is, it contributes £10 in every £100 of all the UK’s economic output. One in 14 UK workers is in financial services. That is 2.3 million employees, two thirds of whom are outside London. Indeed, this industry really is spread across the country. Scotland has less than a tenth of the population of France, but exports about half the amount of financial services that France does. The financial services sector pays more tax in a year than any other sector—£76 billion in the last year. As the Chancellor pointed out in his Mansion House speech in the summer, that is enough to pay for the entire national police force and school system combined.

During this hideous pandemic, I am glad to say that the financial services sector stepped up to the plate and played a crucial role in keeping the economy going. It lent more than £75 billion in emergency finance to nearly 2 million businesses. Indeed, it lent £101 million to more than 2,000 businesses in my constituency of South Cambridgeshire. To help homeowners, lenders also gave nearly 3 million mortgage deferrals during the pandemic. The financial services sector certainly has played its part in ensuring that the economy has bounced back so quickly. Now, guided by the Government, it is also increasingly playing a critical role in ensuring that we reach net zero carbon dioxide emissions by 2050. From green bonds to climate-related financial disclosures to carbon markets, the financial services sector will help, rather than hinder, in the biggest challenge facing humankind: stopping climate change.

Although we all recognise the importance of financial services, it is not a popular sector. A leading German politician once said to me that it was the great British tragedy—that we do not like our most successful industry. It has often brought that unpopularity upon itself; we all know the reasons, so I will not rehearse them here. It is one of the few industries in which we are genuinely world leaders, but regular surveys of international financial centres show that our crown is starting to slip: London is now usually ranked second to New York; our lead over Singapore and Hong Kong shows signs of shrinking; and our global market share in some sectors, such as insurance and bank lending, is trending down. That is a cause for concern, but not alarm. We can turn the tide, but we need to have a clear strategic objective that the UK should be the world’s leading international financial centre.

The industry is at a major turning point. Financial services policy in the next decade will be very different from financial services policy in the last decade. We are at the beginning of a new era. There are two major reasons for this, and both represent major opportunities. The first is that the wide-ranging reform and reconstruction of the industry in the wake of the 2008 financial crisis has, by and large, been completed. Almost the entire regulation of the industry was rewritten in a tsunami of reforms from both the EU and UK. This absolutely needed to be done to ensure that the crisis could not happen again—to protect taxpayers and consumers—but that regulatory repair job is now largely behind us. We must not forget any of the lessons from it, but we can now pursue a more forward-looking agenda. The Government have set this out in their document, “A new chapter for financial services”, which was published earlier this year and which I very much welcome. It sets out a vision for the UK as a leading financial centre that is open, innovative, competitive, and green.

The second reason that we are at a turning point is that we have left the EU. Clearly, leaving the single market represented a major challenge for many financial services companies—and I think that I am right in saying that not everyone in the industry fully supported Brexit. But leaving the EU has created opportunities to ensure that regulation and legislation is tailored to our national circumstances. We do not have an equivalence deal with the EU, nor, indeed, that promised memorandum of understanding. I actually never thought that such a deal or memorandum was that necessary; it was more a “nice to have”, rather than a “must have”.

There are many other existing legal routes for UK-based financial services companies to sell to clients in the EU, as we are currently seeing. The no-deal scenario that we had in financial services does have the advantage of giving us full regulatory control. There are three fundamental problems with the EU financial services regulation, from a UK perspective. The first is that the necessity of getting agreement from 27 or 28 countries means that it is very inflexible; once a law is made, it is very difficult to change it. Secondly, the EU tends to focus on competition between its members rather than global competition. It is more worried about competition between London, Paris and Frankfurt than between London, New York and Singapore. Thirdly, the EU necessarily assumes a one-size-fits-all approach even though markets in different EU countries often have incredibly different dynamics. In contrast, when we had the chairman and chief executive of the Financial Conduct Authority in front of the Select Committee yesterday, they talked about how we can now have a very agile policy regime.

When we left the EU, the Government ensured legal continuity, as they had to, by incorporating all European financial services legislation wholesale into UK law. Now, though, we can take our time to consider what reforms we want both to EU-originated laws and to laws that we adopted unilaterally when we were part of the EU. We must of course abide by global regulatory principles, as set out by international bodies such as the Basel Committee on Banking Supervision, the Financial Stability Board, the International Organisation of Securities Commissions, and the Financial Action Task Force. However, those various principles are at a high level and below them lies an awful lot of detail—and we know where the devil lies. We must continue being a beacon of high regulatory standards and resist any temptation of a race to the bottom, but we should also get the details right and ensure that they are appropriate, proportionate, and do not have unintended consequences. There is no conflict between abiding by globally high standards and being globally competitive.

Reform of imported EU legislation will take many years, if not decades, but the Government have made a start. They have completed the Lord Hill review of stock market listings and the Kalifa review of financial technology and adopted their recommendations, which now need to be implemented. We need to ensure that the prospectus directive is made more proportionate. I personally support allowing two classes of shares to encourage investment in start-up companies. The Government are now consulting on regulatory reform of wholesale financial markets, particularly the second markets in financial instruments directive, MiFID II, and the rules on the capitalisation of the insurance market—Solvency II. If we get the reforms of Solvency II right, that promises to unleash productive investment across the UK, especially in high-growth firms. MiFID II and the European market infrastructure regulation are extraordinarily detailed and prescriptive, and could be simplified without harm. Excessive detail can prevent beneficial innovation. We should avoid gold-plating international standards, unless there are clear reasons to do so. Rules on pre-trade transparency can be counterproductive. The share trading obligation can be safely removed.

Some retail legislation, such as on PRIIPS—packaged retail investment and insurance products—is applied to wholesale markets for little purpose. This week on the Treasury Committee, we heard from representatives of the commodities exchange, ICE Futures Europe, that they are required to produce countless retail key information documents for institutional investors who do not want them and will never read them. It was, they said, a pointless waste of time. Retail and wholesale markets are different and need to be treated differently. We should avoid making our rules extraterritorial unless there is a clear reason to do so. The EU often requires all EU-headquartered financial services companies to abide by EU rules wherever they operate in the world, in a deliberate attempt to set global regulation, but the UK should start with the presumption that UK-headquartered financial institutions need only abide by the rules in the markets where they are actually operating, as long as those markets operate by global standards. For example, when trading in the US, the presumption should be that UK financial services companies just need to abide by US rules.

The Government should also consider reforms to the capital requirements directive and regulation. These are the rules that implement the Basel capital rules for banks into EU and then into UK law. The Basel rules are designed for international banks operating across borders, not domestic banks operating just within one country, but the requirements of the single market meant that the EU ensured that the same capital rules were applied to domestic banks operating just in one country as were applied to international banks operating around the world. The UK should consider following the US rather than the EU and not require non-systemically-important domestic banks, such as challenger banks, to abide by inappropriate global capital rules. This could improve competition among banks without affecting prudential stability.

There is also domestic legislation that the UK could usefully revisit. The Treasury is currently reviewing the ringfencing rules separating retail and wholesale banks, which, in part, duplicates imported EU regulation on bank recovery and resolution. The ringfencing rules can lead to very complex and inappropriate governance structures for retail banks that do not have any significant investment banking operations, and it is certainly worth looking at whether that can be changed.

Critical to the continuing success of financial services will be the process by which we make new rules, which the Government are also reviewing. Our financial services rules will no longer go through the EU policy-making machinery. They will no longer be scrutinised in extraordinary depth and amended at length by the European Parliament’s formidable Committee on Economic and Monetary Affairs, which I wrestled with many times, and which was once admirably chaired by the UK’s own Baroness Bowles. There is no way that the UK Parliament has the capacity to replicate that function. Parliament must set the objectives and principles of future financial services regulation, but the details should be determined by the regulators, particularly the FCA and the Bank of England.

[Dame Angela Eagle (Wallasey) (Lab)]

I agree that, as we are currently set up, the UK Parliament could not even begin to replicate what the European Parliament did with regard to oversight of regulation, but surely, if we, as a Parliament, were properly geared up with appropriate support, we could.

[Anthony Browne]

I basically agree with the hon. Member, a fellow member of the Treasury Committee.

--- Later in debate ---

[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.

[Sir Robert Neill]

The hon. Lady makes some very important points, particularly that last one. Does she agree that now we have left the EU and therefore, regrettably, left some of the justice co-operation measures we had, it is all the more important that we seek, bilaterally and in a broader sphere, to improve and strengthen international judicial and legal co-operation on the admissibility of evidence, rendering of suspects and, above all, dealing with digital evidence being obtained in other jurisdictions and then made available to prosecutors and the courts in the United Kingdom?

[Dame Angela Eagle]

I could not agree more with the hon. Gentleman, who is a distinguished Chair of the Select Committee on Justice. He is also a practitioner himself, so he knows about the practicalities of these issues. It is hard, in contemplating the extra work that has to be done because of Brexit, to know quite where one starts, but if we do not get it right and if we do not get on with it, this terrible reputation of London having become a laundromat for dirty money will only persist and perhaps get stronger, which will do us untold damage. I urge the Minister responding to this debate to give us some words of comfort that he is getting on with the economic crime strategy. We have an economic crime strategy—

[Madam Deputy Speaker (Dame Eleanor Laing)]

Order. I hesitate to interrupt the hon. Lady, but I have been very lenient on timekeeping this afternoon because we have plenty of time and not very many speakers, and I have been particularly lenient because she is the only representative of the Opposition Back Benches. However, she is in danger of taking a very large chunk of time: she has spoken for about 20 minutes, which is longer than the person who introduced the debate. I wanted to keep such a balance, so I am not stopping her, but I am hoping, in the interests of being fair to everyone, that she will soon draw her remarks to a close.

[Dame Angela Eagle]

Madam Deputy Speaker, I am delighted to do so. I suppose that, when one gets let off the leash away from debates with three-minute limits, all the words just come tumbling out, but I would not want to take more than my allotted time.

I hope the Minister will be able to give us some words of comfort, particularly that he will be taking fast action to establish a beneficial ownership register and bring some transparency to what is going on in respect of financial crime.

Finally, I want to mention the issue of the model all too often pursued by some of our financial services, and this is a final philosophical point perhaps. All too often, complexity is seen as an end in itself in our financial services, and as a proxy for competition and a proxy for innovation, when in fact it is merely an excuse for opaque pricing. That makes it difficult for average consumers who want to put their money somewhere, make money, protect their money, or get a reasonable return on their money, and who find it too complex to do so. I do not believe that this is serving customers well, catering, as it does increasingly, for just a few at the top of the earnings distribution rather than the many who have smaller pots of money. I hope that the Minister will reflect in his response about what might be done to reverse that trend. With that final observation, Madam Deputy Speaker, I am happy to draw my remarks to a close.

[Madam Deputy Speaker]

Thank you. I hope that we do not have to have a time limit this afternoon. If everyone takes about eight minutes, there will be no need for one. If that does not happen, I will have to put on a time limit.