Financial Services: UK Economy

Debate between Angela Eagle and Anthony Browne

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.