Financial Services: UK Economy

Debate between Angela Eagle and Robert Neill

Thursday 9th December 2021 Commons Chamber

[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—