Equivalence Determinations for Financial Services (Amendment etc.) (EU Exit) Regulations 2020

Baroness Kramer Excerpts

Wednesday 2nd September 2020 Grand Committee

[Baroness Kramer (LD) [V]]

My Lords, this statutory instrument is clearly necessary to enable an equivalence regime for financial services to be in place following the transition period.

We all know that financial services are critical to this country’s GDP and tax base. Historically, the sector has provided more than 2 million jobs in the UK and more than £76 billion a year in tax revenue but, in the past, one-third of the sector has relied on EU clients, nearly half of whose business has been lost due to Brexit. I note with concern that, reflecting this shift, London, according to the think tank Z/Yen, which manages the index, has lost its position as the global number one financial centre to New York.

Even more concerning, both New York and London have been losing position, although London is losing it faster than New York. The rising locations are in Asia and the EU 27. One expert described these centres, especially the EU ones, as small black holes, growing rapidly as they sweep in new and transferred operations. We cannot afford to lose any more business. Equivalence matters. My party therefore supports the passage of this SI. We note that, like all the SIs dealing with equivalence, this one represents unilateral action by the UK, without which EEA firms could not continue to access the London markets. However, to deny that access would be extreme self-harm as we would be the losers. Essentially, this SI attempts to retain some parts of the status quo.

However, I want to confirm that the arrangements in Schedule 3, which relate to benchmarks, allow Libor to be replaced by risk-free reference rates set by the eurozone and non-eurozone EEA countries. The UK equivalent will be SONIA, the sterling overnight index average. Your Lordships will know that Libor has been a disgraced benchmark since American journalists exposed that it had been corrupted and manipulated for decades under the noses of the UK Government and regulators, who were blinded by their philosophy of light-touch regulation.

I also want to use this opportunity to ask the Minister to give the Committee an update on the status of the equivalence negotiations with the EU. Can the Government confirm that they are no longer seeking mutual recognition? Quite a number of members of the Tory party—we heard some of this again today—and the regulators have indicated that they expect and want divergence to be a significant feature of future financial services regulation. Is that correct? What will be the underpinning philosophy of divergence, since I assume that light-touch regulation remains disgraced? Are the Government making any progress on finding a mutually agreed mechanism with the EU to resolve any dispute on divergence and equivalence? Is there any progress on getting a notice period for cancellation longer than the current norm of 30 days? Without a notice period of at least two years for equivalence cancellation, firms that use London will be living with disturbing uncertainty.

How are other issues that could lead to the cancellation of equivalence to be resolved? Perhaps the most obvious issue is that of financial stability related to the supervision in the UK of central counterparties clearing trillions of euros in derivatives. Actions to protect the UK economy in a crisis could cause havoc for the euro and the EU without some mechanism for co-operation and mutual support.

The expectation of the financial services industry is not that London will collapse as a global financial centre the day after the end of the transition period but that it will be in the EU’s interest to pull business into the 27 salami slice by salami slice as capacity expands, which is at least a 10-year strategy. New York has been reasserting its dominance in dollar-based financial business. China and India, as rising economic stars, have made it clear that they have no intention of ceding control of their key financial markets to any foreign country. The UK remains a major global player only so long as it dominates European financial services. How this Government deal with equivalence will essentially determine the future of this key sector of our economy.