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

Baroness Kramer Excerpts

Wednesday 17th May 2023 Grand Committee

[Baroness Kramer (LD)]

My Lords, I join in congratulating the noble Earl and the committee on this report. It is rather eerie that, so many months after it was written, it still seems to be exceptionally relevant, which is a compliment to all who were engaged in this process.

The UK is a leader in financial services, and I certainly take the view that preserving that leadership is critical to our economy. I would say to the noble Lord, Lord Davies, that it would be brilliant if we built up some other economies to the leadership position that I would like to see, but frankly, if we look at the real world as it is today, it is financial services and life sciences, and not a whole lot more; perhaps some of the creative industries, but they are under huge pressure as well. So, for the benefit of our people, we absolutely have to make financial services successful.

However, I am concerned that the impact of Brexit is being played down. The industry hesitates to speak openly to the Government about many of the issues that it sees. I congratulate the noble Earl, Lord Effingham, for raising some of those issues today, because frequently it holds back in silence. I see the Government constantly determined just to look on the bright side. Unless we face reality, we cannot take the steps that are necessary. I join with the noble Lord, Lord Desai, in that view.

The noble Lord, Lord Bilimoria, was right that we are seeing a slow bleed of our leading position. New York now heads the league tables, not London. We are coming into year 3 of that being true. Financial services sectors from Singapore to Barbados have benefited. Many of them are former colonies of the UK, and they march into a European company with the message, “We too have been snubbed by the British. Let’s do business together”. I am told that it is proving a very successful pitch. London still stands significantly ahead of any EU financial centre, looked at on an individual basis. But the question is not, “Is London dominant compared with Frankfurt or Paris?” but “Is London dominant compared with Frankfurt plus Paris, plus Berlin, plus Amsterdam, plus Dublin, plus Luxembourg, et cetera?”

The EU is not developing a single centre to rival London—the noble Lord, Lord Liddle, made this point. Paris is rising fast and has that potential, but the EU is creating a network of centres—perhaps unintentionally, but that is how it is developing—to rival London. That would have been unworkable in the past, but with digital technology it is very possible. I would like the Government today to give us the comparison between London and that EU network, and, if they cannot, they are not doing proper due diligence.

EU-generated business has for many years been about a third of financial services activity in the UK. Obviously, some of it has simply gone, post Brexit, without equivalence agreements in place. ESMA-regulated stocks are now traded in Amsterdam, Paris and Dublin but not in London. Picking up the point made by the noble Earl, Lord Effingham, we see many UK-based firms developing EU hubs. I was stunned to be in a conversation about Lloyd’s and hear it described to me as “Lloyd’s of Brussels”. The reality is that firms are having to take advantage of this and seize it—but it is not to London’s advantage.

I may say that it is not just the big players. I will pick up on the point made by the noble Lord, Lord Holmes, on the significance of fintech. In a February survey, Anglia Ruskin University found that 40% of the fintechs it surveyed had now opened offices outside the UK, mainly in the EU—and that was within the past two years. So we have a definite and clear move that is taking place. It is not so much personnel because, frankly, since we do not have free movement of people, those who carry a British passport are pretty much stuck here; it is new hires, and the EU is very much insisting on new hires as its general strategy.

So we really need some focus on this issue, and I will pick up with great concern and anxiety a subject that was picked up by the noble Earl, Lord Kinnoull: central counterparties. There is an article in today’s FT that I recommend, although I have to say that I felt almost physically ill when I read it. Noble Lords will be well aware that the euro swaps market accounts for something in the range of $100 trillion a year—it is always expressed in dollars. Pre Brexit, 70% of that market played through in the UK. As of this last report, which comes from OSTTRA, a post-trade services company based in the UK, the US market share is 51%, the EU share is 35% and the UK has just 14% of the market.

Why does it matter? Because, as the article carries on to say, it means that most market operators now have to have three versions of themselves: a US, a UK and an EU version. They have to run liquidity pools on each of those and have to go to lots of places, hunting for liquidity. That cannot be a good thing, and of course it comes at huge cost. So, if they decide to begin to refine, we are placed in the position of a potential loser. It is absolutely crucial that we manage to keep our position in the central counterparty arena, which brings me to a question that others have raised: the negotiation of the MoU to set up regulatory dialogue between the UK and the EU. I do not understand why it has not been signed; we must get an update and it really needs to be treated by the Government as a matter of urgency.

The noble Lord, Lord Hannan, said, “Well, you know, if the EU doesn’t want to give us equivalence, so be it, that’s their problem”. He will know that the EU is not stupid. If you delay providing equivalence in an area where you have yet to build up your capability, you buy time for that capability to develop. Then it is easy to grant equivalence: you now have a functional rival. I see no reason why that is not the strategy that the EU is pursuing. Frankly, if the situation were reversed, we would be doing the same. So I have really serious concerns in this area.

I will switch now to the other area of discussion, which is the new framework that has been looked at in the report and is the subject of the Financial Services and Markets Bill and various other steps that the Government have taken. I very much join Sir Paul Tucker, who prays in aid practically every previous Governor of the Bank of England who says that the competitiveness objective for the PRA and the FCA is genuinely not desirable and who advises the City to think twice about pushing for this, saying that it really does not know what is best for itself in this situation. I am very concerned about this challenge to financial stability and to the primary objectives of both the FCA and the PCA. The City has a terrible history of disregarding the real issues that are embedded in risk and pushing every opportunity it has to the extreme.

When I look that the other measures the Government are taking, I see that they feed into much of the same. For example, one noble Lord—it might have been the noble Lord, Lord Hannan, or the noble Viscount, Lord Trenchard—mentioned Solvency UK replacing Solvency II. The key element of that is that it will now encourage pension funds, and certainly defined benefit pension funds, to invest much more heavily in high-risk, illiquid assets that are seen as beneficial to the UK economy: scale-ups and infrastructure. I am constantly told, “Yes, look, the Canadian pension funds do it”. But take a look at the credit analysts writing about the Canadian pension funds; the funds are in effect backstopped by the Canadian Government. So my question to the Government today, as they continue on their path, is: are they going to fully backstop defined benefit contribution pension funds? At present, the pension protection scheme that is in place is not 100% for all participants in the funds. So will that happen?

Of course, there is talk now about trying to bring in defined contribution schemes. How on earth are the Government going to provide protection for those as they get higher-risk portfolios, or are we basically going to tell pensioners that they will now face much more risk about receiving the pensions that they believe they have signed up to?

The Minister will know that I am also concerned about the Edinburgh reforms because embedded in them is a rollback of many of the safeguards that were put in place after the 2008 crash. In particular, they undermine the ring-fencing of retail banks and weaken the responsibility for wrongdoing and mismanagement in the senior managers regime. I am really troubled when the Government’s answer is, “Look, it’s not a problem because we have in place resolution regimes that protect the taxpayer if any of these institutions collapse”. In the recent case of Credit Suisse, Swiss regulators abandoned the resolution plan because they realised that it would lead to an economic crisis in Switzerland. In the US, regulators refused to impose a resolution on Silicon Valley Bank because it would destroy a key sector of their economy. It is beginning to look like resolution will only ever be applied in very limited circumstances because of the collateral damage to the economy.

I do not want to repeat all the important discussions that we are having on the Financial Services and Markets Bill, but I must highlight the issues of accountability for and scrutiny of the regulators in this regime, which other noble Lords have spoken about. In our discussions in committee, the Government have heard alarm expressed by Members on every Bench. Among many others, the noble Lords, Lord Forsyth of Drumlean, Lord Bridges and Lord Tyrie and my noble friend Lord Sharkey have put down—or will put down—amendments on Report to ensure scrutiny and accountability. I hope that today the Government will tell us that they will accept those key amendments.