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

Baroness Penn Excerpts

Wednesday 17th May 2023 Grand Committee

[The Parliamentary Secretary, HM Treasury (Baroness Penn) (Con)]

My Lords, I thank the noble Earl, Lord Kinnoull, for securing this important debate on the report from the European Affairs Committee, which he so expertly chairs. I am grateful to all noble Lords for their contributions. Once again, I welcome the noble Lord, Lord Livermore, to his place on the Labour Front Bench.

I welcome the committee’s report on the UK-EU relationship in financial services, particularly its encouraging assessment of the UK financial services sector and the sector’s performance following Brexit. I also welcome the committee’s praise for the Government’s financial services agenda and reforms, including the future regulatory framework review.

Earlier this year, the Prime Minister welcomed President von der Leyen to Windsor to announce the Windsor Framework, achieving a decisive breakthrough. As the Prime Minister said, the UK and the EU may have differed in the past, but the two are allies, trading partners and friends. The Windsor Framework agreement restores the free flow of trade from Great Britain to Northern Ireland, protects Northern Ireland’s place in the Union, and safeguards sovereignty for the people of Northern Ireland. The Government also welcomed agreement at the Partnership Council on 24 March that we will shortly be able to move forward and sign the memorandum of understanding on regulatory co-operation in financial services and operationalise the forum.

I recognise that many noble Lords, including the noble Earl, Lord Kinnoull, my noble friend Lord Trenchard, the noble Lords, Lord Livermore and Lord Liddell, and the noble Baroness, Lady Kramer, asked for further detail on when that MoU would be signed. The Commission has today adopted the MoU and transferred it to the council for political endorsement, and we welcome this positive news. As we have previously said, the Treasury stands ready to sign the MoU, and we look forward to operationalising the forum as soon as possible this year.

I cannot comment any further on the EU process, but welcome movement has been seen today. This reflects the fact that the UK and EU’s financial markets are deeply interconnected, and building a constructive relationship is of mutual benefit. In the meantime, we continue to closely engage with EU authorities bilaterally and through multilateral fora. Indeed, the Chancellor and the Economic Secretary to the Treasury will meet Commissioner McGuinness next week.

The noble Earl, Lord Kinnoull, asked how the Government intend to support the financial services sector outside London, and the noble Lord, Lord Livermore, asked what we are doing to boost the competitiveness of the sector. The noble Earl is right that financial services are vital to the whole UK economy; they are important in not just London and the south-east or Edinburgh and Scotland. The Government’s vision for financial services will drive growth across the country. It is one for a sector that is open, sustainable, technologically advanced and globally competitive, and which acts in the interests of communities across the UK.

The Government are committed to delivering the Edinburgh reforms, which will take forward this ambition for the UK and ensure that the sector benefits from dynamic and proportionate regulation, that consumers benefit from high-quality services with appropriate protection and that the sector embraces the latest technology. This sector-wide plan will have benefits across the UK, both from direct jobs in financial services and through the role the sector has to allocate capital to grow our businesses, develop new technology and tackle climate change.

The noble Baroness, Lady Kramer, asked where the UK is relevant to other EU financial services centres, which picks up on this point about competitiveness. I do not have the figures that she asked for, but I can tell her that the UK is consistently ranked first or second among the world’s leading financial centres.

The noble Lord, Lord Livermore, asked about exports, and I have figures closer to those that the noble Baroness asked for on that subject. The UK is the world’s largest net financial exporter, slightly larger than the US and significantly ahead of the EU as a whole. The UK’s financial exports totalled $87.2 billion in 2021; the top five countries in the EU totalled $53.7 billion in the same year.

The noble Lord, Lord Livermore, asked what more we can do to promote financial services exports, and this is a focus for the UK. We are about to join the Comprehensive and Progressive Agreement for Trans-Pacific Partnership—CPTPP—which adds to the trade agreements with Australia, Japan and New Zealand, as well as the digital economy agreements with Ukraine and Singapore. The UK is looking to add to this list by making progress on negotiations to update our existing FTAs with Canada and Mexico, plus agreeing new FTAs with India and the Gulf Cooperation Council.

Several noble Lords, including the noble Earl, Lord Kinnoull, and my noble friend Lord Holmes, asked about the Swiss negotiations. A huge amount of progress has been made in that area. Given the ambition and novelty of the agreement, there are some complex and highly technical issues to work through. It is important that we get those right, given that this agreement is intended to serve as a new blueprint for financial services trade. We continue to work at pace, and we still aim to conclude those negotiations by the end of the summer.

The noble Earl, Lord Kinnoull, also asked about the publication of the Government’s updated green finance strategy. It was published on 31 March alongside a raft of documents setting out our vision for energy security and to tackle climate change more generally. It set out a vision for how the UK can continue to be a leader in green finance. A recent report reaffirmed our position as the number one global centre for green finance, but we cannot be complacent.

The noble Earl also asked about the State of the Sector report published last year. I confirm we are committed to publishing a second report this year, part of which will cover the opportunities the UK has to strengthen its position as a global financial services hub. That will reflect the Government’s ongoing commitment to this being an open market. I hope that also reassures my noble friend Lord Hannan about our approach to maintaining openness in this sector.

The noble Lord, Lord Liddle, was a little sceptical about the value of divergence, having left the EU. I will agree with him on one point: there is no value in pursuing divergence for divergence’s sake. But, if I may highlight just one example that other noble Lords have touched on, Solvency II reforms in the UK could unlock over £100 billion from UK insurers for productive investment, while maintaining high standards of policyholder protection. I believe that there are significant opportunities for us in charting our own way, having left the EU.

I believe that the noble Lord, Lord Liddle, also expressed some scepticism about the regulator’s new objective on long-term growth and competitiveness. I know that I heard that from the noble Baroness, Lady Kramer. I reassure them both that there is a clear hierarchy in the regulator’s objectives, which puts financial stability ahead of the new growth and competitiveness objective. I also say to my noble friend Lord Trenchard that we have included that new objective for the regulators because we believe that there are opportunities for smarter regulation to both maintain higher standards and drive growth, and that the inclusion of this objective will help to deliver that. I must disagree with my noble friend, however, about returning to the previous structure of financial services regulation. The changes that we made with the establishment of the PRA and FCA were not imposed by Brussels; it was a structure that the UK assessed as best preventing future crises. We continue to believe that it is appropriate in today’s world.

My noble friend Lord Holmes focused specifically on fintech. I was going to quote some statistics on the success of the UK’s fintech sector but the noble Lord, Lord Livermore, did that for me. However, I share my noble friend’s expectations about the promise of the FMI sandbox that is provided for in the Financial Services and Markets Bill. My noble friend also raised crypto assets; the Government have set out their approach towards crypto regulation in our recent consultation, and we will reflect carefully on the responses to that. Our approach is driven by embracing the opportunities of the technology that it represents while also protecting consumers against the risk. My noble friend talked of rational optimism and having the right regulatory framework; I believe that is a good way to describe the Government’s approach.

The noble Lord, Lord Bilimoria, and my noble friends Lord Hannan and Lord Holmes all raised talent and skills as a key component for our financial services sector. We recognise that maintaining a deep talent pool is integral to the UK’s continued success as a financial centre. The Government are committed to ensuring that the UK attracts and retains top talent. Since 2021, we have announced a set of targeted high-skilled visa reforms. These have included the global talent route, global business mobility, high potential individual, scale-up worker and reformed innovator visas. None the less, we continue to listen to the views of the sector. The Financial Services Skills Commission is a key industry body, working to take forward collective action to address the needs of the sector, whether it be in identifying and addressing emerging skills gaps, widening access to talent across the sector or promoting diversity and inclusion across it.

Many noble Lords also touched upon the debates that we have been having on the Financial Services and Markets Bill. I do not wish to repeat all of those debates today, as we will debate the Bill further when we reach Report. I should correct something I said earlier, when I misspoke: the green finance strategy was published on 30 March, not 31 March. I would not want to mislead those who might be googling the wrong date.

To return to the Bill, I once again reiterate the Government’s view that effective parliamentary scrutiny is valuable for consumers, firms and regulators, and that the new powers we are giving to regulators through the Bill should be matched by strengthened scrutiny and accountability of the regulators. There are provisions in the Bill to strengthen that scrutiny and accountability, and we are reflecting carefully on our discussions in Committee about how we can further build on those ahead of Report.

The noble Lord, Lord Desai, asked when we will finally get Brexit done. When it comes to financial services, we have onshored the previous EU regulations, but he is right that moving a set of laws from the EU to the UK statute book brings no benefit in and of itself. The Financial Services and Markets Bill, which is currently before this House—I look forward to it completing its passage—is the basis on which we will take forward a significant programme of reforms that we can implement once it is in place. The benefits of those reforms will not be felt overnight, and their scale means that we will need to phase their implementation over several years. However, that Bill and the reforms it will allow us to deliver are the basis on which we will build our vision for the future of financial services in the UK: a sector that is open, sustainable, technologically advanced and globally competitive.