UK as a Financial Services Hub

Debate between Craig Tracey and Robert Neill

Wednesday 6th February 2019 Westminster Hall

[Robert Neill (Bromley and Chislehurst) (Con)]

It is a pleasure to serve under your chairmanship, Mr Stringer, and I warmly congratulate my hon. Friend the Member for Hitchin and Harpenden (Bim Afolami) on securing this debate on an important topic. I am sorry that more hon. Members are not present, but I hope that the quality makes up for the quantity.

I am particularly keen to speak in this debate because I have a personal and constituency interest in this matter, and because it is critical to our country. About 36% of the working population of my constituency is employed in the financial or professional services sector, and that is about the 15th highest proportion in the country. Most of those people commute to London, although the European headquarters of Direct Line insurance—one of our principal insurance companies—is based in Bromley, and is the largest private sector employer in the borough. This issue matters for the prosperity of my communities, as well as impacting on the national picture.

This debate is important, but perhaps the reason why there are not more people here is that we have come to take it for granted that we are world leaders in financial services and the allied professional services that underpin them—of which more shortly. We take it for granted that the City will always be all right. I use the City as a shorthand for the broader financial services sector because, as my hon. Friend pointed out, only about half that sector’s output is generated in London, and many of the jobs are in fact based outside.

The idea that “the City will be okay” is something that we have to challenge a little. It will be okay, provided that it continues to have the right regulatory tax, fiscal and political environment to support it. It will be okay if we leave the European Union on sensible terms with a deal that protects the interests of our market access, but it will not necessarily be okay in the event of a catastrophic exit from the EU. Although larger firms will be able to manage come what may, smaller firms, which are often the innovators in this sector, will be more at risk. That makes it all the more important that we get it right for the City and the financial services sector as we leave the EU.

My hon. Friend properly referred to the contribution made by the financial services sector to the UK economy, and it is worth mentioning the report “Total tax contribution of UK financial services”, which was issued by the City of London Corporation, to which I pay the highest respect for its work to promote the sector nationally and internationally. The report, which was published in December 2018, highlighted the fact that the industry’s contribution to the Exchequer increased over the past year to £75 billion. That is 10.9%—nearly 11%—of the Government’s total tax receipts from all sources. It is 6.6% of the UK’s economic output. The number of jobs has already been referred to. This is a critical national economic and strategic asset, and Government policy must treat it as such.

It is worth saying that access to the European markets remains important, as it should do. My hon. Friend the Member for Hitchin and Harpenden is right to recognise that there are opportunities to be had from growing our contacts and trade with emerging economies. I was in Hong Kong in September at a legal conference looking at the opportunities for British law firms and their financial services clients, in relation to the belt and road initiative. No doubt there is much that can be done there, but at the moment, often, trade with China—particularly in the service sector—comes with strings attached, and perhaps a lack of transparency about access to the relevant sectors that would frankly not be acceptable in UK terms. The same applies with India, where there are great opportunities, but where there has so far been a marked reluctance about liberalisation in the service sector. As to my profession, as a lawyer, there is marked difficulty with India in getting liberalisation in the legal services sector. I hope that the Government will give more attention to that.

I was the sort of lawyer who became involved in the matters in question if regulatory procedures had not always been properly followed, whereas my hon. Friend was someone who made sure they were. What I have pointed out makes good, robust and internationally recognised regulatory frameworks all the more important. I previously had a spell working for Scottish Widows insurance, and as a trainee jobber, when such things existed, with Ackroyd and Smithers, who were then the leading gilts jobbers. It is an area of law in which I have always taken an interest, aside from its constituency importance for me.

The benign regulatory environment is something we need to watch, as we leave the EU. My hon. Friend is right to say that sometimes EU regulators have been difficult to deal with, from our perspective. Equally, however, dealing outside the EU, with a proper free trade agreement with third countries, to include financial services, will not be without challenges. I am secretary of the all-party parliamentary group on financial markets and services and have just come from a breakfast meeting with the group to discuss the prospects of a free trade agreement in services with the United States. There are real regulatory obstacles—not least having to deal with not one regulator but, in relation to the insurance sector, for example, 50 state insurance regulators as well as a national regulator. With banks, would one be dealing with the federal regulator, the regulator in New York or the state regulator in Chicago?

There is a multiplicity of issues to be addressed, which is why it is critical that we leave the EU with a deal, and with a transition period in which we could maintain all the good aspects of market access to the EU and have time to sort out arrangements and opportunities with non-EU countries. Let us be honest and not kid ourselves—those complexities will not be sorted out overnight. It will take time, and to benefit we must be patient about how we go about things.

[Craig Tracey]

My hon. Friend is right that we need to get regulation that works, but an issue put to me by the insurance industry is that a Norway-plus model would not work for the insurance market as a whole, as we would not all be working to the same rules. The insurance rules are set at EU level, rather than on a global scale, so we need to look at the different facets of financial services, to ensure that they work for the whole market.

[Robert Neill]

That is perfectly true, and the need for the deal and for a time to thrash out our future relationships is all the more important because of it. There is not a simple scenario in which the sector works on a one-size-fits-all basis. The same thing applies to the legal services sector, which is a critical underpinning. It is worth remembering that with respect to financial flows, EU financial services trade with the UK between 2016-17 and the current time increased from £29 billion to £33 billion. That dwarfs the figure for trade with our next largest partner, the United States; it is only half, at £16 billion. The seven largest financial services markets added together—the US, Japan, Switzerland, Canada, China, India and Australia—come to only £26 billion, which is less than our financial services trade with the EU. That is why, at the same time as we look at the opportunities for opening out elsewhere, it is critical to maintain EU access, which has also been important to foreign inward investment into UK financial services as a gateway into EU markets.

It is worth bearing in mind that across measures of competitiveness London ranks as the top city and has the highest volume of financial services foreign direct investment globally. However, that is because of our current advantageous position, which we need to maintain. An important part of that advantageous position is the underpinning that legal services and the legal system give to the financial sector. I am concerned that although the Government have uttered warm words and issued advice to practitioners in the sector, real uncertainties would remain, should we leave the EU without a proper deal.

Some of the areas in question are similar to areas of concern in direct financial services, such as the loss of passporting rights, and the need to operate with a form of equivalence. However, the situation for legal services is even more stark, in some respects, because the establishment directive would go, as would mutual recognition of professional qualifications. That would not enable us to use the fly in, fly out arrangements that are so critical to enabling international law firms to advise their clients in real time while deals are going through. That needs to be dealt with, which is why, again, a transitional arrangement is critical.

The other critical point in that context is that unless we have a deal—if we leave without one—we will lose the existing arrangements for the mutual recognition and enforcement of UK court judgments in EU countries and vice versa. That is vital for contractual certainty and continuity. A contract is worthless if it cannot be enforced, and if it cannot be enforced through the judgment of a court there are no other means to do so. It is vital to find means to maintain that. TheCityUK has pointed out that losing it would mean profound difficulties in relation, for example, to insurance contracts—which would not be of value if we were to leave without the ability to enforce them in the event of default—and, significantly, uncleared derivatives. The derivatives market is particularly important to the UK. It is an area of expertise where, as my hon. Friend the Member for Hitchin and Harpenden said, financial services are not just about figures, but are relevant to real business. Most business work is now underpinned in one way or another by a form of financial instrument being traded, particularly in any significant commercial deal. That has been described as the plumbing of the business system, so anything that threatens the derivatives trade operating out of the City, and what relies on it, would be extremely dangerous.

There have been some areas of progress. I was pleased when the European Securities and Markets Authority agreed a memorandum of understanding with the Bank of England in relation to central counterparties and the central securities depository, which enables that issue of central clearing to continue. However, that is one part of a much more complex structure. There are other areas on which I hope for assurances that the Government are determined to see the issue as central to our negotiations. Those things are largely part of the future state negotiations, but we have to have a deal to get into those future state negotiations to begin with. That cannot be emphasised too strongly.

I also want to emphasise the fact that financial services and many aspects of legal services depend on the free flow of data to underpin them. At the moment that is available to us, in relation to our EU counterparties. However, unless—at least until a future state agreement is achieved—there is regulatory alignment on data sharing, we risk disruption to those data flows. That will severely disrupt the circumstances in which we could guarantee that trades could be carried out and completed. Again, insurance and uncleared derivatives are particularly vulnerable to disruption of data flows.

The City believes that an EU-level solution is the optimal one, and I hope the Government will reassure us that it is their intention to press for that, for the same reason as we spoke of before—the complexities of dealing with the 27 on bilateral agreements would be daunting to say the least, and would cause more delay, which would deter people from writing contracts while that period of uncertainty persisted. I know that a temporary solution to protect data flows is currently under discussion, relating to a non-enforcement period between regulators under what is known as a “safe harbour” precedent, but that is not guaranteed. I hope the Minister will be able to update us on progress and assure us that this, too, remains a very high priority for the UK Government.

Getting global regulation right and making it business-friendly, as my hon. Friend the Member for Hitchin and Harpenden said, is critical. Of course, the City of London Corporation provides the secretariat for the International Regulatory Strategy Group, which is a practitioner-led body comprising the leading UK financial and professional services figures. The key test of global regulation is not necessarily its quantity, but its quality and effectiveness. Thus far, the UK has been a world leader in that, and it is important that we continue to make that central to our policy.

My hon. Friend mentioned FinTech, and I am very pleased that he did, because I have constituents, including one of my councillors, working in the FinTech sector and there are real opportunities there. The ability to retain young talent in the UK is critical here; that applies also to young lawyers and to young professionals right across the board, so it is vital that we have a regime for immigration that not only does that in practice, but sets the right tone.

That is why I am pleased that we have scrapped the £65 fee for the settled status scheme; I rather regret that we ever had it to start with. I have in my constituency many EU-national professionals, working in the City of London, the west end and other sectors. They have been settled with their families in places such as Chislehurst and Bromley—commuter land—for many years, and the suggestion that they were going to have to pay to remain somewhere where they had already put down their roots and that they regarded as home sent the wrong signals. I am pleased that the Government thought twice about that, and I hope that can be reflected in the tone of our approach to our EU friends and neighbours hereafter.

However, we must bear in mind that it goes beyond that. International workers make up 40% of the City’s workforce and 35% of London’s finance and insurance jobs. Many of those are EU nationals; others will come from elsewhere, but having that welcoming and open approach is critical. Successful market economies are only successful if they have that open and broadminded approach, and it is important that we as the UK Parliament recognise and articulate that as strongly as we can.

Finally, sometimes people think that financial services are purely about profit; they see the City purely in terms of big financial institutions. The City of London does a great deal to encourage responsible business practice as well, and the two do not need to be separate. The financial services sector is one of the most active and engaged in corporate community investment across the country, as I see in some of the firms based in my constituency or where constituents of mine work.

New research that the City of London Corporation has published indicates that financial and professional services firms gave £535 million in cash and in-kind donations to various forms of community investment in 2017. It is worth saying that although a flourishing financial services sector is important to the economy, its leaders and the practitioners I know from my constituency also want to ensure that they pay their fair share not only to the Exchequer, but in kind to the communities that they serve. That is not separate from the day-to-day workings of our economy and our lives, but central to it, and I hope that this debate helps to bring that home.