Brexit: Financial Services (European Union Committee Report)

Earl of Caithness Excerpts

Thursday 9th February 2017 Lords Chamber

[The Earl of Caithness (Con)]

My Lords, I thank my friend, the noble Baroness, Lady Falkner, for her introduction and the rest of the committee for its work. Sadly, I am no longer on that committee so I did not take part in this report; but I declare my interest, which is that I remember the 1950s and 1960s very well and do not want our grandchildren to live under such years as we lived under when Britain was going downhill rapidly. One reason why Britain has turned that corner is the financial services, which are the whole subject of this report.

Although the noble Baroness has said that London is the world’s leading financial centre, it has no divine right to be. It was not when I was a child, but it has now got to that position—and there are many countries interested in taking it away. Our change in status as we go from within to outside the EU is undoubtedly an extra threat to the dominance of London, and another undermining factor. The other side of the argument is of course that the EU has lost a major player in its financial discussions. Britain was always at the forefront. When I was a Treasury Minister, we were at the forefront of changing regulations in Europe—we took the lead because nobody else had the experience to do so. The capital markets directive, led by my noble friend Lord Hill of Oareford, and how that has changed direction is just one example of Britain’s influence no longer being in the right place.

We made our decision on 23 June and we must now make the best of it. This report will help the Government to achieve that. I was particularly pleased to read paragraphs 109 and 110, which refer to the transitional period and trying to avoid a cliff edge. As the noble Baroness has just said, the Prime Minister has been firm on that and given a positive lead, which is to be welcomed. Third-party equivalence and passporting are also important. In paragraph 56, the committee tells us that the Government are,

“analysing the difference between the opportunities afforded by passporting and third-country equivalence”.

It would be helpful if the Minister told us where the Government have got to with that.

Paragraph 58 refers to possible regulatory divergence between the UK and EU, and indeed between the UK and US. I thought this was a very good point to make because, since the report was published, we have all seen in the press what has been happening. We have a new President Donald—in fact we have two President Donalds: one in the EU and one in America. President Donald in America has made it absolutely clear that it is “America First”—and, indeed, America second and third—with the rest of the world about fourth. He has been backed up by Patrick McHenry, the Republican vice-chairman of the House Financial Services Committee, who wrote to Janet Yellen at the Federal Reserve, warning her that:

“Continued participation in international forums such as the Financial Stability Board, the Basel Committee on Banking and Supervision and the International Association of Insurance Supervisors is predicated on achieving the objectives set by the new Administration”.


That is worrying.

Let us take away the froth: we all know that America has always put America first in international negotiations, but what worries me is America not standing by its international obligations. Can the Minister say whether there was any indication in the Prime Minister’s meeting with President Donald of the USA—President Trump—that the US will not stand by those international obligations? If it does not, it is serious not just for the UK but for the EU and the rest of the world. Sir Jon Cunliffe at the Bank of England has said:

“It is important that we have proportionate, highest quality regulation – robust and in line with best international standards … The UK – in order to be a successful financial centre, you need good regulation … robust regulation and … regulators that have credibility and experience”.


Those are very wise words from Sir Jon, with whom I had the pleasure of working when I was a Treasury Minister. Abiding by those international obligations is so important. Sir Jon is also quoted in paragraph 51 of the report:

“If we want globalised financial services, we all have to have confidence in each other’s regulatory and supervisory machinery”.


That encapsulates it extremely well.

It is not just a trade negotiation between the political parties that is important, but agreement between the regulators. Can the Minister confirm that the intention is that provisions on international regulatory co-operation in financial services supervision will be included in all future trade agreements, both with the EU and other states, and that this would be an additional requirement in the future mission of the Financial Conduct Authority and Prudential Regulation Authority?

I turn from the report specifically to a wider view of financial services, because if we are no longer members of the EU, we will have to increase our trade around the world. There is no doubt that there is a new world financial order. Europe, the old aunt to the world, is getting even older and more irrelevant. In a recent report PwC said that by 2040, the E7—Brazil, China, India, Indonesia, Mexico, Russia and Turkey—could be double the size of the G7, which comprises the UK, Canada, France, Germany, Italy, Japan and the US. That will certainly change the dynamics. PwC went on to predict that, whereas in 2016 five countries in the world top 20 of projected GDP rankings, based on purchasing power parity, were in Europe, by 2050 there will only be three, all at a lower level than now.

One might think that gives us a great opportunity in dealing with the E7, but then comes the crunch. TheCityUK has done a lot of work on service trade restrictions and produced an index. It is interesting that, on that indexed basis, the E7 countries—which are going to be double the size of the G7 countries—are the most restrictive with regard to accountancy, commercial banking, insurance and legal services. We will have a tough job breaking into those markets. We have a lot of work to do, and if the US is not working to the international standard it will be even harder. I agree, therefore, with what the noble Baroness and her committee say in their report. If the City of London loses its status as the world’s premier financial centre, it will not be to other countries in Europe but to overseas—to New York, Singapore and China.

Can the Minister also comment on currency devaluation, through which we have the potential to really mess up the world and our financial services? We have been told that the euro is undervalued and the American dollar overvalued. Does the Treasury think that a currency devaluation between countries will start, which would be hugely damaging to us?

I will comment briefly on what I call “language and perception”. Language is hugely important in Europe. Phrases such as “common ground” and “a good compromise” are perfectly acceptable in Europe, while here they are portrayed in the press as wishy-washy and as Britain giving everything away. It is not as the press portrays it: it is 27 countries all having to give something and take something to reach a good compromise. I am greatly concerned that language will play a big part in our negotiations, and I hope the Minister is fully aware that this could be a major problem.

As for perception, a lot of people are influenced by it. If the perception is that Britain is not doing as well as before, that will compound our difficulties. One need only look at today’s papers: it is predicted that 30,000 jobs will be lost—that is the headline, the bad perception. That, however, is 0.5% of the people working in the financial services industry, and although the figure comes from the Bruegel think tank, it is at the worst end of TheCityUK’s projections, which thinks, at the other end of the scale, that as few as 3,000 jobs could go. Perception is of major importance.

We have no idea where we will end up at the end of our negotiations with the EU. I hope that the press and both Houses of Parliament will let the Government get on with the negotiations and do the best job we can. One good thing about Brexit is that if it all goes wrong, we have nobody to blame but ourselves.