Leaving the EU: Financial Services

George Kerevan Excerpts

Thursday 3rd November 2016 Commons Chamber

[Sir William Cash (Stone) (Con)]

There seems to me to be a great deal of overstatement and exaggeration in this arena. The media have tended to overstate difficulties in this area to a very significant extent.

This is about confidence. For nearly 400 years, up to our entry to the EU under the European Communities Act 1972, the United Kingdom was able to run one of the most effective—if not the most effective—financial services centres, the City of London. The idea that somehow or other, because of the intervention of the European Union, things will get better is completely outweighed by the disaster area and dysfunctionality that the EU now represents.

Only a few days ago, in Bratislava, I heard the chairman of the European Parliament’s Committee on Budgets saying that the EU needed an “electric shock”, that there was far too much regulation, that it was far too intrusive, and so on. The chairman of ECOFIN said that the EU was facing the biggest economic and political crisis in modern political history. All that is true. The idea that we would not have to leave the European Union—thank heavens the British people made their own judgment about that—and the construal of our leaving the European Union as a disaster in itself simply belie the facts.

The reality is that EU legislation is deeply embedded in the financial services sector. Just to state the obvious, not only are we obliged under sections 2 and 3 of the 1972 Act to absorb all the legislation—I warned in a letter to the Financial Times in 2008 that that would lead to the kind of difficulties we are now experiencing with regard to financial services—but because of the Court of Justice we have to obey all the regulations. The massive regulatory overkill of the whole of the financial services sector as a result of that arrangement is an undoubted disadvantage. There are huge benefits to be gained by being outside the European Union, which I will come to in a moment.

[George Kerevan (East Lothian) (SNP)]

Surely the hon. Gentleman is aware that most EU bank regulation—especially since 2008—has been at the behest of the G20, so we will be subject to it whether we are in the EU or not.

[Sir William Cash]

The problem that the hon. Gentleman has perhaps not quite taken on board is that because of the European Communities Act there is a legislative requirement for us to accept those rules. Outside, we will, I hope, be able to benefit not only the United Kingdom but the EU, as I will come on to in a moment.

We only have to look at places such as Singapore and Hong Kong to understand that one does not have to be in the European Union to have a successful financial services sector and compete in the global marketplace. The same applies to New York. The objective must be to keep the financial markets open throughout the European Union as a matter of mutual concern throughout the UK and the other 27 member states. Breaking up the London system would involve much greater costs for everyone. Europe would end up far worse off, in my judgment—and that of many others, too—if the financial sector migrated to New York, Singapore or Hong Kong.

The passport is not specific to any one aspect of the financial services field. It works best in relation to banking accounting for about a fifth of annual banking sector revenue. It works less well in relation to asset management, which my hon. Friend the Member for Wimbledon (Stephen Hammond) mentioned. It is vital to understand that there are subsidiaries set up all over Europe carrying on the business of other countries irrespective of a passport. A significant amount of EU assets are already in Dublin and Luxembourg and their management—this is the key issue—is run from the UK. Indeed, on a recent assessment I have read, only 7% of assets managed in the UK are thought to be threatened by the loss of the passport.

There is not a single market in insurance at all. I appreciate that my hon. Friend might wish to come back to me on that, and I am very happy to talk to the people he mentioned in reply to me, but I simply make the point that we are not always dependent on the passport. There is a special problem regarding Lloyd’s of London, but I am informed that the pool of underwriters across the EU amounts to only 11% of the market’s gross written premium, and only 3% is directly reliant on the passport.

We have three main alternatives: equivalence, bespoke agreements and local arrangements. Equivalence is granted by the European Commission. The Commission is guardian of the treaties and has the legal clout that we will get away from when we vote to leave, so equivalence would not apply to us if we left the EU. But we have the same regulations as the EU, and under the repeal Bill, which I put together just before the referendum and am glad the Government are so interested in, we would be able to run parallel operations where it was in our mutual interests to have regulatory arrangements in the UK equivalent to those elsewhere in the EU—and, indeed, internationally, as well.

As regards bespoke agreements, we have the potential to secure an agreement similar to that with Switzerland, for example. If no cross-border access arrangement is made, firms will still be able to set up subsidiaries. That would, I have to admit, cost money, but it would not be disproportionate. I do not want to go into the details of a private conversation so I will simply say that I got that straight from some very senior bankers the other day. It boils down to this: we can arrive at an arrangement similar to Switzerland’s or at a free trade agreement. Of the two, I must admit I prefer the latter.

--- Later in debate ---

[George Kerevan (East Lothian) (SNP)]

Let me begin, as others have, by commending the hon. Member for Leicester West (Liz Kendall) for securing the debate. Let me also commend her for summing up everything that I think Opposition Members, as well as many Conservative Back Benchers, believe about the nature of the problems that will face the financial sector post-Brexit. If there were any political justice, the moment that the hon. Lady had finished speaking the Minister would have stood up and agreed with everything that she had said. That would have been the end of it, and we could have gone on to actually solve some of these problems. Sadly, though, the Minister did not do that. We are faced with a situation in which the UK’s major industry, in terms of employment, taxes raised and the nature of our links with the rest of the world—it is a key strategic industry—is left blowing in the wind, waiting to find out what happens.

I always listen with great interest to what the hon. Member for Stone (Sir William Cash) says because he is forensic and thinks things through. He came up with a whole series of fixes—sticking plasters—that could be applied so that the financial sector could legally maintain its markets in Europe. However, I put it to him and those who agree with his line of argument that there is a problem: since 2008, the UK financial sector has been in a special place compared with many other industries. It has had to undergo massive regulatory change, which has produced massive uncertainty in the industry. That process has not yet fully played out. We still have to get to 2019 before we will have implemented all the Vickers proposals on ring-fencing, so the banks are in a major process of reorganisation. Many Members have been to bank headquarters in the City and know that the situation on the ground is very complex. To add to that process of uncertainty, we have another period of uncertainty when the institutions will not even know whether they have the right to trade any longer in the rest of Europe, and that is a step too far.

We all know what the Minister will say when he makes his speech as he has come along to a number of such debates. He will done a fine job of not telling us anything. He will say we cannot have constant reporting on negotiations, but we are not asking for that. Instead, we are saying that given the unique uncertainties in a major industry that is undergoing massive regulatory change, the Government must put forward a transitional period. It must tell the financial institutions, “Yes, we have a transitional period. We will put down a time period, and it will go beyond 2019, when the Vickers proposals bed in.” That would allow everyone to calm down. If the Minister will not do that and instead maintains the silence, the Government will be adding to the regulatory uncertainties that are piling up on the industry.

[Joanna Cherry]

My hon. Friend talks about the uncertainty that is caused by the Government saying that they will not give a running commentary. Does he agree with the First Minister of Scotland that the Government are refusing to give a running commentary and to allow a vote in this House not for reasons of high constitutional principle, but because they do not have a coherent position, and they know that if they come to this House, that fact will be exposed?

[George Kerevan]

It would be my guess that the Government’s silence may just cover up a lack of strategic vision.

I also want to address a point raised in an intervention by the right hon. Member for New Forest West (Sir Desmond Swayne). He said that only about a fifth of revenues from the UK financial sector come from Europe and that we have a huge domestic sector, particularly in retail banking, so we should not exaggerate the crisis in the financial sector that might emerge due to Brexit. I have an answer to that: the problem is that the strategic sectors of banking, particularly high-value investment banking, which is where the profits are, do relate to Europe, and the threat is not from Paris or Frankfurt, but from Wall Street.

I have no wish to force US banks out of the City of London, but the banking community that has gained most since 2008, and that has consolidated and expanded its market share, is the major US banks, particularly the five big investment banks. They have increased their market share in London and Europe while European investment banks are in major decline—Deutsche Bank is in financial trouble, as are the Swiss investment banks, and all we are left with is the European champions, Barclays. If we break up the European financial family in another period of uncertainty, all we will do is strengthen the arm of the US investment banks, and behind them is a whole series of other US financial institutions that are coming into Europe.

US private equity has driven a coach and horses through traditional German bank lending at a regional level. For example, Cerberus is coming in and using a network of Cerberus companies across Europe to buy its way into European property by buying distressed debt. It is using the fact that it can play off one of its divisions against another through transfer pricing to take a gain in taxation. The real threat to our banking system is that, unless we get a grip, Wall Street and the American banks will dominate it. The right hon. Member for New Forest West suggested that the British domestic market was strong enough to survive whatever happens in the next few years, but that is not true. As we weaken the entire European banking family, we open up the possibility that the British retail banking system, which has retreated into its own domestic market, will be very much weakened when it comes to further American competition.

We need a solution to the passporting issue. The Minister will probably not respond to my proposal today, but I will put it on record anyway. The Scottish Government are seeking to maintain Scotland’s position within the single market, and I want to make it very plain that we would do that while being part of the United Kingdom. The UK Government have already done a side deal with Nissan and said that they will keep an open border between Northern Ireland and Ireland, so side deals—by industry and by region—are already out there. If Scotland were allowed to stay in the single market as part of the United Kingdom, that would give us a solution to the passporting problem. British banks could use their offices in Edinburgh and Glasgow to continue to trade with Europe because they would have the passport, and the Treasury would still be able to tax their profits because they would still be in the UK. The alternative is that the major European and American banks will move their nameplates to Dublin and Frankfurt, and the bulk of the business will be run from New York. We need a solution, and one solution would be to accept the Scottish Government’s proposal—or at least give an assurance that it will be thought through, rather than instantly dismissed—that Scotland should remain within the single market.