Leaving the EU: Financial Services

Joanna Cherry Excerpts

Thursday 3rd November 2016 Commons Chamber

[Liz Kendall]

My right hon. Friend is right. Many companies have been planning for months, even before the referendum, to try to mitigate the risks of Brexit. There is a mandate to leave the European Union, but there is no mandate about the terms. The Court’s decision today should allow this House to have its say, to raise the important issues and to hold the Government to account, and I hope that the Government listen.

[Joanna Cherry (Edinburgh South West) (SNP)]

In answer to the right hon. Member for New Forest West (Sir Desmond Swayne), does the hon. Lady agree that this is not just about passporting rights, but about the vital regulatory framework that the EU provides for the financial and banking sector?

[Liz Kendall]

I agree with the hon. and learned Lady, and I will come on to that point later in my speech.

As well as playing a crucial role in our domestic economy, the UK’s financial and professional services have an unrivalled reach and influence across the globe. The UK is the world’s leading exporter of financial services. We have the world’s fourth largest banking sector, third largest insurance industry, second largest fund management sector, and second largest legal services industry.

Many people believe that the British economy is too dependent on financial services and that, despite the significant number of jobs outside the City, that predominantly benefits London and the south-east. I agree. I have long argued that we need to rebalance our economy, develop a modern industrial strategy, and devolve power to our cities, towns and counties to boost jobs and growth in every region, in every part of the UK.

However, strong and effectively regulated financial services are crucial. They directly create jobs and growth, and support employment in related sectors such as legal and accountancy services. They are the bloodstream of the wider economy, pumping money through the country by lending to local businesses. They attract huge levels of inward investment, including about £100 billion over the past decade—more than any other sector—and they are crucial for our pensions and mortgages, and for funding the public services on which we all rely. That is why I am so grateful to the Backbench Business Committee for granting today’s debate, because the decision to leave the European Union has serious implications for the future of this vital sector.

Membership of the single market has brought huge benefits. In particular, it has entitled financial services to use the passport—the mechanism that gives companies the legal right to provide services across the EU, without having to obtain separate authorisation from other member states. Those passports are the foundation of the single market for financial services, and they are essential for investment banks and international insurance companies. Many are now deeply concerned about losing their passporting rights, but I am afraid that some leading hard-line Brexiteers have poured scorn on the idea that we need passporting at all and say that third-country equivalence will do.

Equivalence is when the European Commission recognises that a country’s rules and oversight of a specific area of business are as tough as its own. It is true that some countries outside the EU have been granted equivalence in some areas of financial services, but the Commission is under no obligation to grant it. It can also take years to negotiate, be time-limited, and withdrawn at short notice, and it does not cover areas that are crucial for UK financial services, such as insurance, bank lending and bank deposits.

The new Under-Secretary of State for International Trade and envoy for financial services—I am disappointed that he is not here today—admitted the problems with equivalence in his recent interview with Bloomberg. He said that the UK will probably lose its current legal rights to provide services in the EU after Brexit, and that equivalence will not be “good enough”. He told Bloomberg that the Government want a better version of equivalence, but that in return we may have to accept future EU regulations handed down from Brussels. The problem with that is that we will not have a seat at the table when the EU decides how to regulate our financial services. We will therefore lose our ability to influence regulatory decisions for the better.

The risks of losing our membership of the single market and our passporting rights for financial services are clear. While passporting is permanent, equivalence is precarious. The UK will move from being a rule maker to being a rule taker, and that is not what our financial and professional services want. Although they may hope for the best, they must plan for the worst, and they cannot wait until the last minute to find out what deal they might eventually get. That would not be right for their business, their employees or their customers, who expect them to take action to mitigate any potential risks now. It takes three to five years to move operations to a different country. That is why most international banks, many asset fund managers and other financial services are now working out which operations they might need to move to ensure that they can continue to service their customers, how best to do it, and by when they should do it. The chief executive of Morgan Stanley has said:

“It really isn’t terribly complicated. If we are outside the EU and we don’t have what would be a stable and long-term commitment to access the single market then a lot of the things we do today in London, we’d have to do inside the EU 27”.

Other countries have not been slow to try to exploit the uncertainty. France and Spain have already launched campaigns to lure companies to Paris and Madrid after Brexit. The more likely risk is that some jobs will move to Dublin, Luxembourg or Frankfurt, and even more will move to New York or Asia, unless the Government get their strategy right.

The impact of losing passporting rights and the risks of relying on so-called equivalence are not the only major worries for our financial services. They are also deeply concerned about the Government’s plans for freedom of movement.

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[Joanna Cherry (Edinburgh South West) (SNP)]

I rise to speak about the impact of leaving the European Union on the financial sector and the legal profession, with particular reference to my constituency.

An estimated 7,000 of my constituents are employed in the financial services sector. Across the whole city of Edinburgh, there are 34,800 people employed in financial services. Edinburgh is the UK’s second-largest financial centre. It is a major European centre for asset management and asset servicing, and home to the global headquarters of the Royal Bank of Scotland and the UK headquarters of the Green Investment Bank. Edinburgh is the UK’s largest financial capital centre after London by both gross value added and employment. The financial sector in Edinburgh also supports many other jobs in the service sector. Some of the best coffee shops, sandwich shops and restaurants are in my constituency, supplying constituents who work in the financial and legal sectors.

Very worryingly, earlier this week an independent report for the Scottish Parliament’s Economy Committee revealed that Edinburgh’s reliance on financial services is greater than that in any other city in Europe. Therefore, Edinburgh is at most risk of being affected if we lose the protection hon. Members have been speaking about. I pause to pay tribute to those hon. Members who secured this debate.

There are serious concerns about the potential for lost jobs and business if there is a loss of full access to the single market. Leading economists gave evidence to members of the Scottish Parliament on Tuesday on the impact that Brexit and leaving the single market would have on Scotland’s economy. Across Scotland, the financial sector directly and indirectly employs almost 200,000 people, 20,000 of whom are European Union workers. It contributes £8 billion to the economy of Scotland. In fact, Edinburgh’s economy is more reliant on financial services than London’s economy, or indeed any other city’s economy in the UK. As I said earlier, if we look at Edinburgh’s share of financial services, we see that it is markedly ahead of most large European cities.

[Kirsty Blackman (Aberdeen North) (SNP)]

Is my hon. and learned Friend concerned that the Scottish asset management sector is bigger than that in Frankfurt and in Paris put together? We stand to lose out significantly.

[Joanna Cherry]

Yes, I am concerned about that. Edinburgh’s reliance on financial services is 23.8%, compared with 18.9% in London, 17.3% in Brussels and 17% in Amsterdam. By comparison, Glasgow’s financial services sector is worth about 12.4% to its economy.

This is not fearmongering. Paris and Frankfurt are already angling for some of the jobs that may leave London and Edinburgh if we leave the single market. I attended a briefing last week at which the Irish ambassador spoke. He pointed out that while Britain leaving the European Union poses some problems for the Republic of Ireland, it will also provide some fantastic opportunities for Dublin to attract jobs that we really need in our financial sectors across the UK. In Edinburgh, we really want to hang on to those jobs.

I am happy to say that a lot of people in my constituency are employed in legal and accounting services, which is what I used to do before I came to this place. More than 3,000 of my constituents are employed in the legal services sector. Across Edinburgh, that figure for the legal and accounting sector is closer to 10,000. The Law Society of Scotland has its headquarters in my constituency, and the Faculty of Advocates, of which I am non-practising member, has its headquarters in the neighbouring constituency of Edinburgh East. A lot of lawyers and other people who work in law firms live in my constituency and are worried about the impact of Brexit on legal services. There are many aspects of EU law that have particular relevance to the legal system and professions, including the directive on the mutual recognition of diplomas, the lawyers establishment directive and the lawyers cross-border provision of services directive.

[Sir William Cash]

Does the hon. and learned Lady recognise—I imagine she might—that there is a certain circularity in her argument? It is not surprising that the legal profession inside the European Union, which is concerned about European law, would want to protect that particular part of their activities. She could perhaps be a little more generous in understanding that those who want to leave might actually end up with laws that are made in this place.

[Joanna Cherry]

That is not what I am actually talking about. I am talking about the way in which European Union law has enabled Scots lawyers, English lawyers and lawyers across these islands to practise across Europe not for their benefit but for the benefit of their clients. That is the point. It is also to the benefit, as earlier speakers pointed out, of the financial services sector and to the British economy in general. This is not naked self-interest on the part of the lawyers. Lawyers depend on their clients to make a living. If lawyers are not able to practise across Europe easily, they will not be able to provide such a good service to their clients. That does not just apply in the financial sector. It covers all sorts of areas, including, very importantly, child and family law.

In Scotland, the Law Society of Scotland will be urging the UK Government and the Scottish Government to argue in negotiations that the current arrangements for lawyers to be able to practise in the European Union should be retained. It would be very disappointing if the only route for lawyers to be able to practise in Europe in future would be to requalify in other EU jurisdictions and go through the cumbersome processes that we have done away with as one of the many benefits of being in the EU.

Clearly, the best way to protect the legal and financial services in my constituency and in the city of Edinburgh is to remain part of the single market. That would be the easiest way to give comfort to those sectors. Of course, we are not able to give any comfort to those sectors, because the Government “do not want to give a running commentary”. However, it appears, as the result of a legal decision today, that the Government may in due course be forced to come to this democratically elected Chamber and tell us a little bit more about what their plans are. It is worthy of comment that that is not as a result of European judges sitting in Brussels, Luxembourg or Strasbourg. It is the result of English judges sitting in London. As a Scots lawyer, I wish to pay tribute to those English judges for the decision they have reached.

[Tom Tugendhat]

Of course, a few judges sitting in Belfast came out with a slightly different decision, as the hon. and learned Lady may be aware.

[Joanna Cherry]

Ultimately, it will be for the Supreme Court of the United Kingdom to decide, and it includes, of course, two very senior Scottish judges. I believe that the Supreme Court has already allocated a few days in December. I read that the full Bench will sit, so the Scottish judges will be there as well. The Scottish Government have said that it is very likely that Scotland will intervene in that case, and I have every confidence that the Supreme Court will reach the right decision.

[Several hon. Members rose—]

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[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.

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[Liz Kendall]

Once again, I thank the Backbench Business Committee for granting this debate. We heard many excellent contributions. I am only sorry that we did not have more time and that some Members could not speak for as long as they wanted to.

I do not think we learned any more from the Minister’s comments than we knew before the debate—[Interruption.] My hon. Friend the Member for Nottingham East (Chris Leslie) says that the Minister may regard that as a triumph. I am glad the Minister said that passporting is important, but he did not say that the Government would set out the broad framework and their objectives for the Brexit negotiations. He did not say that it was a priority to get the same access as we currently have to the single market for financial services, and he did not commit to a transitional agreement, let alone such an agreement any time soon. That is a huge mistake. If we want to protect this vital industry as well as jobs and growth, the Government need to act now, because businesses cannot wait. They have to plan for the future. Their customers, their regulators and their boards demand it. I ask the Minister to think again.

Question put and agreed to.

Resolved,

That this House has considered the effect of the UK leaving the EU on financial and other professional services.

[Joanna Cherry]

On a point of order, Madam Deputy Speaker. It is 49 years today since my colleague Mrs Winifred Ewing won the Hamilton by-election and came to this House as a solitary Scottish National party MP, and of course that means 49 years of SNP representation in this House, although we are rather more than one now. How would it be appropriate for me to mark this illustrious occasion in the history of my party and have it entered in the record?

[Madam Deputy Speaker (Mrs Eleanor Laing)]

The hon. and learned Lady has just proved herself to be a very adept and clever lawyer. Coming from me, that is a compliment. She will appreciate, as the House appreciates, that the point she made is not a point of order and does not, fortunately, require any comment from the Chair. However, she has made her point and it will be on the record that an historic event occurred 49 years ago today. I am sure the House will note that and, in its own way, celebrate it.