Leaving the EU: Financial Services

Jonathan Reynolds Excerpts

Thursday 3rd November 2016 Commons Chamber

[Jonathan Reynolds (Stalybridge and Hyde) (Lab/Co-op)]

It is a pleasure to contribute to what has been an excellent, thoughtful and timely discussion. I congratulate my hon. Friends the Members for Leicester West (Liz Kendall) and for Nottingham East (Chris Leslie) on securing this debate to discuss one of our most important industries at a critical time for its future. The financial services sector and its related professional services form part of the backbone of the UK economy. According to a report published earlier this year by TheCityUK, these sectors together represent nearly 12% of UK economic output. They contribute £66 billion in taxes and generate an annual trade surplus of £72 billion.

We have heard from several hon. Members today, particularly from my hon. Friend the Member for Wirral South (Alison McGovern) in her eloquent speech, that it is wrong to misinterpret the term “the City” as simply meaning London—it does not. The financial sector’s presence and contribution are felt throughout the UK. TheCityUK’s report also highlighted the fact that, when related professional services are included, the industry employs 2.2 million individuals across Great Britain, two thirds of whom are located outside the capital. For each of those workers, the value added to the economy is £87,000, compared with the annual average of £52,000 for workers in other sectors. It is evident from those figures that financial services go far beyond a handful of well-paid jobs in the square mile. This is an association that we need to break down to ensure that the future of the industry is given the careful consideration it demands in the Brexit negotiations in order to safeguard stability for the rest of us.

Next year will mark the 10th anniversary of the early stages of the global financial crisis. In the intervening decade, the City has made measurable progress towards becoming a fairer and better functioning sector through the combined efforts of regulators and the industry itself. None the less, public trust in financial services remains at an all-time low, in some cases for understandable reasons. There is still some way to go for the sector to rebuild its reputation and regain that trust. For that reason, the fact that financial services might suffer disproportionately as a consequence of Brexit might not elicit sympathy in some quarters. However, if the financial crisis proved anything, it is that the success of our economy and nation is inextricably linked to the performance of our financial services sector. Arguably, that relationship had become too dependent in several ways before the crisis, but it is still true that it is challenging for the UK to achieve its full potential if our financial sector is not in good health. The positive flipside is that when the City does succeed, it brings a raft of accompanying benefits.

Our financial services sector is world leading. There is good reason why centres such as Frankfurt and Paris are vying to capture a slice of our thriving activity. The Financial Times revealed this week that the French Government are on the cusp of launching a cross-party initiative to lure businesses across the channel, while local financial regulators have simplified the process for new financial companies to register in Paris. The city’s business district has unveiled new adverts that are designed to entice companies to move with the inventive strapline: “Tired of the fog? Try the frogs!” The tone may be light-hearted, but we must take seriously the hard-headed commercial motivations. These existential threats do not mean giving the sector preferential treatment at the expense of others; it is about recognising the sector’s value and ensuring that we can build the environment it needs to continue to grow.

The £72 billion trade surplus, as mentioned in TheCityUK’s report, represents more than that for all other net exporting industries in the UK combined. We are discussing the future of our largest export industry. Getting Brexit right is fundamental to the overall success of our financial services sector and our continued economic prosperity. We need to focus on three main outcomes for financial services to ensure that, at least in the interim, the Government do not inflict damage on one of the most productive elements of our economy.

The first is clarity. Markets loathe uncertainty. While the Government fail to deliver a clear outline of their negotiating plans for financial services, investment and key decisions will continue to stall among domestic and international financial institutions of all sizes because they lack the information that they need to plan properly for the future. Equally, the outline needs to be fair and then effectively communicated. We do not want a bank-by-bank process of deal making similar to the approach that appears to have been offered to Nissan under which one institution receives mystery assurances while another is kept in the dark. Coherence and transparency—not a system of discreet concessions to those who shout loudest—will be critical. The eventual agreement must not cover just one industry, but the whole British economy, to make sure that Brexit works for everyone.

Secondly, the City is heavily invested in and dependent on the principle of free movement for its workers. At the very least, the sector needs basic guidance on what will become of the EU nationals upon whom it relies to function. London in particular boasts a cosmopolitan financial services workforce, attracting talent from the EU and beyond that helps to fuel its success. There is ambiguity about what the status of these individuals might be in the eventual negotiations. Once again, that stalls companies’ ability to plan for the future and make the right hiring choices. Equally, it will discourage people from coming to this country. It is unacceptable to use the personal circumstances of individuals working in financial services as a bargaining chip, so I call on the Government to guarantee their ongoing residency rights.

Thirdly, one of the central goals of the Brexit negotiations must be to guarantee freedom of trade for UK businesses in the EU, which is critical to financial services. The industry’s exports to the EU represented £18.5 billion in 2014. We will strongly argue for the rights of UK financial services companies to win business across the EU. In a world where global markets are becoming ever more connected, it makes no sense to put up barriers. The fact that we are already compliant with EU standards and regulations puts us in a position of strength, because we should at least qualify for equivalence on the day we depart. I second the view of my hon. Friend the Member for Leicester West that passporting—the right to do business across the EU—is a deal breaker in the negotiations.

The scale of this task must not be underestimated. In the lifecycle of a typical equity trade, there are around 100 different stages at which EU laws have an impact. When we discuss passporting, it is important to recognise that we are talking about not one simple directive, but a bundle of legal instruments that stretch across myriad items of regulation. They include the markets in financial instruments directive, the European market infrastructure regulation, the market abuse regulation, the prospectus directive—the list is long. Each financial market component and participant contributes to a complex ecosystem that is made up of many co-existing businesses. Inhibiting or obstructing a single part of the ecosystem could have a significant unforeseen impact. The Government must therefore consider carefully how to provide clarity and equal access for every single link of the chain.

I want to conclude by sharing two scenarios that underline the importance of today’s debate. We are operating in an environment of extreme uncertainty that seems to be benefiting no one except currency speculators. Despite that, a recent report by consulting firm Oliver Wyman managed to produce two reasonable forecasts of what might happen, depending on which type of Brexit we can achieve. Its analysis suggests that an exit from the EU that can deliver passporting and equivalence, alongside access to the single market in a similar scenario to that enjoyed currently, would prompt a decline of about £2 billion in revenues from EU-based activity and put 3,000 to 4,000 jobs at risk. That is the best-case outcome. In the worst-case scenario, with the UK moving to third-country status, without equivalence, and our relationship with the EU being principally through the World Trade Organisation, the implications could be severe. That framework puts up to 35,000 jobs at risks and could cost approximately £18 billion to £20 billion in revenue each year.

I am most grateful for this debate, which has taken place at a critical juncture for the UK economy, and I thank hon. Members for the valid points they have raised. I urge the Government carefully to consider this sector, which sits at the heart of our economic health, and to take on board the arguments that have been made about protecting future jobs, future revenue and the future prosperity of the United Kingdom.