Leaving the EU: Financial Services

Liz Kendall Excerpts

Thursday 3rd November 2016 Commons Chamber

[Liz Kendall (Leicester West) (Lab)]

I beg to move,

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

I start by thanking the Backbench Business Committee for granting this debate and for giving us time on the Floor of the House to discuss this important issue.

The UK’s financial and related professional services are critical to our economy. Together they account for almost 12% of GDP, employ more than 2 million people and contribute £66 billion a year in tax revenues. That is 11% of the total annual tax take, which is the largest contribution of any sector and essential for funding our public services.

While London benefits hugely from those sectors, two thirds of the jobs in financial and professional services are based outside Greater London. Some 160,000 people are employed in Scotland, with Edinburgh’s economy more reliant on financial services than any other UK city, including London. More than 54,000 people are employed in those sectors in Wales. Elsewhere, major employers include Citigroup in Belfast, Deutsche Bank in Birmingham, Aviva in Norwich, American Express in Brighton, and J.P. Morgan in Bournemouth. Overall, there are 22 towns and cities in the UK that each employs more than 10,000 people in financial and professional services, including Manchester, Leeds and Liverpool, Sheffield, Reading and Bristol, and Norwich, Portsmouth and Poole.

[James Berry (Kingston and Surbiton) (Con)]

Does the hon. Lady agree that keeping the financial services passport is vital for many people who work in the sector, not least a lot of my constituents, and that people in business would be the first to say that in financial negotiations it is not wise to give a running commentary?

[Liz Kendall]

I agree with the hon. Gentleman’s first point and I will come on to the issue of passporting later. I believe that businesses really want certainty, which is why it is right that hon. Members raise issues in the House.

In my own fabulous city of Leicester, almost 7,000 people are employed in financial and professional services, including by HSBC, Santander and Hastings Direct. Those people are not the extremely wealthy bankers or hedge fund managers that we often read about in the papers. They are ordinary people on modest wages who work in customer services, call centres and office administration, and who pay their taxes and spend their money in the local community.

[Sir Desmond Swayne (New Forest West) (Con)]

I do not want to diminish the importance of the financial sector, particular that which operates and needs to continue to operate in Europe, but overwhelmingly domestic financial services have no involvement with the continent at all. Their export potential is virtually nil, in the words of the Commission itself. To what extent does the impressive list of employees that the hon. Lady has given divide between those that are involved entirely in the domestic market and those that are involved in transactions overseas?

[Liz Kendall]

The businesses in my constituency and those that I have talked about so far are deeply concerned about losing their membership of the single market and their passporting rights. I care about those jobs and the contribution that those companies make to our economy. It is right for us to raise questions, and it would be wrong to suggest that leaving the European Union does not give rise to serious concerns.

[Mr Ben Bradshaw (Exeter) (Lab)]

Does my hon. Friend agree that today’s excellent ruling in the High Court gives the Government a chance to reflect on the invocation of article 50 and the impact that it is already having on the financial services employers to which she refers, particularly with regard to the uncertainty about our future membership of the single market?

[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.

[Mr Chuka Umunna (Streatham) (Lab)]

I congratulate my hon. Friends the Members for Leicester West (Liz Kendall) and for Nottingham East (Chris Leslie) on instigating this excellent debate. Of course, people want financial services to make a bigger contribution to the Exchequer, but they already make a massive contribution, which is why it is right to have this debate.

In respect of the point that my hon. Friend the Member for Leicester West just made about the benefits and other issues beyond passporting, the desire of other EU member states to take part of the City’s market is illustrated by the fact that we have already had a tussle with the European Union over the City’s role as the clearing house for euro-denominated transactions. That has already been the subject of court action. If we leave the single market, it will not simply be a question of access; the likelihood of our losing the ability to be the clearing house for euro-denominated transactions is only likely to increase.

[Liz Kendall]

My hon. Friend puts that point extremely well. There are a huge number of risks on the issue he raised as well as on access to services, but the Government have so far had virtually nothing to say. Businesses cannot wait to get that certainty. Their regulators, their boards, their customers and their clients want to know what will happen. This will have a huge knock-on effect on the rest of the economy.

[Stephen Timms (East Ham) (Lab)]

My hon. Friend is making a very important case. If the Government get this wrong and we lose substantial financial services business, is not the likelihood that that business will go to New York? New York has the capacity to take it on and already has the equivalence agreement in place.

[Liz Kendall]

I cannot read the minds of those in charge of the many companies that are considering those options, but my right hon. Friend is probably right to say that there may be a greater likelihood that New York will benefit, although I think some jobs will move to the EU, too.

Financial services greatly rely on employing people from across Europe and the rest of the world. Many people in the sector were dismayed and, quite frankly, appalled by speeches made during the Conservative party conference. They do not care about where people come from; they care about what people can contribute. They understand that the success of their business depends on getting people with the right skills in the right place at the right time. They know that we cannot somehow separate freedom of movement from what is best for businesses and the wider economy, because the two are inextricably linked. Companies in the sector are clear: if they lose their ability to get the best person for the job, when and where they need that person, they will simply take their work elsewhere.

Even worse, young people just starting out in their careers, such as the 700 apprentices that HSBC takes on each year, may no longer have the chances that they currently do to travel and develop their skills. Brexit risks placing an unnecessary limit on our young people’s ambitions and opportunities.

[Mr Alistair Carmichael (Orkney and Shetland) (LD)]

The hon. Lady makes an important point. Is she aware of the particular importance of freedom of movement to the so-called Fintech sector? In the region of 30% of chief financial officers and chief executive officers in one of the major expanding areas of our financial services sector come from countries in other parts of the EU. Does that not illustrate what is at stake?

[Liz Kendall]

It absolutely does. The right hon. Gentleman raises an extremely important point. This growing and developing sector is driven by skilled people from across the globe, and we do not want to miss out on those possibilities.

[Norman Lamb (North Norfolk) (LD)]

The hon. Lady referred to the rhetoric at the Conservative party conference. Does she agree that such rhetoric causes a reaction, and that the reaction across Europe was wholly negative? That makes the politics all the more difficult as we try to secure a good deal for this country.

[Liz Kendall]

The right hon. Gentleman is absolutely right. It was a huge strategic mistake for the Prime Minister and the Home Secretary to say what they did at the Conservative party conference. That has not helped us to work better with our EU allies, with whom we need to get a deal. It has made people across the world think that Britain no longer wants people to come here to live and work. It has put off many people who already work in this country and are now thinking about going home.

Businesses in all parts of our economy want certainty, above all. There are things that the Government could be doing to give businesses greater certainty during the inevitably complex, difficult and lengthy process of leaving the EU, and I shall conclude by outlining three of them for the Minister. First, Ministers should set out the broad framework and priorities for their negotiations. Is the objective to secure for financial services their existing rights to trade in the single market; or have Ministers already accepted the loss of passporting rights, as the Trade Minister said in his Bloomberg interview, and do they seek instead to secure a different or hybrid version of passporting or equivalence? What are their objectives on freedom of movement for people working in financial and related professional services? Is this a priority area for the Government in reducing the number of people coming into this country? Do the Government seek to set quotas in this sector, require people to have visas, or both?

Secondly, the Government must commit to a transitional agreement—this has been raised time and again by those who work in financial services—to ensure that there is no cliff edge at the end of the article 50 process. It took four years to reach an equivalence deal on one small aspect of commodity futures dealing with the United States, so it will be impossible to agree a deal covering all the many complex areas of the UK’s financial services industry with the remaining 27 EU countries within two years. Without transitional arrangements, companies may have their passporting rights suddenly removed with nothing put in their place, which would create legal doubt for huge parts of their business. A transitional agreement is therefore essential, and it must come soon. We need at least a joint statement of intent from the UK and the EU before article 50 is triggered to give financial services the certainty they need. That should happen before politicians in France and Germany inevitably start focusing on their own elections next year.

Finally, the Government must make it a priority that they ensure that the remaining EU countries understand the benefits of maintaining an integrated market in financial services. Some £1.1 trillion has been lent to businesses in the remaining 27 countries by banks based in the UK. Putting up barriers to trade would be a self-inflicted wound that would make us all worse off—not just in the UK, but in mainland Europe.

One of the most important complaints I have heard during the past seven years is that nurses and teachers did not cause the financial crisis. That is true, but it was also not the fault of the call centre worker in a big insurance company or the bank teller in the local building society. Plenty of British people do a decent job working in our financial services, and they could be on the front line when it comes to Brexit. The Government must provide more clarity about their plans so that businesses can plan for the future, and so that we protect jobs and growth, and get the best possible deal for Britain.

[Several hon. Members rose—]

--- Later in debate ---

[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?