UK-EU Relationship in Financial Services (European Affairs Committee Report)

Lord Davies of Brixton Excerpts

Wednesday 17th May 2023 Grand Committee

[Lord Davies of Brixton (Lab)]

My Lords, it is a pleasure to take part in this debate. I very much welcome this report, which is important and timely—well, a bit out of time, one might say. It deals with the aftermath of Brexit and, of course, an important part of our economy. I will resist the temptation to go down the Brexit rabbit hole, but I will return to the issue at the end.

Before making my main contribution, I will express my credentials for taking part in this debate. I have worked in the financial services industry for the whole of my working life.

I question the premise on which this debate is taking place, and on which I think the report is based. I may be wrong, and I will be happy to be corrected, but the implied premise is that the bigger the financial services industry, the better. I question that. It strikes me that, in a phrase that is familiar to me, it is akin to making ourselves rich by taking in each other’s washing.

What does the financial services industry contribute to the real economy—the production of goods and services that go towards serving individual and societal wants? My view is that the financial services industry contributes far less than is typically assumed, particularly by the financial services industry itself, and that it is in a sense a millstone around our economy’s neck. It strikes me that it is akin to the resource curse, which is typically talked about in terms of mineral and fuel abundance in less-developed countries and which tends to generate negative developmental outcomes, including poor economic performance, collapsing growth, higher levels of corruption and greater political violence. Well, leaving the political violence and maybe the corruption aside, it is a fact that we are experiencing poor economic performance and have done for a decade and, in my view, one of the contributing factors to that is the overreliance on financial services that contribute nothing to human welfare.

Clearly, we need financial services. We need to facilitate payments between people and organisations. We need to match borrowers and investors. We need to facilitate saving, not least for retirement and the passing of wealth between generations. But is what we have at the moment in the industry commensurate with those needs?

In expressing these views, I take inspiration—although he is not in any way to blame—from Sir John Kay, the eminent economist, and Andy Haldane, who, when he was the economic adviser to the Bank of England, said that

“the past few decades have seen a sea-change in the functioning, and hence perception, of the financial sector. Latterly, that sea-change has at times risked flooding the entire economic and social waterfront. In a nutshell, finance has moved away from serving the economy and towards serving itself—and indeed remunerating itself”.

Any debate about the relationship between the UK and the European economy in financial services should have these views in mind. We should not be promoting a financial services industry that fails to deliver services to individuals.

To quote some figures from Sir John Kay, he points out:

“Lending to firms and individuals engaged in the production of goods and services—which most people would imagine was the principal business of a bank—amounts to about 3 per cent of that total … The value of daily foreign exchange transactions is almost a hundred times the value of daily international trade in goods and services … Trade in securities has grown rapidly, but the explosion in the volume of financial activity is largely attributable to the development of markets in derivatives”,


and derivatives based on derivatives, and no doubt derivatives based on derivatives that are based on derivatives.

They contribute nothing to the proper functioning of a financial economy, as I described earlier. The profitability of this sector is vastly overstated. The value of its activities is poorly reported in the economic statistics, and it is very difficult to say what the productivity of these services is and what, if anything, they actually contribute to the betterment of lives and the efficiency of businesses. The true value of the financial sector to the community is the value of the services that it provides, not the returns recouped by those who work within it.

There is no doubt that a modern economy requires finance: a country can prosper only if it has a well-functioning financial system. But that does not imply that the bigger your financial system, the better it will be and the more prosperous the country will be. In fact, there is a point at which it becomes counterproductive, and we are well past that point. All the industry does is pass around bits of paper, leading to a net benefit for no one.

This is not an attack on the individuals involved in the industry: they have bought the rhetoric and are doing a good job in terms of the way the industry has developed. But, if you step back and question what the industry is doing for us, I believe that it is well beyond the profitable sector. We need to have that in mind when we discuss these issues. The question should be, “Do we need this work being done?” I look forward to returning to the discussions on the Financial Services and Markets Bill, where we will be able to explore these issues in more detail.

There is a specific problem here: I return to Brexit. Discussing the financial services industry totally in terms of Brexit, which we tend to do, is getting it wrong. We should be looking at the financial services themselves and what value they give, and then ask the second question: how does that fit with our relationship with the European Union?