Brexit: The Future of Financial Regulation and Supervision (European Union Committee Report)

Lord Davies of Oldham Excerpts

Wednesday 6th June 2018 Lords Chamber

[Lord Davies of Oldham (Lab)]

My Lords, I, too, congratulate the committee on its report, under the obviously effective chairmanship of the noble Baroness, Lady Falkner. I congratulate her on her speech, too, because she spent a great deal of time accurately depicting what the report contained but also added some reservations of her own, which might just have passed us all by, had not some of those themes been developed later in the debate. For instance, she emphasised the problems with the insurance industry and the limited progress that has been made. She also mentioned the concept of equivalence, which, as we all recognise, is an easy term to use but a very difficult one to realise when making decisions.

No one doubts the significance of securing the right framework for the crucial sector of financial services. The opening paragraph of the report emphasises the level of interdependence that must not be lost as the UK leaves the EU. The problem, of course, as identified in the report, is the range of issues where it is so easy to lose that concept of interdependence. My noble friend Lord Liddle indicated that, when we are talking about technical issues, we also have to work out who is in fact taking the decisions. It is a great weakness for the UK if, instead of being the rule-maker—which we have been used to in so many areas of financial services—we become a rule-taker. Yet, as the report indicates, the UK has so much to offer, as well as to benefit from, the European Union, particularly in the field of financial services, where we have considerable expertise. My admiration for the report lies in the clarity with which it identifies areas of real difficulty that the Government need to address—the difficult negotiations, and the difficult decisions to be taken. We cannot be too optimistic about progress so far.

Of course, my party made some progress in this debate only yesterday in tabling a fresh amendment to the withdrawal Bill, seeking for us to continue in the single market. That will not please many Members on the other side of the House. They should not worry: it will not please my noble friend Lord Liddle either, because he wants full membership of the EEA, and what was offered yesterday is much more marginal than that. But such developments as this are bound to put this report into a developing context; that is the problem. The committee had to report as it saw things at that time. We are all too well aware of the march of time and of crucial periods ending. The report certainly succeeds in identifying the key issues that require resolution, and we should greatly appreciate the work of the committee for that clarity. But how often does the report refer to difficult issues? How often does it present the challenge of what is to be done, rather than the solution?

I am not critical of the report for that; we live in an age of great uncertainty. It is clear that the Government contribute to that uncertainty by not contributing much at all in the way of substantial advance. Quite a long time ago, we thought that certain crucial, fundamental blocks had been agreed by the Government. Can one recall how many months ago it was that the Irish border issue was “under control” and had been resolved? And what have we had subsequently? Almost continuous anxiety about the Irish border issue— it colours a great deal of the whole debate. The Government’s record is therefore somewhat less than encouraging when it comes to negotiations.

The report warns of the fragmentation that would result from ending passporting, which would clearly increase costs for companies and firms and reduce financial stability. The relocation of clearing activities to the EU would increase those risks. The report sees no reason why they should diverge from EU standards; the answer should be regulatory alignment. How far have we got with any fulfilment of that objective? I do not blame the report for analysing a problem and saying what the solution should be; it is in the hands of others to make progress towards a solution, but progress seems to be very limited indeed. There is clearly a need for international standards to be enhanced, and the UK can make a substantial contribution to that. However, that means that the UK has to stay in a significant position with regard to these issues.

The report emphasises the significance of the financial services industry, which makes up 7.2% of our economy, the jobs involved and its contribution to the Exchequer, which is not likely to be ignored by the government Front Bench. But the great danger is the prolonged uncertainty. Almost every speech this evening indicated less than certainty about where we are going—not defining what is going to happen, but expressing what needs to happen against a background where nothing is certain. The great danger is that this prolonged uncertainty will cause firms to take the only action they can. They will take decisions to relocate within the European Union—not with bombast, advertising the fact, but quietly going about the process of safeguarding their interests as they see power drift away from London towards other parts of the present European Union.

No one has mentioned this in the debate, but we should all have responded to the fact that the report spends quite a bit of time talking about the burdens Parliament will carry and the challenges it will face. The report does not pull any punches on this. It describes the legislative load upon Parliament to transpose the European Union body of law—the acquis communautaire—into British law. Clearly, that is an absolutely massive task that will fall upon this Parliament. In addition, the powers of British institutions are bound to increase, because they will no longer be part of the more general regulatory framework but will be the sole regulatory framework in crucial areas. That means that Parliament will have to take a much keener interest in the key regulatory bodies in this country. I will come on to the reason why that is necessary in just a moment.

I am glad that the noble Baroness, Lady Neville-Rolfe, referred to fintech. After all, that is a crucial success story for the UK financial services. The report pays particular attention to the fintech industry, in which the UK has played such a leading role. The report says that those concerned with the development of fintech must be in crucial positions to ensure that international standards are of the highest as it develops. But how? In which capacity will they be able to fulfil that role? The report is optimistic about certain opportunities, although it goes on to identify the difficulties facing the Government.

There have been several contributions in this debate with undertones of anxieties and reservations about our position, and concern about the limited progress we have made so far—from my noble friends Lord Davies and Lord Desai but also from other speakers, and certainly from the noble Baroness who spoke just before me. Are British regulatory systems fit for the situation we face, with its fresh challenges? I have heard today, and in this report too, many congratulations on certain aspects of our regulatory control. However, can we just recognise that we have 29 overlapping regulatory authorities at present? There are doubts about all of the four big accountancy firms because of the role they played in the colossal financial crash of 2008, or in more recent debacles; one thinks only of Carillion, for example, and the role the accountants played in that. How good will our institutions be at fulfilling this role, when they are going to take on so much more? It is clear that public institutions such as the Bank of England and the PRA will need extra resources to carry out the significant roles that will be imposed on them.

We have one success from the Government—I may be able to think of two if I try hard, but one will do for the moment. They have succeeded in negotiating a transition period, which gives a little more breathing space—but not much. We have no time to waste. The successful negotiation to create a transition period takes us only to December 2020 to resolve many of these issues. What is more, the reason why we need to resolve them as quickly as possible is that those outside, whose interests are affected, are bound to act from their perspective. If the Government do not achieve solutions to these problems, they will have to make the judgment that they will not succeed and will have such a limited relationship with the European Union that everything will fall upon the commercial and economic interests involved.

There is still time for the Government perhaps even to produce a White Paper, but we may be beyond the White Paper stage. We need a pretty clear indication—I am sure that the Minister is bound to give it—of just how much progress has been made in meeting the issues that have been raised in this report and by almost everyone who has spoken in the debate this evening, and we need him to reassure us that great progress has been made.