Brexit: Financial Services (European Union Committee Report)

Lord Desai Excerpts

Thursday 9th February 2017 Lords Chamber

[Lord Desai (Lab)]

My Lords, it is a pleasure to follow the noble Earl, and I also thank our chairman, the noble Baroness, Lady Falkner, for guiding us through this extremely complex subject. The more I study the problem of Brexit, the more complicated it appears to be, and I am sure that no one, when they ventured into this territory, knew exactly how complicated it was.

As the noble Earl also said, the City has seen both good times and bad times. The 1950s and the 1960s saw an involuntary exit from the sterling area. I do not know whether noble Lords remember the sterling area, but it was not a great thing after India had become independent and various former colonies began to have their own monetary policy. The City was lucky in then having the Eurodollar market—a result of the folly of American taxation policy—and soon after, when the US renounced its dollar-gold link, a huge market in foreign exchange transactions sprang up and the City was ready for that market.

At about that time—in 1971-72—we entered the European Economic Community, as it then was. In a sense, therefore, we entered the European Economic Community at a time when the City had recovered from its gentle decline and got into totally new activities for which it had, or soon got, the expertise. We know, therefore, that the City can suffer a shock and respond to it.

At the same time, we have to decide among ourselves—or, I hope, the Government will—what is the maximum loss that we could suffer. One of the best negotiating tactics is to figure out the worst-case scenario that we could face, and then find out if there is any way of avoiding it. The worst-case scenario is, obviously—as I said—that if there is not a good deal, we walk away with no deal. A no-deal scenario would mean no passporting, no equivalence and starting from scratch. We should mentally work out what that would mean for the City. Among our witnesses, some were, I would say, rather complacent, saying, “Oh, we are just so good that they will have to come to us”. They say that our eco-system—I was fascinated by that word, because I am sure that most of those people do not like any of this global warming stuff, but they use the word—is so fine and beautifully calibrated that our sheer competitive advantage will make them come to us. I am not so sure about that; it would mean that we do not need to worry about passporting or equivalence and we would still come out on top on sheer competitive advantage. Just as we are willing to suffer an economic loss for the sake of our sovereignty, they are capable of suffering economic loss through their reluctance to come to London. We must not assume that they are going to be terribly rational and will come to us. I keep hearing that, and I doubt it very much.

One advantage for us is that the regulatory system of financial markets is global and not confined to the EU: the EU melds in to the regulatory system headed by the Bank of International Settlements, the IMF, and so on. We have played a major part in the architecture of that system, so, in or out, we shall continue to be relevant to the architecture of the global financial system. To that extent, we ought to be able to put it to the EU that, in or out, the rules that we all have to obey are pretty common, and they are almost the equivalent of equivalence. We all have to follow certain global rules, so there cannot be too much of a disruption between us and them in the area of financial regulation.

I am not worried either that although we may establish equivalence in today’s terms, in the future they might change—and then what will we do? I do not think they will change arbitrarily, independently of the global system, because we will all have to dovetail with each other in that system. The technology is changing so fast that we all have to be ready as new products and technologies come up. The framing of financial regulations will therefore have to be a fast, global and innovative process, and I am sure that we will play our part in that.

Can we work out what we prize most within our interests in keeping the financial centre in the front? It might turn out that immigration is a crucial topic. It might be that our need to access the best talent internationally, and therefore have flexible immigration rules, will be more central to our position on the financial sector than anything else. In agreeing to whatever we agree with the EU, one thing that we ought to remember is to retain the flexibility of admitting highly skilled global experts in the financial markets, and not make the mistake of going overboard in restricting immigration by not distinguishing between those who are likely to be helpful to us and those who would be less helpful.

In the final analysis, we will have to be ready for the worst-case scenario—a repeat of the sterling area scenario, as it were—and to hope that new markets spring up for us while the damage is minimised. At the same time we ought to try as far as possible, consistent with our general aims of a hard Brexit, not to lose an advantage which we could retain.