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

Lord Livermore Excerpts

Wednesday 17th May 2023 Grand Committee

[Lord Livermore (Lab)]

My Lords, I congratulate the noble Earl, Lord Kinnoull, on his opening speech. I thank him and the European Affairs Committee for their report into the UK-EU relationship in financial services. Although published nearly a year ago, it is a testament to the quality of the report that it is, as the noble Baroness, Lady Kramer, said, still just as relevant today as it was then.

I have recently returned to your Lordships’ House from a leave of absence, during which time I was working in the European banking practice at McKinsey & Company, so it feels particularly appropriate that this should be the first debate I take part in in my new role. It is a pleasure to speak alongside so many noble Lords who have such expertise in this subject. This has been a very interesting debate, which I have greatly enjoyed listening to and from which I have learned much.

The committee’s report rightly begins by highlighting the importance of the financial services sector to the whole of the UK economy. It notes that, as many noble Lords have said, the sector is a major employer,

“employing 2.3 million people and making up 10% of total UK tax receipts”.

Indeed, in the year since the report was published, employment in financial services has increased substantially to almost 2.5 million, with two-thirds of those jobs based outside London. The strength and stability of our financial services sector continues to be of profound importance to our economy, with the sector contributing more than £170 billion a year to GDP—8.3% of all economic output.

The report goes on to note:

“The UK’s financial services sector is not only significant to the domestic economy; it is also vital for the functioning of the wider global economy”.


As the noble Earl, Lord Effingham, noted, the committee highlights the City’s location:

“Driven by its location, bridging time zones between the major financial services centres in East Asia and the Americas, and lying in close proximity to the EU, the world’s largest trading bloc, the sector plays a pivotal role in the world’s financial markets. Its participants ‘benefit from an ecosystem recognised for its openness, global connections and a culture of collaboration’”.


In my view, we should be immensely proud of this picture that the committee paints—proud that our capital city is one of only two global financial capitals and is at the very heart of the international monetary system. I quote from the opening chapter once more. It says that

“London has developed ‘the largest financial services cluster in the world’, having ‘the deepest and broadest capital market in Europe, if not one of the two premier capital markets in the world’, and an insurance market ‘bigger than all of its competitors combined’”.

This is an enviable position. As my noble friend Lord Liddle said, it is vital that we support the sector across the UK to retain its competitiveness on the world stage, so that the UK can continue to be one of the world’s premier global financial centres.

The noble Lord, Lord Bilimoria, mentioned many of the statistics; I will pick just a few. The report highlights that the financial services sector is a major contributor to the UK’s international trade, comprising 19.1% of all UK services exports, and that the European Union is a vital part of this trade, making up some 37% of the total—the second-largest market for UK financial services exports after the US.

However, the value of this trade has been steadily falling. Since 2018, it has fallen by 19%, with little corresponding progress in securing trade deals for our financial services around the world. As focused on by the noble Lord, Lord Desai, in his speech, the committee’s report examines the impact on the financial services sector of the UK’s exit from the European Union. It details that some firms have had to make operational and structural adjustments to continue to conduct business between the UK and EU. In evidence given to the committee, the think tank New Financial stated that

“nearly 500 firms based in the UK have responded to Brexit in some form by relocating part of their business, staff, legal entities, or capital to the EU”.

Evidence to the committee identified that 7,000 financial services jobs have left the UK to move to the EU, with witnesses expressing concern about the opportunity cost of Brexit to the UK’s financial services sector: that new jobs may in future be created in the EU that might once have been created here. The committee therefore

“warns against complacency in this regard, as it is not yet clear whether the impact of Brexit on employment has fully played out”.

The EU will always remain an important market for many UK financial services firms, and we must prioritise strengthening the UK-EU business relationship in the interests of the City and our country. Looking ahead, it was extremely welcome to read in the report that so many witnesses were optimistic about the future outlook for the financial services sector. The report notes that London has retained its position as the world’s second-largest financial centre and the most important in Europe. It also states that

“there was a strong sense … that the sector has retained its resilience”.

However, I was particularly interested to note the observations made by the noble Lord, Lord Hill, in his evidence, urging us to look further afield and that international competition to the City’s pre-eminence will come not from within the EU but from the rest of the world.

Given how much has happened since this report and the Government’s response to it were published—we are now near the end of the passage of the Financial Services and Markets Bill, and the Government have announced the Edinburgh reforms—I would be grateful to the Minister if she could set out the action the Government are taking both to boost financial services exports and to support the competitiveness and international position of the sector more generally.

The main substance of the committee’s report examines four main areas: equivalence, regulatory co-operation, regulatory reform and divergence, and future opportunities for the sector. In chapter 2, the committee focuses on equivalence, noting the absence of EU equivalence decisions. It heard evidence that although some of the missing equivalence decisions would be mutually beneficial for the UK-EU trading relationship, the sector does not seem to view either their absence or the competitive imbalance compared with other third countries as a matter of fundamental concern. Given that equivalence decisions are unilateral in nature, I agree with the committee’s conclusion that relying on a process governed by others is not a suitable strategy for the long-term health of the financial services sector.

In chapter 3, the committee regrets that although the UK and EU committed to it alongside the trade and co-operation agreement, a memorandum of understanding on regulatory co-operation has still not been signed. I share the committee’s concern in this regard. As my noble friend Lord Liddle noted, the collapse of Silicon Valley Bank and Credit Suisse highlights the importance of regulators working closely with their international counterparts, both in the EU and beyond, in order to respond to market events and maintain as much confidence in the system as possible.

We should listen to the concerns of our world-class financial and professional services firms, negotiate for mutual recognition of professional qualifications for our services sector, and finalise a memorandum of understanding on regulatory co-operation. The Government’s response to the committee’s report stated that they are ready to sign the MoU, yet it has still not been signed almost a year later. As the noble Viscount, Lord Trenchard, and other noble Lords asked, I would be grateful if the Minister could update the Grand Committee on progress on this. The report goes on to consider the issues of regulatory reform and divergence. The committee’s recommendations in this area pre-date the Financial Services and Markets Bill, but their observation that the Government should weigh up the benefits of divergence against the costs of implementing new rules is notable.

Clearly, regulatory divergence has the potential to produce opportunities for the sector, such as reform of Solvency II to unlock capital for investment in the green transition. But we should continue to take an intelligent approach to regulation, not diverging for its own sake, and, where it makes sense to remain aligned with the EU on banking regulation, we should continue to do so.

The final chapter of the report focuses on future opportunities for the sector. I endorse the committee’s view that fintech and green finance provide significant opportunities for the UK economy, and it is vital that we benefit from the gains in productivity that these areas can bring. As the noble Lord, Lord Holmes of Richmond, said, the UK today remains a top destination for fintech investment, attracting £10 billion of investment in 2022. This is second only to the US and more than all of the next 10 European countries combined. The strength and resilience of our financial services sector, our reputation for high regulatory standards and legal services, our world-leading universities and our access to a highly skilled workforce all come together to make Britain the destination in Europe to invest in fintech. Our goal now should be to make Britain the best place to start and grow a fintech company, not just in Europe but in the world.

As it is so relevant to so many areas that the committee focuses on, I end by endorsing some of the closing words of the committee’s report:

“We … urge the Government not to disregard the importance of a cooperative and constructive UK-EU relationship in financial services.


Once again, I thank the noble Earl, Lord Kinnoull, and the European Affairs Committee for their report. It is an excellent document, which still has much to contribute to this ongoing debate.