Brexit: Financial Services (European Union Committee Report)

Lord Tunnicliffe Excerpts

Thursday 9th February 2017 Lords Chamber

[Lord Tunnicliffe (Lab)]

My Lords, I too would like to express my sincere thanks to the noble Baroness, Lady Falkner, her committee and the members of the EU Financial Affairs Sub-Committee for producing this report as well as to all those who have spoken in this afternoon’s debate. I am grateful to the committee for looking at this issue first of all. Having read the report, I think it is clear this decision was a wise one, given the number of knowledge gaps that undoubtedly exist both in government and industry, and the lack of a strong evidence base which will be required.

In the months following the referendum, the overriding concern has been on what our future relationship with Europe and the rest of the world will look like. In that, there has been an implicit assumption that we have a sufficient knowledge, capacity and basis upon which to make such decisions. The people of this country voted to leave the European Union, and it is our duty to facilitate that. That being said, it will be a process that goes against all the natural instincts of the Houses of Parliament. We are not as institutions good at making a lot of difficult decisions quickly. It will be a strain. That is why reports like the one we are debating today are vital prisms through which we can explore such complex issues. But even such reports, produced and debated in such a short period of time, have to be considered in the current political climate. I wonder, for example, how different this report would have been if we had heard from the Prime Minister prior to its publication.

It will come as no surprise to noble Lords that I am interested in process. I am interested in the mechanics of the system. This report confirmed my suspicions that at present we are not sufficiently prepared for the monumental task of extracting ourselves from the European Union. I do not doubt the determination of the Government in wanting to maintain a strong and vibrant financial service sector here in the UK. However, I doubt whether they have the strategy to achieve this. I fear that, instead of a clear plan, the Government are clinging on to the notion that our position as a global leader in financial services is unshakeable.

Many noble Lords this afternoon have discussed this issue, and there has been a general conversation about being sensible, about this being two-sided and about Europe needing us as much as we need Europe. There have been conversations in Strasbourg and the rest of Europe where that impression has come across. The problem is that the negotiations will not necessarily be conducted by rational people looking at economic advantage; they will be conducted, dare I say, by politicians, who on occasions have been known to be irrational—indeed, tragically irrational.

Our lack of knowledge is well illustrated by passporting, which has become the issue to be discussed whenever Brexit and financial services are mentioned. Passporting is obviously related to equivalence—and, separately, the cliff edge—and those seem to be the key areas of concern. Why has passporting caught the imagination of so many people? Because it perfectly exemplifies our relationship with the EU. Passporting has become integral to the way in which banks operate. As Douglas Flint, group chairman of HSBC, told the committee,

“Everyone is affected by passporting rights to a greater or lesser degree”.


It also cuts across the most significant debates we will have about Brexit—notably, our membership of the single market, which the Prime Minister has confirmed Britain will no longer be a member of, as well as equivalence and regulatory divergence.

Despite all this, it appears that our knowledge of the system in which we are operating is limited. Before we can make a decision about where we want to go, we surely need to figure out what we have been doing and where we are. As the report states,

“It is striking that some firms do not themselves appear to be aware of their reliance on the current passporting arrangements”—


the implication being that they do not have a full picture of the reciprocal impacts that passporting has on both the UK and EU financial markets. I for one believe this to be a startling realisation. There is a responsibility on the Government and industry alike to rectify this deficit as quickly as possible.

In a Written Answer to my noble friend Lady Hayter on 24 January, the Minister stated that:

“Government ministers have met with a full range of institutions from across our financial services sector”.


It is encouraging that such conversations are taking place, but I wonder whether the noble Baroness could go into more detail than she has provided on meetings that related specifically to passporting rights. Do the Government share the view of the EU Select Committee about the awareness of passporting access across the industry? If so, I would be interested to hear how the Government intend to resolve this problem.

Given that the Prime Minister has made it clear that she has no intention of Britain remaining a member of the single market, could the Minister outline what implications the Government believe that will have for our ability to maintain passporting rights, and whether it will be a priority for the Treasury in the negotiations?

That brings me to the evidence base more generally. I appreciate that not all communications, let alone the detail of those communications, will or should be available for scrutiny. What I am asking for—and I believe that I am justified in doing so—is evidence that the Government are building the robust analysis and filling the gaps which the report made clear are so apparent. Can the Minister say whether, further to the request by the EU Financial Services Sub-Committee, the Treasury is modelling the effect of different scenarios on the deal that will be struck between us and the EU?

Related to that, will those models take into account the executive order signed by President Trump, which seeks to review the working of the Dodd-Frank Act? I know that the Government have been keen not to comment on the domestic policy of the US, but surely when minimum standards of financial regulation are at risk we have a responsibility to advocate measures which were designed to protect consumers.

Indeed, the report warns of the challenges associated with possible regulatory divergence between ourselves, the US and the EU. The UK has played an integral role in the design, implementation and management of financial service regulations. Do the Government intend that we continue to work with our European partners on regulation setting?

We have heard today some of the more intricate matters that the Treasury will have to consider. However, the point that I am trying to make is that, if we do not understand the basics of the overall industry, we will not be properly prepared to discuss the parameters of a debate on, for instance, as mentioned by a number of noble Lords today, our continued position as the European clearing centre, or—we have heard less of this, but it is important to London—as a hub for fintech development. Too often these basics are overlooked.

We must not confuse the mass of detail that we have for understanding the industry as a whole. The report left me with the impression that we do not have the necessary understanding of the industry to enter these negotiations, that the industry does not have a complete understanding of itself and that the Government have yet to find the tools with which to fill these knowledge gaps. I hope the Minister’s response will put my concerns to rest.