Future of Financial Services

Lord Tunnicliffe Excerpts

Wednesday 11th November 2020 Lords Chamber

[Lord Tunnicliffe (Lab) [V]]

My Lords, I am grateful to the Minister for dealing with the second Treasury Statement in as many days. This Statement is billed as a prelude to the Financial Services Bill, which we will be able to scrutinise following its Commons stages. The process promises to be an interesting one, and I hope the Minister will avail himself of the expertise that exists across your Lordships’ House.

The Chancellor was correct to outline the importance to our economy of the financial services sector. It is a huge employer, generates a significant amount of economic activity and makes a large contribution to the Exchequer. It is vital that we harness the potential of financial services to grow our economy, particularly in terms of green growth.

It is a shame that this Statement has come only now. As it stands, we are weeks away from leaving the transition period without an agreement giving UK firms preferential access to the EU markets that are so important to their day-to-day operations. The Government have unilaterally published equivalence decisions for EU and European Economic Area member states, but the Minister will concede that that gets us only so far.

In his Statement, the Chancellor reiterated the Government’s position that an equivalence determination for UK firms should be simple and swift as we start from a point of regulatory alignment. If that were true, why were the Government not able to secure equivalence determinations by the deadline set out in the political declaration? The Chancellor has sought to blame the EU, but when the Government were asked to complete various questionnaires to aid that process they managed just four out of 28 by the June deadline.

While we may start at a point of alignment, decision-makers in the European Commission will no doubt be studying the Financial Services Bill in detail. Equivalence may not require total alignment, but it seems odd for the Government to amend UK regulations at the same time as demanding that our EU colleagues take a snapshot of them. Does the Minister believe that the contents of the Financial Services Bill are likely to have any bearing on the ongoing discussions? Is it possible that the EU will delay a ruling until that Bill is on the statute book? We will scrutinise the Bill closely, not only in the context of equivalence but to ensure that the reforms do not lead to a deregulatory race to the bottom that puts investors and financial stability at risk.

I turn to the green components of the Statement. The Government would have us believe that their commitment to tackling climate change is second to none, but those of us who share an interest in recent legislation will be sceptical, to say the least. We are told that everything done by Ministers is with a net-zero future in mind, but time after time they oppose sensible climate amendments, most recently on the Agriculture Bill. While the various green finance initiatives announced in recent days represent a degree of progress, the Treasury has not gone as far as many would like. It is certainly not the comprehensive green agenda that is needed to make swift and decisive progress towards the 2050 net-zero target and our wider international obligations. As the shadow Chancellor observed in her response in the Commons,

“Over the last decade, the UK has pumped £6 billion into overseas fossil fuel projects via UK Export Finance”.—[Official Report, Commons, 9/11/20; col. 621.]


There is no indication that this behaviour will be banned, undermining any meaningful action taken in the UK.

The Financial Conduct Authority has signalled a change in approach to firms’ disclosure of climate-related information, which we support. However, mandatory reporting will not be implemented until 2025. Why are the Government not being more ambitious? Green gilts are another case in point. How can we be sure that the money will represent genuinely new investment? Why have the Government waited until 16 other countries have introduced their own schemes, rather than taking the lead on the issue of green financing?

I wish I could be more optimistic, but, sadly, I remember the story of the Green Investment Bank. The institution, proposed in the last Labour Government’s final Budget, should have been key to improving the UK’s environmental record. Instead, just years into its existence, it was sold off by the former Business Secretary Sajid Javid. Earlier this year, a government Minister suggested at a roundtable event that the “Green Investment Bank 2.0” could materialise in the future. Can the Minister confirm whether this is being looked at and, if so, when we can expect news?

[Baroness Kramer (LD) [V]]

My Lords, I declare my interests as listed in the register. I agree with the Chancellor that financial services are fundamental to Britain’s economic strength. However, I recommend that anyone looking to assess their future ignore the hype in the Chancellor’s statement—he seems to have drunk the moonshot Kool-Aid—and look at reality. Our failure to negotiate mutual recognition, or at least equivalence-plus, with the EU is a serious problem. If only the Government had taken as much interest in this area as they do in fishing or, as Catherine McGuinness of the City of London Corporation is quoted as saying in today’s Times, finance risks being

“the neglected child of an acrimonious divorce”.

Over £1 trillion in assets have already transferred from the UK to the EU. Last year, Ministers seemed to think that half the financial services business with EU clients, which is about 15% of total UK financial services, had left or was in the process of leaving, including swathes of insurance and asset management. Is 15% still the number, I ask the Minister? The size of these asset transfers suggests that the actuality is well above those expectations. Job transfers are unclear because of Covid, but we do know that, even in 2019, the recruitment of graduates who do not have EU passports had pretty much collapsed for anything except retail banking.

The EU, which I once thought had a 10-year strategy to remove, slice by slice, most EU and euro-related financial services back to the 27, seems to have accelerated that programme. For example, Mr Dombrovskis has cautioned EU businesses to shift a significant portion of their clearing activity out of the UK in the next 18 months. Without dominance in clearing euro-denominated derivatives, the UK’s global role is seriously at risk. Does the Minister agree?

On fintech, many firms have made it clear that they will have to move EU business if we cannot agree on the rules that govern data. Where are negotiations on this, because at the last look they were pretty dire, with the UK determined to please the United States by watering down data protection?

I am delighted that we are finally going to issue a green sovereign. We may be a leader in green finance now, but every single significant financial centre is committed to the green agenda. I note that the EU is expected to issue €200 billion in green bonds as part of its Covid recovery fund, none of which will be issued through London. But will the Government replace the Green Investment Bank? The noble Lord, Lord Tunnicliffe, mentioned it; it was sold off in part because, along with the British Business Bank, it was associated with Vince Cable, but that was also a deliberate act of environmental vandalism. Will it be replaced?

We are entering a period of regional economic blocs. The United States has actively repatriated a great deal of dollar financial services. China and Asia generally, contrary to the expectations of George Osborne, are using Hong Kong and Singapore rather than London, even with all the disruption in Hong Kong. India is developing Mumbai, so I caution the Government not to misread the potential of dialogue with India. We are now outside all the regional blocs. We have capacity and skills in financial services, but everyone else has the clients and issues the major currencies. You can move capacity and skills, but you cannot move the clients. London will remain a global centre but, I fear, one of gradually less significance. Will the Government give us a reality check on the future of this crucial industry and a proper assessment of the damage that their hard-line Brexit is delivering?