Financial Services: UK Economy

Robert Neill Excerpts

Thursday 9th December 2021 Commons Chamber

[Anthony Browne]

I very much agree. I was coming to this point. If we can get those elements into trade agreements, we should aspire to do that. However, often, regulatory agreements between regulators are more appropriate.

[Sir Robert Neill (Bromley and Chislehurst) (Con)]

Does my hon. Friend agree that in addition to the importance of financial services in trade deals, it is important that we are aware of supporting other professional services that go with them, such as law and accountancy? The legal underpinning and enforceability of our financial services deals is critical going forward.

[Anthony Browne]

I fully agree with my hon. Friend. I have been focusing obviously on financial services, but there is the wider concept of financial and related professional services, including legal services. As he knows far better than me, London and the UK are a global centre for legal services. That is a huge export industry in its own right and we should do what we can to promote that internationally.

I was just talking about the importance of the relationship between the UK and Switzerland. We have a lot to gain by working more closely together. That is why I am delighted that the Government are working towards an outcomes-based mutual recognition agreement with Switzerland. I emphasise that it is outcomes-based because it is pragmatic and we share that pragmatism. Similarly, we can have an ambitious agreement with Singapore and other jurisdictions, such as Japan and South Korea.

I am pleased that the Government are working closely with the United States to remove barriers to financial services trade between us. We have some agreements and we could have more. The Government are doing the same with Australia, Canada and New Zealand. Coming to the point about trade agreements that my hon. Friend the Member for Bromley and Chislehurst (Sir Robert Neill) raised, I welcome the agreement in principle on the UK-New Zealand free trade deal, which facilitates cross-border data transfer and recognises the importance of allowing firms to offshore back-office functions. Those are both important for financial services.

We can promote financial services through trade agreements and mutual recognition agreements between regulators to the benefit of both sides. The Government must continue to work closely with our partners through the G7, the G20 and the Financial Stability Board to ensure consistent international standards. As the most globalised of all international financial centres, we are more impacted by global inconsistencies on standards than other jurisdictions.

[Sir Robert Neill]

My hon. Friend makes an important point about co-operation between regulators and agreements between regulators. Does he agree that that is particularly important in the context of dealing with the United States, where much of the regulation takes place at the state, rather than federal level? Therefore, it is not easily embraced in a straightforward, normal type of free trade agreement.

[Anthony Browne]

My hon. Friend makes an incredibly valid point. I know that the UK Treasury has spent a lot of time wrestling with the relationships with the United States, which is in many ways almost unmanageable, because it has 50 different state regulators, and the federal regulators answer to Congress, rather than to the Government, so agreements between Governments may not have an impact on the regulators themselves.

In conclusion, we are at a turning point for Britain’s financial services industry. In the past decade, we have faced the major challenges of the global financial crisis and Brexit, and we took the steps necessary to forge through both of those. We can now look forward to a new era of financial services, with new opportunities. We need to make sure that the UK is the undisputed leading international financial centre, both globally competitive and serving communities and consumers across our country, and exporting more, creating more jobs, funding more businesses and paying more tax. That is something we should all welcome.

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[Dame Angela Eagle]

I can see the Minister is nodding, possibly because he recognises some of those tensions, which always existed when we were in the EU.

When we were in the EU, because of the size of the influence of the UK financial services industry as part of that bloc, we had a very good and effective way of pulling at least a lot of the regulation that went on more towards our way of doing things. One of the worries I have post Brexit, which I suppose is a philosophical and practical worry, is that the EU will now go off and do a lot more of the things that we were able to persuade it not to do when we were a member. The divergence between how EU regulation works and how we may wish our future regulation of financial services to work is likely to grow larger.

It has not been a very friendly divorce to date, and there may well be implications to that, too, in terms of competition for business. We have seen some of that in the wholesale markets for euros and we will doubtless see more of it. The outcome of our way of leaving the EU will challenge some of the agreements that we came to and the influence we were able to have when we were inside the Council chambers, the European Parliament and the European Commission, rather than the situation we find ourselves in now. As the hon. Member for South Cambridgeshire said, that can be an advantage, but it can also be a disadvantage. It is an opportunity, but there are also threats and issues that we have to deal with. We have a sharp disjunction with the recent past, after 40 years of that kind of influence, that we will have to deal with in the coming period. We have the inadequacies of the non-existent deal on financial services, which was part of the EU-UK so-called trade agreement, and those are already having an effect.

The hon. Gentleman was right to say that we are in a period of rapid regulatory change, which would have been the case regardless of whether we left the European Union. The fact that we have, and the fact that we have onshored all this regulatory machinery, means that we now have to start looking at how we wish to change all of it.

Even thinking about the sheer weight of work and oversight that will have to be done by the Treasury Committee is quite overwhelming, as the hon. Gentleman acknowledged in the exchange we had during his speech. The Minister must go weak at the knees when he thinks of the detailed work that he will have to put in to deal with the onshoring in the aftermath of Brexit, and whether we want to move quickly or slowly to adapt the laws and regulations that we have imported.

Members of the Treasury Committee have also gone weak at the knees thinking about how they might have some oversight, because of the highly technical nature of much of that regulation. We certainly need to be significantly more tooled up than we have been if we are to have proper oversight of what the regulators are tasked with doing, what philosophical direction the Government wish to go in, and what the practical aspects of that method will mean for our financial services industry and, of course—they have not been mentioned much—for consumers in the UK and for financial stability.

We should not lose sight of those two basic reasons why we have to get regulation right. Consumer protection is a huge issue in financial services, as the hon. Gentleman touched on when he said that financial services are not always the most popular sector of our economy. Perhaps some of those who supply and form part of the industry ought to stop and think about why that is they case and do some self-reflection about it.

Clearly, financial stability is also crucial in an era when markets are becoming more rapid and more global. In the context of highly rapid technical change, financial stability becomes even more important, because innovation outruns the capacity of many regulators to keep up with what on earth is going on in some markets. Those two important issues have to underpin all regulation; the future of the entire financial services industry rests on them.

Regulatory change in a rapidly evolving situation with a lot of flux is inevitably difficult for those who participate in the market and for those who wish to regulate it. It is also difficult for those such as the Minister who want to see how it can be properly harnessed and allowed to be beneficial to our economy while being safe. It is a period of big uncertainty and flex. New technology has the capacity to change things and lead to innovation, some of which might be fantastic and some of which might be awful. That structural issue has hit us greatly through the innovations of digital currencies.

The systems that control financial services have to deal with the practical and philosophical issues that arise, such as whether digital coins are ever stable, what central banks ought to be doing to deal with that, and whether the wild west of Bitcoin and the rest should be left as a gambling thing on the side. Those markets can be volatile—the wild west—but the capacity of software such as open registers and blockchain, and their potential for transparency and in-time and open trading of all sorts of things, could be harnessed for good purposes as well as for the more nefarious ones that feature on the darker edges of the net. On top of that, the demands of climate change will cause a systemic change in the way that things are valued, priced and assessed for value.

That structural change will completely change the context in which the financial services industry has to exist. In the UK, which is one of the most open economies in the world and always has been, we know how important the financial services sector is, and not only to London as a global centre. In 2020, it was worth £164 billion to the UK economy, which is the third-largest sector by size in the OECD. That is 8.6% of economic output, half of which is generated in London but half of which is generated across our regions. Of the 1.1 million jobs, 91,000 are in my region of the north-west. As the hon. Member for South Cambridgeshire pointed out, it is one of the few sectors where we have a healthy trade surplus—£46 billion in 2020. It is the fifth-largest economic sector in our economy, and all the more important for that.

As the hon. Gentleman also pointed out, the sector is important for taxation, with £28.8 billion in tax taken from it. According to PwC, it makes up £75.6 billion, or 10% of the total receipts. In the face of such change—technological, structural or the disjunction of Brexit—any Government would want to see how they could remake the environment in which the financial sector can operate and flourish to benefit and protect the sector so that it can benefit and protect our economy. We certainly all have a stake in ensuring that that is the case.

In that area of flux, we have to remember that the regulators, although they could be powerful, are struggling with an increasingly complex and fast-moving environment that they are not always geared up to deal with in detail or to keep on top of. We have seen the travails of the Financial Conduct Authority and how it manages the perimeter, and philosophically the view of caveat emptor—that the buyer should beware in all circumstances. When things go wrong, the reputation of the entire financial services sector is at stake, so it is a difficult balance.

The Financial Conduct Authority gave evidence to the Treasury Committee yesterday, some of which reflected how difficult it is to try to remake a regulator after scandals such as London Capital & Finance, at the same time as operating within all the extra complexity and uncertainty. It has a formidable task. I suspect that being chair of the FCA is one of those jobs where people are told that, if they do a stint, they will get the diplomatic equivalent of the Washington embassy as a reward. The current Governor of the Bank of England is one example of that.

The FCA needs to be strengthened. We as policy makers, and the Minister in particular, have to think about how it can practically do the job. The job cannot be so big and complex that it is undoable. Sometimes, the way that the FCA has to cope means it is difficult for it to achieve a balance and be given a job that it can sensibly do. We know there is a big turnover of staff at the FCA at the moment, and that there is workplace stress and unrest. We know that the head of the FCA is trying to transform that organisation into what he calls a lean organisation that can respond very quickly to what is going on in the market and in the areas it has to regulate. I am not convinced that it has that balance right yet, and I am not even convinced that that job can sensibly be done without more support.

I want to deal with a couple of areas that the hon. Member for South Cambridgeshire did not touch on. These are what I would call threats to the reputation of the financial services industry in this country. First, I want to talk about economic crime, which I think poses a threat to the entire sector and its integrity if it is allowed to get out of hand. We know that there are rising levels of economic crime, fraud and scams that have been turbocharged during the lockdown. The sector itself has survived covid and the lockdown pretty well so far, because it could manage remotely—it does a lot of its work remotely in the first place—but one of the things we have all seen, unfortunately, is the rise in fraud and scams. We have also seen, and perhaps it is inevitable when it is one of the biggest global centres of financial services, that London has attracted the attention of international criminals and fraudsters who wish to launder their money through cities like London. We know that, as a major financial centre, it is a target for all of these kinds of people.

The Intelligence and Security Committee, in its Russia report, which was suppressed for far too long and was finally published after the 2019 general election, said that London is considered the “laundromat” for corrupt money. We have seen that kind of magnet effect, which is extremely disturbing, and I do not think that we have yet really got a handle on it. There are regulatory failings, there are legislative failings with the structures we have to try to deal with this, and there are certainly enforcement failings of the laws that we do have.

[Sir Robert Neill]

The hon. Lady makes some very important points, particularly that last one. Does she agree that now we have left the EU and therefore, regrettably, left some of the justice co-operation measures we had, it is all the more important that we seek, bilaterally and in a broader sphere, to improve and strengthen international judicial and legal co-operation on the admissibility of evidence, rendering of suspects and, above all, dealing with digital evidence being obtained in other jurisdictions and then made available to prosecutors and the courts in the United Kingdom?

[Dame Angela Eagle]

I could not agree more with the hon. Gentleman, who is a distinguished Chair of the Select Committee on Justice. He is also a practitioner himself, so he knows about the practicalities of these issues. It is hard, in contemplating the extra work that has to be done because of Brexit, to know quite where one starts, but if we do not get it right and if we do not get on with it, this terrible reputation of London having become a laundromat for dirty money will only persist and perhaps get stronger, which will do us untold damage. I urge the Minister responding to this debate to give us some words of comfort that he is getting on with the economic crime strategy. We have an economic crime strategy—

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[Sir Robert Neill (Bromley and Chislehurst) (Con)]

This has been a really valuable debate, and I hope that it gets as much publicity as it ought to get. I hope, too, that the sector gets as much publicity—and as much credit—as it ought to get.

The sector is massively important to my constituents in Bromley and Chislehurst, as it is in much of outer London. In my constituency, financial and professional services together account for over 36% of the workforce. The sector is by far the largest driver of jobs and of prosperity overall in our area. Of course, we must consider not just the jobs in the City or elsewhere in London, but the other jobs that the income from that work supports elsewhere in the employment chain, and the growth of other businesses in the area. The sector is critical.

It is also worth stressing, yet again, the diversity of the sector. We talked in particular about its overall contribution. As my hon. Friend the Member for Wimbledon (Stephen Hammond) said, we often think of the sector in terms of banking. Distinctions are rightly made, which I know the Minister is well seized of, between wholesale and retail, but other sectors in financial services such as insurance contribute something like £30 billion to the economy on their own. The London insurance market is massive, and has a very high reputation in both insurance itself and in reinsurance. It is vital that we include access to insurance products in any free trade deals, and keep regulation appropriate and proportionate.

London’s other great strength is the nexus of the financial services sector with other supporting professions, including the law. I declare an interest here and refer the House to my entry in the Register of Members’ Financial Interests. Legal services are themselves worth some £60 billion to the UK economy and are a net contributor to the UK’s balance of trade. So many of our financial services instruments, from derivatives right the way through to other types of contracts down to trading mechanisms, are underpinned by legal services and by the reputation of the United Kingdom as a jurisdiction of choice, because of its reliability, legal certainty and the expertise of its legal community. That is backed up by the accountancy sector, too.

As we go forward looking at free trade arrangements and regulatory deals, which I think we will have to have for the reasons that have been well set out, it is important that we do not lose sight of the fact that the whole basket comes together and contributes overall to that cluster of excellence and critical mass, which so far has given us a great competitive edge. We cannot take that for granted, and that is why some of us were troubled at the lack of reference to financial and professional services generally in the trade and co-operation agreement. We have to build on what we now have and this is a very good example of that.

Reference was made to regulatory reform. The opportunity, for example, that the insurance industry suggested for two specific reforms to solvency II would be of considerable benefit. I hope the Minister will be able to update us on progress on that. Perhaps, too, we can have an update on where we are with the actual implementation of the outcomes of the Kalifa and Hill reviews, and where we are, for example, on the movements that are freeing up and easing listing, to which I know the Government are already committed, and where we might be on variable classes of shares to encourage different types of listing on London markets.

The other point I want to make on legal services and future co-operation echoes the point made by the hon. Member for Wallasey (Dame Angela Eagle). In maintaining London’s reputation as a reliable and honest jurisdiction, it is important that we bear down on the risk of economic crime. That cannot be done in isolation. Sovereignty takes us only so far when it comes to fighting international organised crime, so it is absolutely critical that, having regrettably lost access to some of the European Union justice and policing mechanisms, we find ways to replicate them either bilaterally or perhaps through future agreements as we, I hope, develop a more constructive relationship with our European partners than is perhaps the case at the moment. It is in nobody’s interest that we have a permanent state of tension between two such significant markets on the world stage. Including legal co-operation is massively important, certainly on the justice side and stretching that out into other jurisdictions, too.

As the Minister has heard me say many times, it is regrettable that the European Union is taking a needlessly obstructive approach to the United Kingdom’s application to join the Lugano convention on the enforcement of civil judgments. It wrongly argues that it is a single market mechanism. I think the Government are right in saying that it is not a single market mechanism. It is entirely separate and this is a regrettable product of the tensions we have had. I hope the Government will not give up on that and will also look at workarounds with other, non-EU countries to maintain high levels of recognition. The enforceability of any contract, including a contract for financial services, is absolutely critical to our remaining the jurisdiction of choice.

My final point is on the contribution the City of London Corporation makes in areas such as green finance. A huge amount is being done. The City Corporation, with the Government, provided the seed funding for the first three years of the Green Finance Institute. That, of course, has been involved in building coalitions of private finance actors. The most obvious of those is the Coalition for the Energy Efficiency of Buildings. The work of the City Corporation in such areas, and in bringing forward and helping to promote and organise a bespoke platform, the Green horizons summit at COP26, shows the innovation of the financial services sector and the City as its great champion.

It was a pleasure to welcome the current Lord Mayor and the Remembrancer of the City to this place only last week at the inaugural reception of the all-party parliamentary group for London as a global city. That co-operation is as important as the way the City has sought to champion the bringing together of professional expertise. The Minister will know, and I hope will never cease to value, the work of organisations such as the Financial Markets Law Committee. It probably has more legal and financial expertise brought together in one room than we will find anywhere else in any developed economy and perhaps anywhere on the globe. Its reports are of the highest quality. It is chaired, as we know, by a former Lord Chief Justice and has a range of high-ranking professionals. I hope that the Government will continue to listen carefully to their suggestions on how to keep regulation proportionate and deal with a system that gives us good access to markets across the globe, while at the same time dealing with the necessary prudential measures from the point of view of the UK economy.

On that note, I hope we can recognise the financial services, and their allied and supporting professions, as the jewel in the crown of the British economy and emphasise that repeatedly whenever we get the chance to promote the UK abroad. We should also promote them to our own constituents and fellow citizens because they do not always get the credit that they should.