UK as a Financial Services Hub

Debate between Robert Neill and Bim Afolami

Wednesday 6th February 2019 Westminster Hall

[Bim Afolami]

I thank my hon. Friend; I will address that aspect directly in my remarks.

Before I come to that, I think it is worth defining, for people who might read or watch the debate, what financial services actually do. To many, it looks like it is just about shuffling paper around or playing with spreadsheets. Put simply, financial services are partners of business. In 2017, UK banks lent £14 billion per quarter. Almost 1,500 equity finance deals, with an investment value of almost £6 billion, helped smaller businesses grow in 2017.

Another thing to assess and to remember is that financial services create business demand for other goods and services. The financial services industry is the largest buyer of tech services in the UK, for example. A business contributing to what we might call “the real economy” needs financial services to be available, cheap and effective. In Britain, companies from around the world have access to those services through our financial services sector.

What impact do financial services have on the Treasury’s balance sheet? The Minister will be keenly aware of this—I know that the Chancellor is. The financial services sector contributed over £72 billion in taxes last year. To give people a sense of scale, that is half of the NHS budget and about 11% of total UK Government revenue. In addition, the sector provides 1.1 million jobs to the UK-wide workforce. If one includes related professional services in an advisory capacity, such as accounting or legal services, that number rises to 2 million.

We are global leaders. The UK is the leading destination country for foreign direct investment projects in financial services from the United States, Sweden and China. The UK attracts 15% of the US’s global projects of that nature, 47% of Sweden’s and 15% of China’s. I come back to the point made by my hon. Friend the Member for North Warwickshire (Craig Tracey); those who believe that financial services affect the City of London only should think again. Two-thirds of financial services jobs in the UK are based outside London. In fact, with regards to the foreign direct investment that I just described, between 2013 and 2017, regions outside London accounted for 49% of the jobs created, 48% of the gross value added in financial services, 36% of the estimated capital investment in the UK and 37% of the total number of jobs. All that went to regions outside London.

Highly paid bankers and insurance brokers or traders who earn millions of pounds do not reflect the reality of 99% of financial services. A major reason that they matter is the cluster effect of the jobs that major financial institutions create around them. Let us take self-employed freelance workers, who often work as consultants for major firms in the industry. The number of self-employed workers in the UK has gone up by roughly 50% since 2001. According to statistics from IPSE, the Association of Independent Professionals and the Self-Employed—I refer the House to my entry in the Register of Members’ Financial Interests—22% of the self-employed work in financial services, and 40% of those freelancers had at least one project based in the EU in the past 12 months. A good Brexit deal really matters to them, and those statistics show the ancillary losses that a poor deal for financial services will bring.

Numerous challenges and changes are on the horizon, which will require our Government to change and develop their approach to the sector. I will focus on three principal areas: first, the digitisation of the economy and the rise of FinTech; secondly, the challenges and tough choices we face as we leave the European Union; and thirdly, the need to increase the penetration of financial services into our most deprived areas. That will deepen and improve the relationship between the financial services sector and our most deprived people, to ensure that everyone benefits from the sector, not just the affluent.

On digitisation, we are in a new economy: the internet and social media, as all Members of Parliament know, have completely changed not only how politics operates but how goods and services are produced and sold throughout the world. Anyone who has read Stian Westlake and Jonathan Haskel’s book, “Capitalism without Capital: The Rise of the Intangible Economy”, will be in no doubt about the profound economic change that we are seeing. These days, anyone can produce almost anything anywhere using 3D printing; anyone can advertise a product worldwide at the click of a mouse; and, as I saw last week, a film producer based in Hitchin in my constituency can work with clients in China in minutes.

Such changes are exciting from a technological perspective, but present a real challenge to the way in which we do things. For the past 15 years or so, companies have invested more in intangibles, such as branding, design and technology, than they have in machinery, hardware or property. Businesses such as Uber do not own cars; they own software and data. Coffee bars and gyms rely on branding to help them stand out from the crowd, and they often lease their premises and physical goods, rather than owning them. That is capitalism without capital.

What does that mean for financial services and, in particular, for banking? The normal model for bank lending is this: when lending to a business, the assessment of the company’s balance sheet—the assets and liabilities—is a critical aspect of assessing credit-worthiness. In the new economy, banks struggle to understand how to value and monitor intangible property. In the old days, if a company went bust, a bank could recover its money by selling physical assets—it would have a mortgage over the buildings and could sell capital assets such as machinery. If a company with intangible assets folds, those assets cannot be sold off easily—in effect, their value will have sunk with the company.

A lot of smaller businesses in the new economy therefore do not have the same access to bank loans. They are much more reliant on venture capital and angel investors, and that is a very different model of financing from traditional bank lending. My first question to the Minister is this: how will our regulatory system have to change in order to catch up with the new economy, which is changing at both a domestic and a global level? Without changing the rules on bank lending, we will be unable to finance small entrepreneurial businesses properly over the longer term.

FinTech is another success story for Britain in financial services. Indeed, we are the world’s FinTech hub. Of the European Union’s $26 billion of FinTech investment, the UK attracted $16 billion, which is a huge chunk of that European market. In the first half of 2018, that helped the UK to overtake US FinTech investment for the first time. If we consider the size of the United Kingdom, for us to overtake the US in terms of total investment is really something.

Those numbers look impressive, and they are, but there are clouds ahead. I suggest that the money is still being raised easily because the successful companies that attract a lot of the equity investment are based in Britain—they were set up here. However, there is much evidence across the FinTech sector that new start-ups increasingly are created in competitor countries, in cities such as Berlin and Paris. Much of the money raised by companies—the money I was just describing—still comes to Britain, but it is spent abroad. The companies are expanding their footprints elsewhere due to worries about the short and medium-term outlook for FinTech in Britain. We need to face up to that.

The fundamental point that we need to be honest about is that Brexit has put huge uncertainty at the centre of Britain’s short and medium-term economic outlook, which affects financial services and FinTech in particular. There are many reasons for the success of FinTech over the past few years, but the key factor is that London has become the principal magnet for the best software engineers, the best inventors, and the best and most successful investors from all over the world. How will we maintain that while dealing with the challenge of Brexit?

I suggest a twofold approach. First, we need to ensure that we remain one of the best places to raise equity finance, and enable the employees of FinTech start-ups to take equity in the businesses in which they work. Will the Minister undertake to ensure that the Treasury will not seek to change the enterprise investment scheme or entrepreneurs’ relief? Will he also consider eliminating stamp duty on shares? That idea was floated recently by Xavier Rolet, the former head of the London stock exchange. Oxera Consulting calculates that the abolition of stamp duty on shares would cut the cost of raising capital for small and medium-sized enterprises by between 7% and 8.5%. KMPG estimates that that could rise to 13% for some technology companies. Cutting the cost of capital for SMEs would lead to increased growth, profitability and employment, and higher salaries for workers, all of which make revenue for Her Majesty’s Treasury while creating a more dynamic business environment.

The second approach is simple: it is about people. In recent conversations—some took place earlier this week—with major FinTech investors, they were extremely clear that the ability to hire high-quality people, and to keep them in this country away from the clutches of Paris or Berlin, is very important. The £30,000 earnings threshold proposed in the immigration White Paper should not be a huge problem for the sector, because the vast majority of the people brought in by our FinTech companies earn more than that. One consideration, however, might not have been fully appreciated: 42% of our founders in FinTech are from abroad, and when they start their business, they often do not earn much, because they are ploughing what they earn back into their businesses, so they might fall beneath the £30,000 cap.

What are the Government’s plans to ensure that founders—the talented people who are the brains behind FinTech businesses—can move easily to the UK to start their firms? If they cannot, they will go somewhere else, and that innovation and wealth, and those jobs, will go to other countries.

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

My hon. Friend is making a most powerful speech, and I agree with everything that he is saying. Does he agree that it is important to look at the means of retaining those bright graduates who come here and train? They are precisely the people who might wish to start their businesses in the UK. We need a scheme that makes it possible for them to remain in the UK, without having to leave and come back, so that they can move from graduate employment into the sector, using their skills. We would then get the brightest and best from day one.

[Bim Afolami]

I completely agree that we need to make it easier for graduates to stay. My understanding is that the Home Secretary has extended the time in which graduates may search for a job in Britain—I think up to 12 months. I would like to see that go up further, and I think the Home Secretary is quite amenable to that. We have to be honest: if we are thinking about immigration caps and the like, we should not turn away graduates, who will often be the brains of new businesses. We should help as many of them as possible to stay here; I agree with my hon. Friend on that point.

Brexit obviously dominates Parliament and Whitehall at the moment. We are in fast-moving times, so I will offer no predictions, largely because by the time anyone sees this debate, they would be completely out of date. As things stand, the political declaration that sits alongside the withdrawal agreement explains that the UK will have access to the EU market, and vice versa, under an equivalence regime. That means that the usual equivalence assessment will need to be undertaken for UK firms in the EU market, and the UK will have a similar equivalence process for the EU. Let me explain the notion of equivalence for those who are not familiar with it, with reference to the European Union. Essentially, the EU may look at a set of regulations that govern a certain area of financial services, such as bank lending, and deem another country’s regulations equivalent to its own, thereby allowing firms based in that other country to sell products to customers—individuals and firms—in the European Union.

Our reliance on an equivalence regime leaves me with three questions. First, to what extent do the Government wish to align themselves with EU regulations at a time when the European Union is pushing ahead in a much more restrictive and onerous direction, in regulatory terms? In recent years we have seen the alternative investment fund managers directive, the cap on bankers’ bonuses, MiFID II and other regulations, which were often well intentioned but have tended to increase costs, reduce Europe’s competitiveness and increase complexity. That has made accessing financial services more expensive, more complicated and not necessarily any safer for the consumer. I believe that onslaught of complicated regulation has led in part to the poor productivity of financial services since 2008. Productivity has slowed by just over 2% in the past 10 years.