Financial Services: UK Economy

Stephen Hammond Excerpts

Thursday 9th December 2021 Commons Chamber

[Anthony Browne]

I basically agree with the hon. Member, a fellow member of the Treasury Committee.

[Stephen Hammond (Wimbledon) (Con)]

This is a really important point that we discussed in the debate last November prior to the Financial Services Act 2021, which came into force earlier this year. The key point is that we are giving the regulator huge increases of power with almost no appropriate increase in parliamentary scrutiny of those powers.

[Anthony Browne]

I thank my hon. Friend. That is exactly the point I was about to come to.

This will give the regulators more power, as my hon. Friend said, over issues that will directly affect the lives of voters. That means that they must be made more accountable to voters’ representatives—that is, to Parliament. The Government and the Treasury Committee are considering how that might work, and the Committee has held various hearings on the issue.

One proposed solution is a stand-alone financial services committee such as exists in Washington—the US House Committee on Financial Services, a stand-alone committee that just considers financial services. However, there is a real risk that that would tread on the toes of and undermine the existing Treasury Committee, which must retain oversight of all the Treasury’s functions. Another alternative is a full Committee of both Houses—the House of Commons and the House of Lords—but that would be unmanageable on an ongoing basis. It has worked as a task and finish group, such as the Parliamentary Commission on Banking Standards, but it would be very difficult on an ongoing basis. I am coming to the conclusion that the Treasury Committee needs—I totally agree with the hon. Member for Wallasey (Dame Angela Eagle) on this—a well-supported sub-Committee, or secretariat, that can do the work in focusing on financial services regulation and holding the newly empowered regulators to account. It could include appointed expert advisers, as well as members from the House of Lords, on an appropriate basis.

Obviously, we would need to agree the governance around that. As the Government have made clear, this is an issue properly for Parliament itself to decide. The Treasury Committee will make its own recommendations in due course. Indeed, if any Members here have other thoughts on it, I would be very interested to hear them.

The regulators themselves are also changing. The Government have proposed giving them international competitiveness objectives, but that must be very much secondary to their principal objectives of financial stability and consumer protection. They must not lose focus on their principal objectives.

[Stephen Hammond]

My hon. Friend is right that we must not move away from the primary focus, but does he agree—he made the point earlier on the difference between wholesale and retail—that there ought to be a more balanced view between wholesale regulation and those two objectives if we are to remain a global centre internationally?

[Anthony Browne]

I agree. I support having a secondary objective of international competitiveness and growth. A regulator could decide on policy A or policy B and, from a UK perspective, it could make no difference in terms of consumer protection or prudential stability, but one could mean that we were more able to compete internationally. We asked the chief executive and chair of the Financial Conduct Authority about this in the Treasury Committee yesterday and they went through the details on how that might affect their thinking. But we absolutely must not lose sight of prudential stability. We have had a crisis once and we do not want it again.

We must maintain our support for innovation in financial services, as long as it brings real consumer and economic benefits. We must ensure that the fintech sector thrives. Creating a digital identity ecosystem, which the Government are looking at, will certainly help. As cryptocurrencies grow, it is inevitable that they will need some form of regulation to protect consumers, but it must be done in a proportionate way that focuses on tackling any harms. It is absolutely right that the Bank of England is exploring central bank digital currencies. We do not know whether retail customers want direct access to central bank funding, but it is absolutely right that we try to find out.

Finally, I want to cast our eyes across the world, and look at international partnerships. We are no longer part of the EU, and we do not know what our future relationship with it will be. As I said earlier, I consider any memorandum of understanding as a “nice to have” rather than a “must have”, and it certainly must not shackle the UK’s new regulatory regime. Any partnership would require both sides to agree it, and there seems little political desire for that at the moment on the other side of the channel. Rather, UK-based banks are worried that the EU is considering ways deliberately to make it more difficult to offer services to their EU-based clients, and we have to keep an eye out for that. That makes it all the more important that the UK forms meaningful partnerships with other international financial centres. I have long advocated a close financial services partnership between the UK and Switzerland, a major financial centre. We share a common approach, a global outlook and pragmatism.

--- Later in debate ---

[Stephen Hammond (Wimbledon) (Con)]

It is an honour and a privilege to follow the two speeches from my hon. Friend the Member for South Cambridgeshire (Anthony Browne) and the hon. Member for Wallasey (Dame Angela Eagle). Both of them gave us philosophical, intelligent and really interesting speeches, and I noted that both of them made the point that financial services as an industry perhaps do not get the respect or the renown they probably should have.

I was reflecting on that when I heard the remark my hon. Friend the Member for South Cambridgeshire made about the German who said financial services are not recognised. Why is that? I think it is probably for three particular reasons, yet when we look at the contribution to the UK economy, we should really be shouting out against that. The first point is that, for all too many, when we say financial services, they think of banking. They forget all the related professional services, notwithstanding the subdivisions—indeed, financial services themselves are more tightly defined—and just concentrate on banking. They think back to the financial crisis and all the attendant problems that my hon. Friend so rightly pointed out.

The second point is that, when we say financial services, people may expect the hon. Member for Wimbledon to stand up, but they should expect the hon. Member for Wallasey to stand up as well. Although, understandably, financial services account for 16% of London’s total gross value added, the reality is that in the north-west the industry is 6% of the regional economy, in the south-west it is 6%, in the west midlands it is 6% and in Yorkshire and Humberside it is 6%. The smallest contribution of financial services anywhere in the country is actually the east midlands, and that is 3%, but it is none the less 3% of that regional economy. So we should be standing up and saying that this is a UK-wide industry.

The third point—with complete respect to my hon. Friend on the Front Bench, who is establishing his reputation for being perhaps the best City Minister we have ever had—is that there are one or two at the top of this Government who have occasionally thought that fishing was more important than financial services. If one says that the total contribution to the UK economy of financial services was £67.4 billion last year, and for fishing the number is so small it is not worth talking about, correcting that and looking to that in the future would underline the point about the power of financial services. As has already been stated, there is a huge trade surplus.

My hon. Friend the Member for South Cambridgeshire talked about the opportunities and the hon. Member for Wallasey talked about the threats from the EU. It is none the less true that during our membership of the EU we established ourselves as the world’s global financial centre, and whether we like it or not 40% of UK financial services exports still go there. So my hon. Friend the Economic Secretary to the Treasury will know that in those very complex negotiations—I will not repeat what has already been said about them—we must have a sensible, diplomatic and economically viable dialogue with our nearest and dearest neighbours.

The tax contribution has already been mentioned several times, and the hon. Lady made the point that PwC estimates that £75.5 billion, or 11% of Government receipts, come from the wider financial and associated professional services sector, including insurance and legal. So there cannot be any doubt that this is a hugely important industry and a powerful industry for the UK, and if we want a globally successful Britain we need a globally successful, renowned and well-regulated industry. It is noticeable that in the last few years we have very slightly slipped in the global financial centres index to second place and we must recognise that there are threats as well as opportunities from leaving the EU. It is of significance that on the first trading day of this year we lost £6 billion of activity out of London, and that is a continual threat. So I say yet again not only that we need those important negotiations to be conducted in a manner that is to London’s benefit but that we equally need to recognise of course that the threat is also now once again from New York, Switzerland, Singapore and Hong Kong. In the global alliances that we strike in financial services it is perfectly possible to recognise that, with some economic diplomacy put into deepening regulatory engagement, we could find ourselves in a powerful international regulatory alliance with the Americans, the Swiss and some of the far-east countries. Andrew Bailey some years ago when I was serving on the Treasury Committee raised this as an opportunity we should consider. Building those new trade and investment ties, and underpinning international agreements with financial services, is key to a globally successful Britain.

I want to briefly talk about two other points. First, as has been said, there is a difference between wholesale regulation and retail regulation. The Financial Services Act 2021 says that the Financial Conduct Authority must have regard to the relevant international standards and the effect of the rules on the UK’s international standing. That is hugely important, particularly in wholesale regulation where we hope to ensure that the UK is an international powerhouse. I accept that that will always be a secondary objective of the rules and the obligations on the regulator, but it must not be deviated from. I hope that my hon. Friend the Economic Secretary will set that in place. In terms of the history of regulation in the UK, a large number of people think the system, while rightly seeking to ensure extensive consumer protection, has come at the cost of overspecification for the wholesale markets to no benefit at all and to the diminution of our standing.

The other point has also been raised, but it is important. The 2021 Act has given a huge increase in power to the regulators in a way that we have seen with very few other regulators, by which I mean the lack of scrutiny in this House. I note that the financial services document “Future Regulatory Framework (FRP) review” has come out and it talks about this, and my hon. Friend the Member for South Cambridgeshire referred to evidence to the Treasury Committee. Because of the importance of this industry to the country, I urge the House to consider very carefully establishing a Select Committee of both Houses or indeed a standing sub-committee of the Treasury Committee. I do not accept the argument that several have put that there is not the expertise or capability within this House, or that this House is not able to get the necessary resources and capability brought into it to undertake that proper and appropriate parliamentary scrutiny.

Finally, in the last minute of my speech I want to talk about two other matters. We have talked a lot about the past and what financial services has done, but it could do a lot more to help in what this Government and this country want to achieve. If levelling up means anything, it means bringing opportunity to the regions of this country. Financial services is already a powerful industry in the regions of this country, and bringing in those high-paid, high-value jobs also brings in skills. We should be doing all sorts of things to encourage that, not necessarily just within Government; universities should specialise in master’s degrees in financial capabilities and regulation. We should be focusing heavily on developing the UK as a centre of financial skills. That way we would not only drive UK levelling up but bring the talent to make London and the other global centres of this country into the powerhouse of financial services.

Finally, the Government have done a huge amount of good work already in delivering the net-zero economy from financial services. Financial services can do much more in that area; all sorts of things, particularly using the tax system, have been done already, but we can do much more, and the financial services sector must play its role to deliver that objective.