UK-EU Relationship in Financial Services (European Affairs Committee Report)

Viscount Trenchard Excerpts

Wednesday 17th May 2023 Grand Committee

[Viscount Trenchard (Con)]

My Lords, I congratulate the noble Earl, Lord Kinnoull, on his expert introduction of this debate and on securing the time for it today. It was my privilege to serve under his chairmanship as a member of the committee that produced the report. However, it is a pity that we are debating it only now, 11 months after publication. Instead of debating this report, we should be debating our recently published report on the wider future UK-EU relationship, which your Lordships may have seen has been published.

Nevertheless, financial services are an important sector of our economy—one in which the UK’s global position is very strong. I will not repeat the statistics that the noble Earl has already provided but, for the EU, the financial services sector is only partially a Union competence, with member states retaining considerable freedom of action, particularly in the retail sector.

As we reported, there has not been much concern in the City about the lack of equivalence decisions by the EU. However, we noted that the agreement within the TCA that we would enter into a memorandum of understanding on regulatory co-operation has still not been realised. It was believed that the EU deliberately blocked progress on this. Indeed, there was a broad consensus among the witnesses who gave evidence to our inquiry that the approach adopted by the EU towards equivalence decisions has been political rather than technical, as the noble Earl mentioned. Our report urged the Government to step up political and diplomatic financial services engagement with the EU and we noted that both the EU and the UK have mechanisms for regulatory co-operation with the USA that they do not yet have with each other.

The adoption of the Windsor Framework was supposed to end the standoff with regard to signing the MoU, the content of which was agreed two years ago, and permit the parties to agree a date for signature. The Financial Times, no less, reported in March that the European Commission was then ready to sign it. Can my noble friend the Minister tell the House whether a signing date has now been agreed? If not, when does she expect that one will be agreed?

The Government’s response to our report highlighted the Financial Services and Markets Bill, awaiting Report stage in your Lordships’ House, and suggested that the Bill would

“deliver on the Government’s ambitious vision for the financial services sector to promote and enhance the UK’s position as a global leader”.

However, as several noble Lords and I argued throughout the Committee stage, it is somewhat under- whelming in its effect. Seven years on from the Brexit vote, we still have substantially all the cumbersome EU financial services legislation on the statute book. The future regulatory framework review was welcomed by the Government, who confirmed their view that the detailed regulatory requirements should be in the regulators’ rules and not in legislation. Parliament is not equipped to monitor and update large numbers of highly technical provisions in a flexible, market-responsive manner. As an example of this, the Treasury observed that the markets in financial instruments regulation sets percentage caps on how much trading volume can happen outside recognised trading venues.

As the City Corporation observed in its briefing provided by the Remembrancer’s Office, since the end of the transition period the Treasury has used its powers to onshore EU equivalence regimes in many areas. Nevertheless, the Government should continue to use these powers to find third-country services and persons equivalent, using a more outcomes-based approach, rather than the EU rules-based approach. The ongoing negotiations with Switzerland are also a good example of how we should pursue bilateral mutual recognition. I think that the corporation is right in its argument that the Government should seek, wherever possible, to embed the G20 endorsed deference model into its domestic regime and bilateral agreements, emphasising consumer choice and competition.

The Bill makes some much-needed changes, such as the Solvency II changes, to financial regulation straight- away, but it is disappointing that it is limited in scope. I have suggested that the Government should use the Bill at least to abolish the cumbersome and unnecessary alternative investment fund managers directive and all its derived legislation within two months of the passage of the Bill. When I worked in Brussels for EFAMA, my French and German colleagues thought that the EU should leave that market to London and not try to regulate it. It was one major piece of European legislation introduced in 2014 for political reasons, which was universally opposed by all British stakeholders, including industry, the regulators and the Government. We do not need to ask the regulators to consult on what might replace it. That would cost money and take time that we do not have. Does my noble friend not recognise that she needs to act fast and with more determination to achieve the Government’s aim to secure the City’s position as the leading global financial services market?

I am glad to note that the City also supports the views of many noble Lords that we need a Joint Committee of both Houses to provide oversight of what the regulators are doing with their new powers. Where I differ from the corporation’s view is that I think that this would be far more effective than enhancing the role of the Treasury Select Committee’s sub-committee, which has been set up for this purpose. To have one Joint Committee doing this work would avoid the duplication of time and effort that the regulators would have to spend if they were required to work with two different committees doing much the same thing. In any case, the oversight and supervision procedures contained in the Bill are unsatisfactory, especially from the point of view of your Lordships’ House.

I also ask my noble friend to look again at the sensible proposal by my noble friend Lord Bridges to establish an independent office for financial regulation, which would ensure that a new Joint Committee would be well equipped and informed to carry out its role efficiently. This would I believe be better than what the current Bill provides for. It requires the regulators to consult their own cost-benefit panels—it gives them a statutory duty to consult their own panels. If the panels are a part of each regulator, it is rather strange to legislate that they must consult a part of themselves. Again, a single, truly independent body, as proposed by my noble friend Lord Bridges, would surely work better than the two duplicated panels doing the same work. Indeed, the Bill is much longer than it would have been if we still had a single regulator, as provided for by FSMA 2000. That is because there are many sections which are repeated so as to place identical, or near identical, obligations on the FCA and PRA separately. It might have made sense, given that we are once again free to determine our own regulatory regime, to merge the two regulators back into a single FSA.

I worry that the new competitiveness objectives given to the regulators will not provide the needed growth and innovation because they are only secondary, and will not, in effect, be very different from matters to which they should “have regard” in forming that policy —but I hope that I shall be proved wrong.

I know that the senior leadership of the FCA is aware of the perception that much of the industry holds about it. I trust that its new chairman, Mr Ashley Alder, will be successful in beginning to change this perception. His experience as chief executive of the Hong Kong SFC and chairman of IOSCO will stand him in good stead.

The UK Listings Review, chaired by my noble friend Lord Hill of Oareford, identified several steps that the Government should take in order to arrest and reverse the recent decline of the competitive position of the London Stock Exchange. Our report endorsed the recommendation that the Treasury should make an annual “state of the City” report to Parliament. It is encouraging that the Chancellor, together with the City Corporation, has followed up on that. I look forward to other noble Lords’ contributions and the Minister’s reply.