Thursday 26 April 2018
[Sir David Amess in the Chair]
I beg to move,
That this House has considered the financial services and the impact on the UK economy.
It is a privilege to serve under your leadership, Sir David. I thank the Backbench Business Committee for granting time to discuss this important matter, and the 16 Members who supported the application. They all agree that the financial services sector is of specific importance and that the House should set aside proper time to discuss the issues that affect it.
Today is of course a very quiet day in this place, and time for the debate was allocated only last week. Many Members have given me their apologies because they cannot be here due to previous constituency commitments, and a bit of a gremlin in the parliamentary IT system unfortunately meant that the debate was advertised on the Parliament website only last night. Fortunately, I have received many comments in the past few days from stakeholders representing literally millions of people about the importance of this debate, and it is really important that we point out to the public that the fact that not many Members are present right now does not mean that many of them do not care about this issue— they do.
I will address the financial services sector in its own right and its importance to the wider economy, lay out some of the many considerations that the Brexit negotiations bring for the sector, and raise some specific actions that the Government may wish to consider taking. Fundamentally, we know from history how important it is to get the regulatory environment for financial services right, and it is important that we, as legislators, focus on those issues.
London is the leading international financial centre. Some 1.1 million people are employed directly in financial services, and the number of people employed in the sector increases to nearly 2.3 million when other professional services are added. One in 14 people working in Britain today works in financial and professional services. Those jobs are not just in the City of London: Manchester is a leader in legal services, as is Birmingham in accountancy; Edinburgh has a global reputation for fund management; and Northern Ireland is increasingly an area of expertise for vital back-office and middle-office functions. Two thirds of financial services jobs are based outside London. In fact, 21 cities and towns across the country have more than 10,000 people working in the industry.
More than 3,000 jobs in my constituency are in financial services, many of them in insurance, and many of my constituents commute to London to work in the sector. It is estimated that, across the country, banking employs more than 400,000 people, insurance more than 300,000, management consultancy more than half a million, accountancy 360,000, and legal services 340,000.
But this is not just about jobs: the financial services sector is a massive contributor to the public purse. TheCityUK estimates that the sector paid more than £72 billion in tax last year—11% of total British tax receipts and 4.5% of our GDP. Some £31 billion of that came from income tax and national insurance contributions. The banking sector alone paid £35.4 billion, of which £17 billion was from non-British banks that have chosen to locate here.
The sector is key to our trade. Of every £100 generated in our economy, £11 comes from financial services—it is among Britain’s largest industries. According to the Office for National Statistics, UK-based financial and related professional services generated a trade surplus of more than £80 billion in 2015—larger than the combined trade surplus of all other industries. It is fair to say that British financial and related professional services firms are the face of British businesses around the globe. A large proportion of that trade is with our partners in Europe; more than £27 billion of UK financial services exports go to the EU. Maintaining that trade and the jobs and tax it brings matters hugely to our economic prosperity.
Access to financial services products makes a real difference to real lives. Buying a house and taking on a mortgage is the single largest financial decision most people will ever make. Two thirds of families in the UK own their own home. There are 11 million mortgages across the country. Furthermore, more than 1 million people have opened help to buy ISAs since they were introduced in 2015. Those have helped people buy more than 100,000 homes, and they have been used particularly in areas such as the north-west and Yorkshire and the Humber.
Three quarters of British families and households have savings and pensions managed by the UK fund management industry, and pension providers are key to delivering a better future for us all. We have the second largest pension industry in the world, with total investments of nearly £3 trillion. At the end of last year, more than 9 million people in this country had been automatically enrolled into pensions thanks to this Government’s actions. Insurance services are vital to consumers, too. More than 20 million households have motor insurance, 19 million have contents insurance, and 16 million have buildings insurance.
People also use banks: 99% of British adults have at least one bank account. That is great. We know retail banking is going through a massive transformation. Consumers are moving from paper, cheques and cash to online and contactless payments and records. Government figures show that 56% of consumers used online banking last year. That is great, but it means that nearly half the population did not. The issue of bank branch closures is not just for rural areas. I represent the city of Chelmsford, and I have had many emails from constituents who are concerned about the last bank closing in the Great Baddow area. It is right that MPs raise the issue often in the House. Post offices can and will provide some of the services that people need, but there also needs to be clear and specific communication to those affected.
Financial services are also of huge benefit to the public sector. People in my constituency really want to see investment in infrastructure—that is a top priority— and dynamic financial services are key to getting the infrastructure we need. I should probably declare an interest: I had a long career in infrastructure finance before entering the House. The UK Government aim to invest more than £240 billion between now and 2021, of which it is estimated 45% will come from a diverse range of private investment sources.
Financial services are also key to supporting other businesses. They provide current accounts and insurance cover, and help companies to raise the money they need to invest, grow and create jobs. The total value of loans from major banks to British businesses is just over £460 billion. More than a third of that is lent to small and medium-sized businesses. Last year, British companies raised £27.2 billion by issuing shares, nearly £24 billion of which was raised on the London stock exchange. Companies also raise money from corporate bonds, asset finance, angel investment, crowdfunding, peer-to-peer funding and private placements. According to research by Cambridge University, in 2016 more than 33,000 small and medium-sized enterprises had already received funding—totalling more than £3 billion—from alternative finance providers. That market is growing rapidly.
The UK is a global leader in the FinTech sector. Investment in FinTech more than doubled last year. We are the second largest FinTech country in the world, just after the US. FinTech products have given access to services to many people who found themselves excluded from traditional financial services. FinTech products have increased transparency, dramatically reduced the cost of everyday transactions and helped to fight financial fraud and improve security.
Last month, the Chancellor launched the FinTech sector strategy, which I welcome, but many other parts of the financial services industry could benefit from such sector strategies too. The financial services sector comprises many different subsectors, each of which needs and deserves detailed and specific focus. It is important that we have that focus now, especially because of the Brexit negotiations. Financial services will be very much impacted by the type of Brexit we have.
I will give the example of the insurance sector, which, as I have said, is a major employer in my constituency. The UK is a global leader in insurance services. We are home to the largest insurance industry in Europe. Our commercial insurance market facilitates the flows of trade across all of Europe and acts as a massive bridge to the markets in North America and across the world, in Latin America, Asia and Africa. Many clients across the rest of the EU rely on the London market to provide certain insurance and reinsurance products that they simply cannot get in their own markets.
That is why, every year, European companies pay insurance premiums worth over €9 billion into the London market and why €7 billion of international business is written in the London market by organisations whose parent companies are elsewhere in Europe. Once the UK has left the EU, UK-based insurance and reinsurance undertakings will lose their right to conduct business in EU27 member states by way of freedom of establishment and freedom of services—and vice versa: European companies will lose their right here, unless there is a deal allowing that to continue.
A further technical but very concerning point is that, in December, the European Insurance and Occupational Pensions Authority issued an opinion saying that insurance contracts concluded before the withdrawal date by British companies into the EU27, and by EU27 companies into Britain, are in principle valid post-Brexit, but that those same firms would not be able to continue to ensure the continuity of their services to businesses and customers on a cross-border basis after we exit. That would include their not being able to service the claims of existing policyholders.
The continuity of servicing of cross-border contracts after Brexit is a real concern. According to the Bank of England, 36 million insurance policyholders—individual people—in Britain and the EU are potentially affected. That is only insurance policyholders; there is another £26 trillion of outstanding uncleared derivatives contracts. It is in the interests of both the UK and the EU to resolve the issue of contract continuity, both during the transition period and thereafter, and I am pleased to have heard the Chancellor mention that recently.
As well as resolving contracts, there is the issue of market access. The London Market Group, which represents the commercial insurance sector, points out that without continued access to insurance markets there will be disruption across a wide range of sectors, including aviation, marine, bank lending, satellite communications, shipbuilding and even nuclear power. Market access in the insurance sector is important to those other sectors that come to London to get insurance.
It is also important in sectors other than insurance. British-based asset managers manage more than £1.5 trillion of assets for EU clients. Two thirds of the debt and equity raised by European companies comes from British-based banks. Three quarters of European forex and interest rate trading takes place in the UK. Trade in services is not just a one-way street, and it is important to remind people on the other side of the channel of that. The UK imported £76 billion-worth of services from the EU in 2016, an increase of about 10% on previous years. Financial services also underpin the cross-border flow of goods. I have just bought a new car; like most new cars bought in Britain today, it comes with a financial services contract. The service is linked to the good.
When it comes to the financial services sector, the concept of no deal with Europe is not a good deal for Britain, and it is not a good deal for the rest of Europe either. There is no free trade agreement anywhere in the world that offers anything like the depth and breadth of what is needed by the EU and UK financial services players to help to keep the sector and to ensure it continues to underpin the wider economy. That is why it is right that the Prime Minister, in her Mansion House speech, called for a
“broader agreement than ever before.”
It is important that we focus on the details of what that relationship could look like. Companies in financial services have very long lead times to plan their businesses. Once contingency plans have been put in place, they are unlikely to be undone. The agreement on the transition period is welcome, but it is not legally enforceable until we also know what the withdrawal agreement looks like. Firms, especially in the EU, are still being asked by their regulators to continue planning for a no deal scenario, which risks the transition agreement being undermined in practice. In contrast, the Bank of England and the Prudential Regulation Authority have given helpful guidance to firms here that they can continue to operate under the current regulatory regime. One thing I ask the Minister to do is to work with our European counterparts to try to ensure that firms on the other side of the channel can be given similar messages to the one the Bank of England is giving.
On the long-term agreement, an organisation called the International Regulatory Strategy Group prepared an excellent report on “A New Basis for Access to EU/UK Financial Services Post-Brexit”, which I strongly recommend. It concluded that a deal should be sought that was based on mutual recognition and regulatory co-operation, delivering market access rights. That view has broad support from across many areas of the financial services community.
The UK Government have called for cross-border access in financial services based on regulatory and supervisory co-operation. It has been encouraging to see an acknowledgement of the importance of services in the EU’s own negotiating guidelines. It is important to recognise that, if we are to achieve that high level of market access, we also need a high level of regulatory dialogue, trust and co-operation. The lessons of the last financial crash remind us how important good regulation is, because if a failure happens it can become systemic. The crash also emphasised the need for international co-operation and made us realise that, when it comes to cross-border institutions, the regulatory framework needs to work across borders too.
However, it is important to remember that the industry has come a long way since 2008. Across the world, capital requirements on large banks are now 10 times higher than they were before the crisis. British banks have raised over £130 billion of loss-absorbing capital. The recovery and resolution regime, which I am proud to have played a part in negotiating, means that failed banks can be wound down without needing to rely on taxpayer bail-outs. Fundamental to that is the fact that senior executives can now be held individually accountable for the banks they run.
Under this Government’s leadership, the UK has worked with regulators all across the world to improve the stability of the financial sector. When it comes to the detail of the regulation, we have worked most deeply with our neighbours in the EU. We have created a common rule book in many subsectors of financial services, and industry players in the vast majority of those subsectors want to continue to use that rule book. It is important that we focus on how that co-operation continues and what sort of regulatory environment we want to have going forward.
There is huge devil in the detail of financial services regulation. We should not kid ourselves that global rule-making will replace the level of detail that EU-UK co-operation has given, and we should remember that our co-operation with Europe has helped us to have a stronger influence on the global stage.
The example of taxpayers’ money no longer being needed to bail out a failing cross-border bank was critical to building British stability in financial services after the financial crash. We agreed that that should happen at a global level, but it was actually getting the devil in the detail right between the UK and the rest of the EU that enabled us to get the detailed negotiating right and to then take the details back to the global stage.
In his excellent Canary Wharf speech, the Chancellor spoke of ongoing co-operation on a number of areas, including market abuse, transaction reporting, stability monitoring and the means to identify prudential concerns about individual firms. Achieving a successful Brexit negotiation is fundamental to ensuring that the UK’s global financial services sector remains competitive and is able to continue to deliver not just for the British economy but for clients across Europe, too.
I know I have already spoken for quite a long time, but I will use this opportunity to take a few more minutes to focus on areas where I think the Government or our regulators might take action. On supporting innovation, the FinTech sector deal is very welcome. Open banking provides huge opportunities, allowing customers to better compare deals and find the best products to suit their needs. It means that we will get new market entrants, and some of the services that they will offer will be taken up by people who have been or have felt excluded from traditional services.
The Government could do more to unlock the sharing of data in this space, especially by increasing transparency over capital requirements for new bank start-ups—sorry, I am a bit of a geek on bank capital requirements, after many years of negotiating—which would help to get more of those new businesses and ideas off the ground. The growth of green finance is potentially very exciting, and targeted measures could put us at the forefront of that exciting area of innovation.
I will look at a few issues on regulatory oversight. Our financial services sector has a strong reputation across the globe for high standards of regulation and transparency, which is vital in underpinning the trust that delivers the sector’s success. However, the industry has not always been perfect, and when issues arise it is important that they are dealt with fairly. Many small and medium-sized businesses were badly affected by the mis-selling of interest rate hedging products—especially by organisations such as the Royal Bank of Scotland and HBOS—in the run-up to the financial crash and in how those products were managed thereafter.
One of my constituents told me how he was forced to hand over the keys to his business, which he had grown and delivered, and was then given no transparency on what happened to the businesses thereafter. These are complex cases, and many of those affected still do not believe that they have been given a fair hearing or fair compensation. There have been questions on whether the Financial Ombudsman Service has the capacity to cope, and I understand that a new independent investigation into it is being undertaken. It is important that we take this opportunity to move forward and restore that confidence, so I will be grateful if the Minister will keep a firm eye on how we deal with those legacy cases.
As Members of Parliament, it is important that we focus on consumer issues. The Government have rightly taken action to cap the charges associated with payday loans. However, a recent Which? study found that consumers needing to borrow as little as £100 could sometimes be charged up to £156 more for the loan by a major high street bank than a payday lender would have been allowed to charge when borrowing the same amount for the same period. There is a particular issue with how banks treat heavy overdraft users, who are often quite vulnerable. It appears that we may need to look at the way banks lend in this area. I understand that a consultation on that was meant to be launched in the spring but that it has been pushed back to next year. I ask the Minister to look at that issue.
Cyber-security is a big issue, and I am honoured to chair the all-party parliamentary group on cyber security. I strongly recommend Members look at it. Cyber-crime is now second only to political risk as one of the key challenges facing the financial sector, and the sector is taking action. Yesterday morning I was with TheCityUK to launch a major new report on how boards and companies can better protect themselves with cyber-security. Cyber-security is often linked to money laundering, and it is absolutely right that tackling that economic crime is a major priority for the Government and the industry.
Many Members on both sides of the House have mentioned money laundering issues in the past few weeks, especially since the terrible incident in Salisbury, which the Minister, my hon. Friend the Member for Salisbury (John Glen), dealt with so thoughtfully. It is a significant and important issue, on which Britain needs to lead the world, so it has been good to see the Chancellor this week putting the fight against dirty money right at the top of the International Monetary Fund’s agenda for leaders across the world to focus on.
Regulators here have also asked the Government to look at some potential legal and regulatory barriers that currently limit effective counter-fraud procedures. It is easier to transfer money at speed across different bank accounts today than ever before. Many legitimate customers welcome that, but that speed of transfer is also exploited by criminals.
There needs to be a balance between openness and speed, and I would like to see the Government and regulators looking at ways to enable banks to share information across the industry and for us to discuss whether the approach to payment processing could be flexed to allow more time to scrutinise higher risk payments. I remember a constituent of mine coming into my constituency surgery traumatised because he had lost his life savings thinking he was genuinely buying the car of his dreams, only to find it had been a massive fraud. It was impossible for the bank to track down what had happened to that money afterwards.
If the law were changed, banks tell me that they would be able to share data more quickly and safely, so they could better detect and prevent those types of economic crime. Innocent people’s life savings are being stolen, and we should do what we can to stop it. I would love to see the Government and the regulators working to see if there is anything more we can do to make sure that we can target those incidents while also protecting personal data.
One of the great things about the Government’s industrial sector strategy deals is that they run across all areas of Government and identify areas where all Departments can help to deliver success. The financial services sector is no different from others in this area. On skills, the sector needs to know that there is a strong pipeline of talent of people who have the skills, education and training needed to keep the industry globally competitive—particularly focusing on areas such as FinTech and cyber.
Financial services is a people-driven business, but many of those people commute, so investment in infrastructure—physical as well as digital—is key. We need to connect those regional clusters, reduce journey times and bring a larger number of people within an easily commutable distance of jobs in those sectors. My goodness, how much we need to improve our commuter experience! My local railway station in Chelmsford is the busiest two-platform train station anywhere in the United Kingdom. We need investment in infrastructure to ensure that people can get to work in this sector. We also need to provide housing and to enable our country’s businesses and ideas to connect with markets across the globe.
As I said, financial services do not exist just in London. Just as it is for other industries, localism is important for this one. Local and devolved decision making can help. An industrial strategy must be suitable for the whole nation, but local differences need to be permitted. The most effective way to support this industry is to have a strategy that gives local areas the power to focus on their strengths.
The UK’s financial and professional services sector is a world-leading industry today and is well placed to continue to lead the world in the future. We cannot divorce this sector from our wider industrial strategy. Our dynamic financial services industry is key to every other part of our country’s industrial performance. It is the key pillar of our economy and deserves the full and focused attention of the Government and Members of the House.
It is a pleasure to serve under your chairmanship, Sir David. I am grateful for the opportunity to speak. I should at the outset disclose my interests—both directly, in the Register of Members’ Financial Interests, and as co-chair and member of a number of all-party parliamentary groups. My background is also relevant. I have worked in financial services for the best part of the last 15 years, including in the weeks before the general election was unexpectedly called, having taken a new job in insurance and so having to review that rather quickly just after Easter last year.
I thank my hon. Friend the Member for Chelmsford (Vicky Ford) for co-ordinating the debate and for speaking so comprehensively and lucidly in outlining the challenges and opportunities for the sector. I will not go over them at length, because she covered many of them so incredibly well.
I welcome the debate for a number of reasons, the first being that financial services are important for the economy as a whole. My hon. Friend explained that in a lot of detail. This sector accounts for 11% of GDP and a significant number of jobs across the country. Those jobs are not just in London. When I was working in financial services, I spent as much time in Manchester, Glasgow, Edinburgh, Sheffield and Leeds as I did in London. That demonstrates the number of jobs involved and the importance of regional centres for financial services as a whole and for our economy, both regionally and nationally.
Financial services are important for the economy as a whole, but also for people. Financial services are the vehicle—the driver—for ensuring that people and businesses can get out there and do as they wish, and can work hard, achieve and get on. Credit is a fact of life. Credit opens up those opportunities and helps to realise the ambitions of people, businesses and organisations.
I particularly believe that financial services are important for social mobility. I have a history degree, so I did not necessarily expect to get into financial services. I come from a relatively working-class background in Derbyshire. I was at a report launch at Rolls-Royce in my county—not my constituency—a couple of weeks ago, and the report talked about the importance of IT for social mobility. My social mobility was through IT in financial services, and I know so many people—ex-colleagues and friends in the sector—who have also experienced social mobility as a result of what banking, insurance, asset management and wealth management offered them. Credit makes the world go round, and we need to ensure that that is at the heart of our strategy as a country and for our economy as a whole.
The challenge, of course, is to lift the discussion out of the framework of the 2008 financial crisis, important as that was, and out of the entirely sterile and cartoonish debate that it falls into at points. I was working in financial services at the time, and there is no doubt that in 2008 a significant amount of bad behaviour was going on, extremely bad practice was occurring—illegal practice was occurring—and the regulations were not appropriate. The debate is not about too much or too little regulation; it is about the appropriateness of the regulations. The capital ratios had got too low, and we got into a place that was significantly problematic. We do not want to go there again.
I make my comments on the basis that all of that is accepted. We also have to recognise that we are now in 2018. The financial crisis was 10 years ago—a decade ago. Nearly a third of my life has taken place since it occurred. We have to stop having the debate about what happened in 2008 and start having the debate about what will happen in 2018 and 2028.
We have not yet heard the comments from the Opposition Front Bench. I know the hon. Member for Stalybridge and Hyde (Jonathan Reynolds) as a very thoughtful speaker. I have had the pleasure of listening to him in numerous debates over the months that I have been in this place. However, there is a sterility to the debate on this subject. I am sure he will not contribute to that—or at least I hope he will not—so long as his speech has not been given to him direct from Labour central office.
We have to ensure that we stop talking solely, important as these things are, about how all bankers are bad, the high remuneration is terrible and IT failures are very problematic—that is probably not the best argument to make this week, given all the TSB customers who have been so badly affected and with whom I sympathise hugely. I hope that Mr Pester sorts out the problems as quickly as possible and does not just send us apology emails, which he seems to have sent us this morning. I accept that some bankers were bad and remuneration was too high, but we have to bring the debate on, move it forward and look at the challenges that are coming, not those that are behind us.
In that regard, the first points that I want to make are about the opportunities that we have. My hon. Friend talked extensively about the challenges and the opportunities that are coming with Brexit, and I wholeheartedly endorse many of the statements that she made. Like her, I think that the continuity point is crucial. The Government are working extremely hard on that point. Everyone I talk to in the sector ultimately boils the point about contract continuity down to the ultimate essence, which is that it is highly likely that we will all find a way through this. Actually, it will be almost impossible not to find a way through it, given the meshing together of the EU nation states and the United Kingdom in terms of the contracts that are cross-border. If we do not, we get ourselves into a really tricky place. Ultimately, many of the discussions have, underneath, a tremendous political element, not an economic element. The Government are working very hard on that. They have been completely up front and straightforward about it and are working to ensure early resolution of the problems.
We cannot get ourselves into a place where we are novating or rewriting millions and millions of contracts. I am sure that the lawyers would be delighted, but I am not sure that even the combined might of the European and the UK legal sectors could rewrite all the contracts, even if they wanted to.
I understand that there is significant precedence for what I am referring to, including from 1999, when the euro came in and there was an effective grandfathering of contracts that had gone before. I wish we could get to that place as soon as possible, because people are spending a significant amount of money on preparations that could usefully be spent elsewhere. I strongly encourage the European Union not to play politics in this area and to accept that it is important that there be clarity as soon as possible.
The same principle goes for recognition of the continuity of the ability to book into the United Kingdom. I accept that there is a commercial and economic discussion in the European Union about wanting to develop its own systems, approaches and financial centres, but the reality is that London is central to most of what happens in Europe from a capital perspective and a booking perspective at the moment, particularly in terms of underlying the instruments of risk that come with many of the larger contracts, especially on the commercial side. I hope that the European Union is not playing politics from that angle as well. The reality is that there is no point in making these decisions and agreeing them at five to midnight, as is the wont of the EU in many of its negotiating positions. We have to try to get clarity now. The Government are working on that; I hope that Brussels is doing the same.
I have had the opportunity over the past few months to do a fellowship from the Industry and Parliament Trust on the future of financial services. I have been to a number of different financial services organisations now—I was with UK Finance on Monday. As a country, we have a number of opportunities in financial services over the coming years and a number of interesting questions about where we want the sector to go. I will touch on a few of those, as my hon. Friend did.
First, we have to get the regulatory framework correct. Much progress has been made in the past 10 years on this, and my hon. Friend referred to that. The Prudential Regulation Authority, the Financial Conduct Authority and the Financial Services Authority do a good job generally on many of these areas. Andrew Bailey is highly respected for that and rightly so. However, it is incumbent on us to raise the quality and interest of debate in this House. I agree with my hon. Friend that Thursday is perhaps not the best time to do these debates—I am sure that if we held this debate on another day, we would have more hon. Members here. However, from a Back-Bench perspective, we cannot outsource decisions and discussions on regulation to the PRA and Andrew Bailey on the basis that they know what they are doing; we have to have those discussions and debates here, because there are political angles to them. I know that the Government are intricately involved in that, but as Back Benchers and Members of this place, we have to get involved as well.
We have a huge opportunity with FinTech. That is a truism, which everybody knows, but we have a particular opportunity because, compared with some of the larger countries, we have a relatively contained group of people who are highly switched on, mobile, flexible and connected, and with whom we can do an incredible amount of work as a country, to test some of the innovations that will be coming through the FinTech sector in the next five to 10 years. We should see the UK as an incubator, as I know the Government do. We should be supportive of what FinTech offers, to transform society as a whole, not just for those at the top. FinTech should be seen as an opportunity to support everybody who experiences financial services and who may be more vulnerable and to transform their experience. Some of the things that have been done, particularly around the regulatory sandbox, are very impressive. I spoke to colleagues in America just a few months ago, and they are very complimentary of what the sandbox is achieving. I hope we can continue to replicate—to create and perpetuate—that environment, which supports FinTech and FinTech development.
Competition is a long-standing and challenging area. We have done much in the last few years, including around account switching, to make the process of markets more flexible. Customers seem to have an inherent stickiness in terms of being willing to transfer banks. We have to do some further work on that. I tried to change my bank account on Monday. I went into an unnamed company and I was told that it would take an hour to change my bank account. While I think it is perfectly legitimate—I am not trying to seek Government control over these processes—the sector needs to reflect on the challenges and barriers that it puts up, to ensure that flexibility can be created within the industry. We need to encourage greater competition. The challenger banks are doing incredibly well, but we need to ensure that there is greater flexibility and competition as a whole.
Within that, we have to ensure, and not forget, the importance of mutuals. I declare an interest: I was employed by a mutual—Co-op Insurance—for all of six weeks before the election. Mutuals are incredibly important to the future of our financial sector. They do great work; they often explain what they are doing and their mission better than some of the larger players in the sector. We should welcome how mutuals work in this country, across both business and personal banking. We should support them in their endeavours, particularly by looking at the barriers to entry for new mutuals coming into the sector. It is important that, just as we have new challenger banks, we should have new mutuals, also keeping the existing players honest and on their game.
There is a significant opportunity for automation and artificial intelligence in this industry. A significant amount of attention is going on that. I was working on some of those elements last year in the private sector. However, banks and financial services organisations need to recognise that opportunities for automation and artificial intelligence are not just about cost reduction and cost drivers; they are an opportunity to put the customer at the heart of processes. I mean that in an actual way; this is not just lip service. My constituents tell me about their frustration, which I share, that they find banks faceless and financial services companies unwilling to engage. We have to get away from that “computer says no” mentality. I hope some of the opportunities around automation will be about not just cost reduction, but customer service improvement.
My hon. Friend talked extensively about the importance of cyber-security, data handling and risk as a whole. I wholeheartedly support that. In particular, we need to see open banking as an opportunity, but we need to recognise that, through application programming interfaces, we are opening new challenges and domains where security can be challenged. We do not want banks to have created firewalls and frameworks to prevent cyber-events, only for those cyber-events to be transferred elsewhere as a result of open banking. Catastrophic data losses need to be avoided—that is obvious—but if they are not and we do not have that at the centre of our minds, we could get into a difficult position.
We also need to recognise that data handling, and the changes around big data, machine learning and the like, which are coming into the sector, will change the way in which the economic models of banks and insurance work. Insurance is effectively about pooled risk, but it is also about making an assessment of risk. When we can interrogate the levels of data coming into the sector, we move away from the necessity of pooling risk based on a series of avatars about what people aged 35 and 40 tend to do. We can make a decision on actuality: what people actually do and what they have actually done. That is creating a more perfect market, where risk is priced closer to the challenges, but it also creates a series of ethical questions about how we use that data. The hon. Member for Bristol North West (Darren Jones) and I—under the auspices of the Parliamentary Internet, Communications and Technology Forum, which he co-chairs—are launching an investigation into the ethics of technology and artificial intelligence. I encourage hon. Members who are interested in that to get involved.
Finally, one of the most important points for my constituents regarding financial services is vulnerable customers and branches. My hon. Friend spoke about branch closures in her constituency. I have similar examples. A branch closed in Clay Cross—a town in my constituency—just a number of months ago. There were serious concerns from local residents about that. We have to see financial services, and the challenges and opportunities they present, as a way to address some of these things. There is a clear move for the majority of people in the country towards digital banking—that is to be welcomed—but there will always be a group of people who are unable to be engaged through that process. We need to ensure processes are in place to engage them.
I welcome the developments around post office openings in recent years, but I wonder whether the sector as a whole is really thinking through the opportunities it has. For example, nobody in the sector has been able to give me a clear answer as to why some form of shared service in local towns is not possible—why banks cannot inherently share the infrastructure of branches so that a customer might walk into the space between four physical walls, but have four different banks in that space, sharing the overheads, costs and all the challenges, which they say are the reasons for their leaving these important towns in the first place. I hope that banks and other financial services will reflect on other opportunities than just the post office.
In conclusion, there are many opportunities for financial services in the coming years. It is crucial that we recognise the importance of financial services to the economy as a whole. I hope that, as a country, we can grasp those opportunities and recognise the importance of credit in our society every moment of every day. If we do that, we can hopefully ensure that our country continues to thrive in the years to come.
I am glad to be able to speak for the Scottish National party in this debate.
I am sure the Brexiteers will accuse me of not being optimistic enough, but having looked the issues for financial services in the UK post-Brexit, I cannot help but have some apprehension. I understand that a lot of people in the industry are apprehensive as well. The challenges are huge and significant.
We have the best possible set-up in financial services with the EU, whether with regard to co-operation, influence or regulation. We are part of the decision-making process and have been key players in the set-up of financial services across the EU. There is no doubt that we will not be able to replicate the influence we have, because that influence is born from being part of the EU and a member of the single market and the customs union. The UK Government must seriously consider that reckless approach. The financial services sector provides a good illustration of why remaining in the single market and the customs union is the least-damaging option for the UK’s and Scotland’s economy. Brexit is a key risk to that sector.
The financial services industry is huge—the figures were mentioned by the hon. Member for Chelmsford (Vicky Ford)—and, as she said, Scotland is a key part of it. Many financial services jobs are outside London. Edinburgh has 49,800 employees in the industry—a significant number—but Glasgow has 36,300 employees or thereabouts. Nearly 60% of employment in financial and related professional services in Scotland is concentrated in those cities. Edinburgh has an important international financial centre and a strong presence in banking, life insurance and investment management activities, and Glasgow has strengths in insurance, legal services and accountancy, but Aberdeen and Fife employ a large number of people in the industry.
As the Member for Glasgow Central, it would be remiss of me not to talk about Glasgow which, since 2001, has developed its international financial services district. That has rejuvenated an area in the city that had been left behind by old industries, with warehouses and neglected areas near the Broomielaw. It has been redeveloped into a hugely vibrant sector of the city. Many large companies based there employ people in high-value jobs. Those companies were able to get buildings, set up to work and employ people locally.
The IFSD has attracted £1 billion of investment to the area, so it is no small project. It has brought in more than 15,500 new jobs through investment and expansion by working in partnership with the city council, Scottish Development International, Scottish Enterprise and Skills Development Scotland, to name a few.
It worries me greatly that Glasgow, which is recognised in the global financial centres index as the 14th most competitive financial centre in Europe, would lose out as a result of the reckless move towards leaving the EU, the customs union and the single market. It concerns me because when jobs go in London, London may be able to absorb it, but the economies of Edinburgh and Glasgow are more peripheral in the UK set-up. The UK has a London-focused economy. Without any great control in the Scottish Parliament over such things, I am concerned that we will not be able to put the mechanisms in place to protect those industries as we would like to do. We are at the whim of what the UK Government decide to do.
I hope the Minister can tell us more about the White Paper that the Government were due to publish last summer on the approach to Brexit and financial services. As I understand, that has not yet been brought forward. I asked the Library for an update on its report from July on financial services and Brexit, and although it could give me an update, it could not give me much progress, because not much has been made—certainly not anything visible or tangible. That concerns me and the sector greatly because of the uncertainty. We should be in no doubt that the sector has to plan and make decisions. The more uncertainty there is, the greater the risk of losing jobs.
Predictably, the European Banking Authority has decided to move to Paris. There are moves afoot from France to build up its sector and to regain what it feels it has lost to the UK in terms of financial services expertise. There is a risk, and other countries are looking to step into the void that we are leaving. The transition agreement merely extends the deadline to reach a deal to the end of 2020. The financial services industry needs and deserves more certainty so it can plan for that.
Not only will we lose financial institutions and companies, but those companies will not have the automatic access to EU markets that they currently have. That loss of influence is significant for the companies that base themselves here, for the decisions and investments that they make and for the jobs they create.
We will also lose influence in Government and between Governments. We will not be in those decision-making rooms where the regulations are being drawn up. We will not have the early influence that we have through EU institutions. We have set a lot of the rules, but in future, at most, we will be able to take rules, which is a huge difference.
The Minister has acknowledged that in an article, where he wrote:
“We know how important it is to the financial services industry that they have continued market access”.
I am sure he will tell us more about what he intends to do about that. Market access is not the same as being part of a market or a component in that market. Market access is second best. The Tories are delusional if they think we will get a better deal than we have at the moment.
Remaining in the European Economic Area could enable financial passporting to continue. That is crucial, because equivalence is nowhere near as uniform and comprehensive as passporting. It does not cover the full range of services currently sold by UK-based firms into the EU, or the full range of clients. As I understand it, banking services could not be offered under an equivalence regime.
Many are deeply concerned about what would happen if there was policy divergence between us and the EU in future, because that could result in the Commission revoking access to those markets with only 30 days’ notice. If a regulatory change that we disagreed with was agreed by the EU, such as a cap on bankers’ bonuses, that could be enough to trigger that denial of services. Switzerland’s referendum to limit immigration from the EU triggered such a response from the EU.
That is worrying given the Government’s attitude to immigration and how they want to treat immigration from all parts of the world—not just the Windrush generation, but EU nationals. Many constituents who come to my surgeries are in highly skilled jobs and have come here as highly skilled migrants. They have found that, because they made a minor change to their tax returns many years ago, the Government deem them a threat to national security under paragraph 322.5 of the immigration rules. If that is how they treat the highly skilled migrants who come to this country to contribute, work and generate wealth, I have little confidence that they will do anything to improve the situation. That is how people are being treated now. How will they treat EU nationals who have come to work in the finance sector?
Some 9,000 EU nationals work in the financial and business services sector in Scotland. Each of those people brings wealth to this country, pays their taxes, has a family, works here and has settled here. They have no great certainty about their future status, how their employers will employ them and whether they will have the right to work as they do now, which is a huge worry.
Those individuals are making decisions as to whether they want to stay here on the basis of what they hear and see. The mood music around immigration has not been very welcoming. Those narratives are almost certainly causing many of them to give up and leave. The Minister is sighing somewhat at that, but that is the reality—that is what I get at my surgeries.
I am not. I am listening very carefully.
People are not sure what will happen, and they need to have more certainty before they make their decisions. Just as people in the financial sector are making decisions about where their businesses will go, individual employees are deciding as well.
My husband works as an IT professional in Glasgow and knows many people in the sector. They are highly sought-after, highly skilled and well-paid jobs, but they are tied to financial institutions in the city such as J.P. Morgan and Barclays. If those financial institutions contract, those IT jobs, which are highly skilled, will contract too. We need to think carefully about the full pipeline of people. It is not just about bankers in suits sitting in offices; it is the full ecosystem. Those bankers buy lunch, commute into towns and take public transport.
Glasgow has a long and distinguished history in banking. The Bank of Scotland opened its doors in 1695. The Royal Bank of Scotland has its global headquarters in Edinburgh, the Clydesdale Bank has its European headquarters in Glasgow and there are lots of other banking operations in Scotland. I have mentioned Barclays, but HSBC and others also have a presence within Scotland.
Scotland’s general insurance, life insurance and pensions sectors also have a strong reputation and an enviable history of success, with their origins dating back to the early 1700s, when the increase in international trade led to a requirement for marine insurance, and Scotland continues to be a major centre for that sector.
The hon. Member for Chelmsford mentioned the insurance industry. The Association of British Insurers is deeply concerned about the current uncertainty. It has contracts that run for 10 years and pension contracts that run for more than 30 years, and has pointed out that
“these contracts cannot be transferred safely and quickly to a new EU location. Special arrangements would be needed to transfer the contracts, covering both legal form and regulatory responsibility…If nothing is fixed, insurers will be left in an impossible position and face an unacceptable choice: break their promise to customers or risk breaking the law.”
That is deeply serious and I hope the Government are looking at it. It is a huge concern for the sector, which relies on confidence and its reputation.
Fund management in Scotland encompasses a broad mix of large institutional companies and smaller boutique firms that provide investment services to institutional and personal clients around the world. The quality of investment management expertise in Scotland has led to a robust growth in boutique firms and new business start-ups. We have also become a major European centre for asset servicing.
Looking forward, Scottish Government analysis shows that a hard Brexit threatens to cost our economy £12.7 billion—£2,300 per person—a year by 2030, compared with what would happen if we remained in the EU. The UK Government’s analysis is that reverting to World Trade Organisation rules could reduce growth by 8%; that a free trade agreement with the EU would reduce growth by 5%; and that membership of the European Economic Area would reduce growth by 2%.
The EU is the largest single market for Scotland’s international exports—in 2016, Scottish exports to the EU were worth £12.7 billion. The Fraser of Allander Institute estimates that 134,000 Scottish jobs are supported by EU trade. Last week, a report for Citibase, a service provider to small and medium-sized enterprises, found that 63% of Scotland’s SMEs would like to reverse the Brexit process and remain in the single market. That report also found that just 14% of Scotland’s SMEs trusted the UK Government to get a good deal on Brexit. Steve Jude, the chief executive officer of Citibase, has said:
“The message is clear. Scottish confidence in the Westminster Government to secure a good deal for them is at an all-time low, with most SMEs wanting to press the reset button on the entire process.”
The Government should take on board those concerns, because we do not have to leave the EU. Yes, the EU referendum produced a UK-wide result, but there was no mandate for leaving the customs union and the single market, and we must think very carefully about the potential damage that leaving the EU would do to our economy, which would hurt all of us and all of our constituents.
The hon. Members for Chelmsford and for North East Derbyshire (Lee Rowley) mentioned bank closures, which are of huge concern to our constituents right across the country. That is particularly true for RBS, in which the Government have the leading share. We own RBS and we should be telling it that it is unacceptable to renege on the trust we have put in it—we helped it to get back on its feet—by whipping away services to our communities. We have heard Members from across this House—not just Scottish National party Members but Conservative Members—criticising RBS for saying that it would provide banking services and send its vans around before pulling back on that as well. RBS has reneged not once but twice. RBS has provided a limited service, which are the bank vans it sends around. Those vans do not have disabled access, which has led to people being served in car parks in the wind, rain and all weathers. That is a ridiculous situation and the Government should do more to put pressure on RBS.
The hon. Member for North East Derbyshire mentioned the idea, which has a lot of merit, of a shared service point for bank branches. Banks should come together to see what they can do collaboratively so that their customers are not left with nothing. I know people from other parties have mentioned that idea. It definitely has merit.
Hon. Members have mentioned on the record dirty money, the importance of clamping down on money laundering and the SNP position on the scandal of Scottish limited partnerships being used for money laundering. I hope there will be progress on tackling SLPs and addressing their lack of accountability. We have tabled amendments to the Sanctions and Anti-Money Laundering Bill to that end, but if the Government are not going to take them on board, as I had hoped they would, I hope they will bring something else forward soon so that we can deal with that.
The major issue that prevents a clampdown on money laundering is the Companies House loophole. I have mentioned that to the Economic Secretary to the Treasury before—he has heard my views on it. Just recently, we had the strange case of the businessman Kevin Brewer, who fully admitted what he was trying to do in testing the Companies House loophole. However, he was fined and found guilty of crimes related to money laundering when all he was trying to do was to prove that the system was absolutely defunct and open to all kinds of corruption.
The Government have hailed the prosecution of Kevin Brewer, but all they have done in this case is to shoot the messenger. This man was deliberately trying to do something—he told the people he involved in this activity exactly what he was going to do. There has been a clampdown on this person but there is no clampdown on the many hundreds of people—at least—who abuse the Companies House loophole by paying their £12 to register a company with no checks whatsoever by Companies House as to the veracity of that person.
If someone applies for any other Government service such as a passport or a form to do their tax returns, they have to go through the Government’s Verify system. This situation is allowing people to set up companies with no checks on them whatsoever. It is wide open to money laundering and corruption. The Government need to take heed of that and take action.
The hon. Member for North East Derbyshire said the EU was “playing politics”. I found that comment slightly bizarre, because it is playing politics that has got us into this situation in the first place. A weak Tory Government, pandering to its Back Benchers, led us into the EU referendum and to the calamitous situation we are in. If anyone is playing politics, it is the Conservative party, and we need to get a lot more serious than playing politics because there is so much at stake.
The hon. Gentleman also mentioned innovation within financial services. That is an area where the UK has taken a great lead. I was on holiday in the US recently, over the Easter period. I found it astonishing that US companies do not even have chip and pin, never mind contactless payment, for their financial transactions. In this building and in other buildings in the UK, we are used to being able just to tap our cards to make a payment, so I found it bizarre to be given a slip of paper to sign. US companies find our position unusual, whereby we can just tap something and pay with our phone or a card. There is an interesting contrast between where we are and where they are in terms of technology—there are huge advances coming along in financial technology and other areas.
Hopefully, if we get any kind of Brexit deal right, FinTech will continue to blossom. Staying within the single market and the customs union gives us the best possible chance of using and developing our expertise and making it sellable to the rest of the world through the EU, which of course has a huge customer base.
I will close my remarks by saying that the problems within the financial sector are clear with regard to the EU and Brexit. The sector has made clear the difficulties that are arising, and the impact that those difficulties will have on jobs and on our economy, but we are coming up very close to the date when we will leave the EU, and the solutions are not there. The transition period will give only a little extra time for that process and does not give the reassurance required.
We need solutions from this Government and we need them soon. We need a White Paper and solutions that will make a difference to companies and give them reassurance before they decide that they will just take flight, and take with them so many jobs and so much else that they give to the UK economy.
Thank you very much, Sir David, for calling me; it is always a pleasure to spend some time on a Thursday afternoon with you in the Chair.
I begin by congratulating the hon. Member for Chelmsford (Vicky Ford) on securing this debate and on her very fine speech to introduce the subject that we are debating. Indeed, I have enjoyed listening not only to her speech, but to those of the hon. Members for North East Derbyshire (Lee Rowley) and for Glasgow Central (Alison Thewliss).
All speeches on this subject and this sector begin by talking about how hugely important financial services are to the UK, which is absolutely correct. Such speeches always begin by talking about the role that the sector plays in employment and in the number of jobs in the UK, and it is always good to hear that about two thirds of jobs in financial services are based outside London and the south-east. We always rightly mention the huge amounts of revenue that the sector generates for the Exchequer, but the caveat I always put on both those things—we all need to recognise this danger—is that when we mention such arguments in this place, the public hears something slightly different. They hear us almost saying that we have struck a grand bargain with finance; that we somehow tolerate people doing things that the public thinks are risky or perhaps dangerous because they provide half the budget for the NHS. To me, that is not the message we want to get across to the British public.
We need to get across to the British public a much greater sense of what the sector does for them as consumers and what it does for the country. We need to explain that if we have an ageing population and we want to be able to live in retirement with good pension products, that requires an effective asset management industry. If we want our businesses to be successful, that requires an effective system of finance for business. If we want to solve the housing crisis, that requires a robust mortgage market. I have even tried to push with some Front-Bench colleagues that insurance is a socialist industry: it is about pooling the risks everyone in society faces in a way that shares the burden equitably.
To Labour, it is clear that finance plays a major role in the economy. We want to work in partnership with financial services to deliver the kind of policies we think this country needs. We held a major financial services conference in Bloomberg Europe last Thursday that was addressed by the shadow Chancellor. We went through many of the issues that the sector needs to look at and how we feel we can work with them. I put a slight caveat on that: The Daily Telegraph on 25 March reported me as saying that I believe bankers are a public good, but that is not quite what I said. I said that good financial services are a public good. It tells us something about how the sector is sometimes viewed in public that a Member of Parliament saying that good pension products, good mortgage products and good insurance products are a public good could be reported with some degree of controversy.
Many of the speeches we have heard have rightly highlighted Brexit as the major issue facing the sector, which is extremely correct. I will start with some analysis of that. There is no doubt that Brexit poses enormous challenges to financial services. As well as my concerns about the impact on manufacturing and supply chains, one reason I voted remain related to market access for financial services. The situation we see today is difficult. It is fair to say that the sector is losing hope that it will ever get the certainty it needs to avoid the contingency plans it has been forced to consider.
The hon. Member for Glasgow Central talked about the difference between passporting and equivalence. Her analysis of those two things was correct, but I have to say that neither is available to us. Passporting would only be possible through some sort of continued membership of the single market, and I do not think that is likely. She was right to say, however, that equivalence on its own will simply not give us what we need. The only model in town is one of mutual regulatory recognition. That is hard to deliver, but there is certainly a mutual interest to be found there. In the short term, there is a major threat to financial stability if it does not go ahead.
The hon. Member for North East Derbyshire talked about the difficulties in repapering contracts if we do not get mutual regulatory recognition. He is right. We have to admit that for such sectors as the insurance industry there simply is not enough time, even if we start today or had started six months ago, to move the quantum of contracts that would need to be novated. We have to recognise that the position we are in today is extremely unfavourable. Much time has been wasted by the Government when frankly they could have cut to the chase a lot faster.
To do such a deal is clearly not easy—I recognise that and the burden placed on the Treasury to try to get to that point—but it is also true to say that we have never had a trade negotiation where two countries are aligned and they are moving further apart through the process. From talking to industry, my analysis is that what the EU wants to know more than anything else is whether we seek continued alignment or whether we seek to break off and go in a different direction. It is not getting a clear message from the Government on what the future is. We have heard the Prime Minister say that we will remain aligned, but with the autonomy to move away in the future. That is not the unequivocal message we need to give. We need to spell out clearly that we want to continue, not with the political integration of the European Union, but with the economic integration that has been so successful for financial services in this country. Once we give the EU that signal, there will clearly be questions on the method of alignment we would continue with, the jurisdiction we would seek to govern that future relationship and—perhaps the most difficult of those questions—how we would manage the full freedoms and impact on immigration policy of that relationship, but it has got to be possible.
We also have to understand—I think the hon. Member for Glasgow Central said this—that it is not the EU playing politics if it puts a negotiating position to us. It is clear that there is a threat to jobs and revenue in this country from the Brexit process. We cannot be surprised if other countries enviously eye up parts of our successful sector that they would like to move to their countries. The big threat to jobs in London and the rest of the country is not other parts of the EU, but Singapore and New York. If we are being honest, if the German economy had made a decision akin to the one we are making with Brexit, would we look at parts of their car industry and wonder whether we could take some of that business for ourselves? I think quite reasonably we would. We see that most of all in questions around delegated portfolio management and asset management—essentially the right to manage in this country assets and wealth held overseas. That should not necessarily in itself be an issue of leaving the European Union, but it clearly underpins a large ecosystem in financial services. Some countries will look at that and say, “If we can pull that thread, ultimately that will lead to a relocation of jobs and higher value sectors to our economy.” It is difficult.
People say all the time—certainly the more Brexiteer MPs—that financial services in the City will adjust to Brexit. Of course they will. We are the world-leading financial sector; it will not disappear overnight. The key issue has to be the cost of that adjustment. If it is 10% of the economic activity of financial services in the UK, that is an extremely painful place for us to get to. We would not want to be in that position.
A key point that needs making in establishing what that future relationship will be is that there is absolutely no appetite from financial services in this country for some sort of regulatory bonfire. There is a desire for stability, but there is nothing that I receive regularly that says people want to unpin the post-financial crisis settlement or that says they see a future for the UK undercutting the rest of the EU regulation. The opposite is true. Good regulation attracts business activity to the UK, among other things. We should always seek to cherish and continue our reputation as a first-rate regulator.
The issue of trust in financial services comes up a lot, and many speeches have referenced it. A quote I like to give when I am in the City doing roundtables or making speeches comes from a fellow Member of this House, and it is indicative of where the debate is. It is not a famous quote, but I like to use it. The Member said that
“in our country, far too often the rewards have gone not to risk-takers and job creators but to insiders in our financial system and big businesses who have rigged the market in their interests”.
I read that out, and people think that must be a comment from the Leader of the Opposition or the shadow Chancellor. It is actually a quote from the Secretary of State for Environment, Food and Rural Affairs. He said that on the day he launched his campaign to be leader of the Conservative party. It reflects how many people feel about the financial sector. We have to recognise that an event such as the financial crisis has a huge impact on trust and how people feel when they talk about financial services.
Some of that is a reflection on how the past 10 years have been for many people. They have been very tough years for many in my constituency. The relative positions of capital and labour have fared differently. We have had quantitative easing, which even the Prime Minister has said has clearly had an impact on those already with assets. Labour has faced a flatlining of wages for 10 years and a public sector pay cap. It will be difficult. The hon. Member for North East Derbyshire asked when we will move on from that. We will start to move on from it, although I have a constituent who refuses to vote for me because he is still angry about Howard Wilson’s devaluation of the pound in 1967, so these things can have a considerable shelf life. We will begin to move away to a more positive feeling in the country about financial services, but only if we give people a greater understanding of what the sector is doing for them.
I do not like and have never liked the sense in this debate that we have the real economy over here and financial services doing something different over there. That in no way reflects the complexity of the British economy or what is going on, but I can understand that sentiment among the public. For many, investment banking looks akin to something not that far from gambling. When I talk to constituents about the financial crisis and explain a collateralised debt obligation, they cannot believe that that was the basis on which the global financial system essentially fell apart.
As the hon. Member for Chelmsford said, what happened with the Royal Bank of Scotland and the Global Restructuring Group was not defensible economically, politically or morally. Not only were businesses fundamentally let down, but in some cases people’s financiers and bankers personally benefited from buying the assets that they had put into distress. We must understand that that will generate legitimate anger, and how we politicians respond to that will be crucial to people’s ability to move on. A call for a full public inquiry into events such as those that happened with GRG is the right way forward.
It is fair to say that the next Labour Government will be more interventionist in financial services, and that this Conservative Government have been more interventionist than previous ones. We have to learn the lessons of the past. We have to tell the public, and make them understand, that we are not complacent about the risks, and we are not beholden to finance in the sense that we are unable to properly regulate it because we do not appreciate the full scale of those risks.
We cannot be complacent about regional inequality or productivity, and the finance sector can provide some of the answers. The Opposition have talked about a strategic investment board to look at where finance is investing in the economy. We have talked about a national investment bank, akin to the German model, working with private lenders to secure access to businesses. There is an exciting agenda on transparency, greater stewardship of assets, and incentivising long-term investment over short-term decision making, for which there is a lot of support on both sides of the House.
It was particularly good to hear some talk about financial inclusion. I think I have said to the Minister before that I find it fascinating how we have both a world-leading financial sector and so many people who are victims of significant financial exclusion. Our financial resilience in this country is insufficient; many people have effectively less than £100 to fall back on when times are tough. No matter what we think of the Government’s economic policies over the last eight years, the big change for us all as constituency MPs has been seeing debt become much more an issue of people managing their monthly living costs, and less about the purchase of a car, or a “white good”, as they were called.
How we respond to that in the policies that we pursue is crucial. The Opposition have talked about extending the Financial Conduct Authority’s credit card market report to deal with those people who are in the most difficult circumstances, effectively living off their credit cards every month with no hope of paying the money back. That requires an intervention. We support, as I know the Minister does, the breathing space scheme. We believe that public sector debts such as council tax have to be included in that to make it effective.
The hon. Member for North East Derbyshire rightly mentioned bank branch closures. Clearly, there is a big transition through technology to things such as online banking, but the scale at which that happens has to be of interest to us. I think RBS is to close 50% of all its branches in the south-west of England. That seems an enormous change overnight—I would be very concerned if I was an MP for that region.
The impact of technology will undoubtedly lead to a period of radical change in financial services over the next few years, but it could also be one of tremendous benefit. I agree that things such as open banking, where people might be able to separate out their overdrafts from their current accounts, could lead to much better deals for consumers.
Big data, and access to big data, could change the access to finance that many people enjoy, because risk is fundamentally about information. If we can get better information on people and offer them better financial products, that could benefit us all. The danger is that financial services for consumers end up being akin to what we have in the energy market: a small set of consumers getting good deals because they are savvy and use technology to their benefit, while a large group of people get poor deals, used to subsidise the people who are savvy. That leads to resentment and, frankly, to the kinds of interventions that both sides of the House have proposed in the energy market. We have to avoid that.
My final point is on dirty money and transparency—again, an issue where there is huge agreement on both sides of the House. I think the motivation is there in the Government—perhaps the Minister could reference that in his remarks—as well as among the Opposition, but two policies are key. First, we must finally introduce a public register showing where beneficial ownership of UK property lies. That policy was very much associated with the former Prime Minister, and appears to have been lost somewhat since he left.
Secondly—this is more contentious—we need a public register of beneficial ownership in the Crown dependencies and overseas territories, by Order in Council if necessary. It is no good having the finest and most robust money laundering policies in place in the UK if people can register a company in a Crown dependency, and access all the things that they associate with this country, without the same level of transparency. That will simply lead to the migration of company and property registrations to other parts of the world within the British umbrella.
We should be proud of our financial services sector, not just for its economic contribution but for the benefits it brings in helping us to manage our day-to-day lives. It is incumbent on us all to ensure that the sector is fit for every type of consumer, and that vulnerable people do not fall through the gaps. We need a sector that is at the cutting edge of technological change, but using that change to meet the diverse needs of its customer base. Most of all, we need to offer some certainty, and continued market access, through the final Brexit negotiations. The more clarity the Minister can give us on that, the better for us all.
It is a pleasure to serve under your chairmanship, Sir David. I congratulate my hon. Friend the Member for Chelmsford (Vicky Ford) on securing the debate, and my hon. Friend the Member for North East Derbyshire (Lee Rowley) and the hon. Members for Glasgow Central (Alison Thewliss) and for Stalybridge and Hyde (Jonathan Reynolds) on their contributions.
We have had a very well-informed discussion of a wide range of financial services issues. It felt as if every discussion I have had over the last three and a half months as a Minister has been put under scrutiny. I will try to respond to all the points raised. I acknowledge the deep knowledge and experience of my hon. Friend the Member for Chelmsford, in both her work in financial services, infrastructure and project financing and, more recently, her work as a Member of the European Parliament, particularly on the Committee on Economic and Monetary Affairs.
Before I get into the substance of the issues, it would be useful to acknowledge that today’s debate is occurring not in a vacuum, but in the context of a strong and resilient economy. GDP growth has remained solid at 1.8% in 2017, extending the period of continuous growth to five years. That is higher than the 1.5% forecast at the autumn Budget. The UK economy has beaten expectations, and the Treasury and the Government will continue to set ourselves the mission to beat the forecasts. As Economic Secretary to the Treasury, I am committed, along with my Treasury officials, to ensuring that the financial services industry retains its place on the mantel as a beacon of prosperity for this country.
As I continue to tell industry and my colleagues in Government, financial services constitute the plumbing of this country’s economy. We do not want to be reticent about describing and applauding that. Financial services, as others have mentioned, represent 12% of total UK economic output, and the industry contributed £72.1 billion to the Exchequer in 2016-17—11% of total Government tax receipts. It is a critical industry for our nation.
As others have also mentioned, more than 1 million people are employed in the financial and insurance sector in the UK. Some 63% of those jobs are outside London, with 52% outside London and the south-east. That includes 98,000 in the north-west, and 87,000 in Scotland—including, I understand, that of the spouse of the hon. Member for Glasgow Central. Those figures represent the livelihoods of people up and down this country and, as the hon. Lady pointed out, they represent a multitude of jobs beyond the square mile. As I often point out, there is a whole ecosystem of support services and economic activity related to financial services. Bank tellers, mortgage brokers, salespeople, and IT staff form the backbone of this industry in the UK.
The Government’s approach to financial services is based on ensuring that the sector does what it should: effectively channelling savings and capital flows into productive investment to allow the real economy to manage financial risk, take advantage of commercial opportunities, and boost economic prosperity up, down and across the country.
Our historical success has been based on being the most open and dynamic financial hub in the world and having the deftness to continuously innovate and adapt, but there is no room for complacency. We cannot and will not rest on our laurels. The success of financial services has helped elevate the UK to the status of a post-industrial economy. My hon. Friend the Member for Chelmsford made reference to the industrial strategy, which was launched in November 2017 to prepare the whole UK economy for the future. We are taking action across a range of sectors. We published an investment management strategy. I look forward to responding to the recommendations of the green finance taskforce, which reported in March. We are poised to continue to be leaders in innovating in these sectors, to capture the value of innovation, capitalise on all opportunities and speed prosperity to all regions of the United Kingdom.
Close alignment between our financial sector and other parts of the economy is therefore crucial to the success of our industrial strategy. Financial services is a high-growth, high-tech driver of the UK economy and we are working to ensure that, in the face of rapid change, the UK remains the No. 1 place in the world to conduct financial services business. We are fully committed to that mandate, as demonstrated in the announcement of our FinTech sector strategy last month, which is intentionally aligned with and complementary to our industrial strategy.
I want to run through current Government thinking on the regulation of financial services, which is key to how the sector will thrive in a post-Brexit Britain. I also want to reassure hon. Members that the changes required to the financial services regulatory framework following our exit from the EU are an integral part of the Treasury’s exit planning. The Government are listening to the views of industry—the International Regulatory Strategy Group was mentioned—and of course to those across Parliament. I look forward to further work with my Treasury colleagues on financial services regulation as we prepare for our departure from the European Union.
Following the financial crisis 10 years ago, the Government introduced necessary changes to seek to restore public trust in financial services. I recognise that that has been a long and difficult process, but we continue to attract international commendation for the robustness of our regulatory and prudential systems. In the last round of the Financial Sector Assessment Program, the International Monetary Fund found that the UK was fully compliant on the 19 Basel core principles for effective banking supervision. Only France and Switzerland are able to match that. A decade on from the crisis, we should never lose sight of the principal purpose of the regulatory and supervisory regimes: to ensure financial stability and protect taxpayers from having to step in to deal with failure. The key lesson from the financial crisis has been cross-border co-operation, not a global race to the bottom or destabilising protectionism.
That thinking extends to our approach to Brexit. It is crucial that our exit from the EU is smooth and orderly. As my hon. Friend the Member for Chelmsford said, we made a big step forward in agreeing the legal text on an implementation period, which will keep market access on existing terms for firms and consumers. In December, the Government said that, if necessary, we will legislate to ensure that the contractual obligations she mentioned continue to be met, which will benefit millions of UK consumers who have insurance policies from EU firms. It is in the interests of the EU to take similar measures for UK firms serving EU customers, and we continue to encourage co-operation between regulators. We are working on that active dialogue all the time.
It defies logic that a loose relationship with the UK would give the EU the depth of co-operation necessary for a market as close as the UK, and vice versa. That means—I want to be crystal clear—that we do not intend to rip up the rule book after exit. When I hear echoes that there should be a bonfire of financial services regulation post-exit, or a race to the bottom, nothing could be further from the truth.
On 7 March, the Chancellor set out a vision for our future relationship in financial services in what has been called his HSBC speech. The hon. Member for Glasgow Central asked about that vision. It was a thorough analysis of the challenge and the opportunity and the need to prioritise financial stability, and argued for a deal that preserves the mutual benefits of the sector. Neither the UK or EU should be under any illusion about the significant additional costs that would be borne by Europe’s businesses and consumers if this highly efficient market were to fragment. It is a complex ecosystem that serves the UK and the EU. Oliver Wyman calculates that the wholesale banking industry would need to find $30 billion to $50 billion of extra capital if new regulatory barriers forced fragmentation of firms’ balance sheets.
To echo the Chancellor, the major winners from fragmentation would not—despite what President Macron suggests—be Paris or Frankfurt, Dublin or Luxembourg, but New York, Singapore or Hong Kong. That point was made by the hon. Member for Stalybridge and Hyde.
I agree entirely with the Minister’s analysis but he would surely recognise that the transition period can come into play only if the Northern Irish issue is solved. The only way to solve the Northern Ireland issue is with a customs union, and the only way to solve where the country is on that is to let the House of Commons vote on it. Does the Minister know whether the Trade Bill will come back to the House at any point in the near future to give the it the chance to resolve the issue and get the benefits he is describing?
The hon. Gentleman has made a valiant attempt to try to draw out from me something over which, as he is probably very aware, I have little control. I do share with him an appreciation of the centrality of financial services in the City of London and we have a shared understanding that, if the EU does not come to a place of understanding about City of London financial services, it would leave Europe a lot less competitive.
To address that, the Chancellor set out what our future regulatory framework should look like, underpinned by three things: a binding dialogue for regulatory requirements, supervisory co-operation arrangements that are reciprocal and reliable, and an independent arbitration mechanism to provide durable dispute resolution. That is clear. It is complex, but necessarily so, given what we are dealing with.
Reaching such an agreement with the EU need not be a challenging objective because the status quo is an unbeatable precedent to work from. Our markets are already deeply interconnected; our rule books are identical; and our mutual commitment to world-leading standards is unbeatable. The EU itself has challenged the notion that financial services cannot be addressed in trade negotiations, as evidenced in its approach to creating a deep bilateral framework with the US in the Transatlantic Trade and Investment Partnership negotiations. In those negotiations, the EU pitched a relationship based on mutual recognition of regulations and a unique dialogue on aligning future rule-making. TTIP is a precedent for the approach that we wish to take with the EU. It is in neither the UK’s nor the EU’s interest to exclude financial services from the future relationship.
The UK is clear that there are limitations to how much either of us can achieve unilaterally. The reality is that the European Council and European Parliament have now formally recognised the need to address the terms of market access in financial services between the UK and the EU, so we need to come to the table and discuss it further.
Myriad financial services on which businesses rely to reduce their costs are derived from or pass through, or are linked to, the UK market. Businesses also reap the benefits of the savings and capital flows to consumers across the continent. Those flows untap greater financial prospects for a broad range of people and allow them to access new products and services, such as innovative investment opportunities, tailored and appropriate debt products, and technology-driven solutions such as open banking.
My hon. Friend the Member for North East Derbyshire talked about shared services in the context of the challenges relating to bank closures. The only inhibitor to that is the banks themselves—there is no restriction on finding a shared venue. I know from my conversations with banks in my constituency that phenomenal changes are going on in the age profile of bank users. Just before the Easter recess, I took the opportunity to visit different banking environments and a mobile banking facility in Derbyshire. I was very impressed with what I saw. It happened to be a Lloyds mobile bank, and it came to the village twice a week at the same time. It had disabled facilities. Of course, we all want to retain that certainty about the bank network, but that is not possible because it is a commercial decision. I am in active dialogue with a range of banks, as we all are as constituency MPs, and I know that these are difficult decisions. I commend my hon. Friend’s suggestion, and I raise it actively when I meet representatives of banks.
On bank branch closures, I too commend the suggestion about bringing together many banks to operate out of the same premises, although that could be difficult to achieve. People have raised with me the issue of depositing cash. The people who run the church or school fête tend to have large quantities of small denominations of cash. Is there more we can do to ensure that the Post Office offers that service?
UK Finance and the Post Office have come to a new understanding about how the Post Office’s services are made available if the last bank leaves a town or community. In 99% of cases, the services that an individual non-business customer would wish to use are accessible in post offices. There are some limits—this needs to be checked, but I am pretty sure it is £2,000 in cash—but alternative arrangements can be made if necessary. Although I accept that in some cases there is a cultural barrier to the widespread use of post offices, there is no functional reason why they cannot provide the vast majority—99%—of the services that most consumers and 95% of small businesses want. I urge my hon. Friend to look into those options and make that clear to her constituents.
On business customers, does the Minister agree that the closure of bank branches in rural areas means that staff have to cover longer distances, in some cases carrying large sums of cash backwards and forwards? Has he raised with banks the concern that carrying money around in that way can put people at risk?
I thank the hon. Lady for that point. I do not believe I have made that point to the head of a bank yet, but it is certainly something I would be happy to take up, particularly given the rurality of some communities.
Let me move back to my script. The industry in the UK has matured and developed in the UK as a creator of wealth for a broad spectrum of people across the world. Firms based in the UK do business with and have exposure to jurisdictions across the globe. We need to ensure that investors and banks from across the world can continue to come together to meet and transact, which means embracing the exciting commercial opportunities that will define international capital markets over the coming decades. The UK already has world-leading positions in the markets of the future, including FinTech, for which we have developed what we call FinTech bridges to other jurisdictions—most recently Australia. We are world leaders in green and sustainable finance, and in rupee and renminbi products, and we are committed to strengthening that position further. That also means expanding our bilateral relationships with key partners around the globe, which includes our economic and financial dialogues with China, India, Brazil, Korea, Hong Kong, Singapore and Japan. There are enormous growth opportunities for the future.
Our new financial regulatory working group with the US, launched last week, cemented the already strong and deep relationship between the UK and US regulators. All of that will increase our financial co-operation with priority overseas markets and further establish the UK as the partner of choice for financial services.
As has been made clear, the significance of financial services to this country’s economy cannot be understated. It has propelled the UK to greater heights and its people to greater prosperity. I thank all hon. Members who have contributed to this very useful discussion, which has highlighted to me what a privilege it is to represent these interests in Government. Beyond Brexit, the Government are committed to creating the right environment so that this industry can continue to thrive.
I thank hon. Members for their contributions. Many times since joining this place, I have heard hon. Members take very angry and aggressive positions in opposition to each other. It is good, on this calm and quiet Thursday afternoon, to hear hon. Members speaking in support of the financial sector, and about their pride in it and in the way the people who work in it and in the related professional sector use those services and their careers to support customers and the wider economy.
I want to pick up a couple of small issues. The Minister stated clearly that Britain does not want a bonfire of regulation; our aim is to continue to be a benchmark of good regulation across the globe. I absolutely support that aim, and I think it is important that we continue to say that again and again.
The Minister also made the very clear point that, from the British point of view, we want to give certainty in the Brexit negotiations to businesses and consumers on this side of the channel that they will not face disruption. We want to ensure that their contracts continue to be recognised during the transition and beyond, and we need those on the other side of the channel to give the same level of certainty.
I am going to make terrible mistakes if I try to name everybody’s constituencies—
The hon. Member for Glasgow Central (Alison Thewliss) said she is extremely concerned about how soon we can give certainty in the EU negotiations. There are two sides to giving certainty. The Government’s statements—especially the detailed HSBC Canary Wharf speech—contain a huge amount of detail about the need for ongoing co-operation. The EU negotiators have also talked about wanting to have super-equivalence, and that is helpful, but we have not seen the same level of detail. It needs to come from both sides.
In my experience of many years of EU negotiations, having a seat at the table was sometimes helpful—that will be missed—but there were other times when it was a challenge. The financial services industry is much more important to our economy than it is to that of many other countries, although it does support them, but that left us with different exposures. That is why we did not want to have an identical approach to solve certain issues; the approach of maximum harmonisation—one size fits all—that we increasingly see across the single market is very challenging.
The hon. Member for Stalybridge and Hyde (Johnathan Reynolds) spoke about needing to confirm whether we are going to align. To me, that sometimes means having a completely identical approach, which can be a challenge. One thing I learned from my time in European politics is that there are times when the EU recognises equivalence, but without that being identical. I particularly look at the way in which we treated the bank sector. When we introduced our bank levy, the rest of Europe, particularly within the eurozone, had the funded deposit guarantee system. There were two different ways to solve the same issue to make sure that funds were set aside in case there was failure, but they are both built into the legislation.
My point was not around the specifics of regulations; it is a question of economic models and the partnership we seek with the European Union. We have to try to move the negotiations forward. We have to give them an unequivocal sign of what our future intentions are, or we simply will not get the progress that we need. We are already way behind where we need to be. The point around equivalence is simply this: yes, that model will work, but it must have legal certainty. Without that certainty we will have the migration of business.
On legal certainty, I completely agree. It is only five or six stops on the Jubilee line to get to Canary Wharf, so I took the bother to go and listen to every single word that was said in that speech. I wish more Members from this House had bothered to go and listen to it and to speak to the industry players who were there afterwards, because it went into detail and addressed very important things—especially how one was going to co-operate with the colleges of supervisors that have been set up on a bank-by-bank basis. Speaking to the individuals who are responsible for the regulatory functions within their own institutions and getting that level of detail was welcome. It is not fair to criticise only the British side of the negotiations for not giving enough detail—the British side has given significant detail.
Maintaining ongoing co-operation, dialogue and exchange of information is key in building regulatory trust. Let us not forget that £45 billion of taxpayers’ money had to be spent bailing out RBS; we had to bail out branches of not just the British bank but the Dutch and Irish bank because there was no legal mechanism for a cross-border reorganisation of a bank in crisis. That has been resolved, and part of the way it has been resolved is by having that ongoing dialogue that brings together the British regulators with the Dutch and the Irish. The very clear message from the Chancellor that he wanted to continue to be part of that should be welcomed. It is not as simple as saying we need alignment to give legal certainty. From the contributions that I had from organisations prior to this debate, the calls are for more legal certainty to be given from the other side of the negotiation table.
I thank Members for the many suggestions on how to deal with the issue of branch closures. There are clearly different problems in different parts of the country. As I said, my part of the country is an urban area—a city—and because we are seeing a change towards digital banking, there is less demand for physical banking, so we need to manage that transition.
I thank my hon. Friend the Member for North East Derbyshire (Lee Rowley), who made fantastic points so eloquently about the future of financial services, reminding us that we need to look forward to what sorts of services we want come 2028 and beyond. The actions that we take are absolutely key. Unlocking some of the benefits of the digital age, but also making sure there is perhaps some friction in the system so that we can put protections in for consumers, is definitely one of the actions I want to continue focusing on after this debate. I think that will help to protect people from cyber-attacks on their bank accounts.
It is absolutely vital that we continue to champion these industries, to support the people who work in them and to work with other parts of the world. I completely welcome the comments that the Minister made about setting up the regulatory working group with the United States and other parts of the world, and I wish him great success. Let us pick up the specific issues that have been addressed by Members here to make sure that we make targeted interventions where we can to help the industry, the people who work in it and the very many of our constituents who are, at the end of the day, consumers of these services and rely on them. Thank you, Sir David, for this wonderful afternoon.
Question put and agreed to.
That this House has considered the financial services and the impact on the UK economy.