Skip to main content

Brexit: The Future of Financial Regulation and Supervision (European Union Committee Report)

Volume 791: debated on Wednesday 6 June 2018

Motion to Take Note

Moved by

That this House takes note of the Report from the European Union Committee Brexit: The Future of Financial Regulation and Supervision (11th Report, HL Paper 66).

My Lords, on behalf of the EU Sub-Committee on Financial Affairs, I am delighted to introduce this EU Committee report, Brexit: The Future of Financial Regulation and Supervision. Our inquiry was undertaken between September and December 2017, and subsequently, four members have left the committee. They are the noble Lords, Lord Haskins, Lord Skidelsky, Lord Woolmer and Lord Fraser of Corriegarth. I wish to acknowledge their contribution to this inquiry and to the overall work of the committee.

The already small secretariat of our committee became smaller during the course of the inquiry, but we were served by an outstanding policy analyst, Dr Holly Snaith, who left us for the Bank of England. However, we did a nearly direct swap, as we were joined in turn by Matthew Manning, the current clerk to the committee, who is with us today. We are enormously grateful to them both for their work on this report, particularly in light of the challenging circumstances in which the committee has operated in the last seven or eight months.

As noble Lords will be aware, the financial services sector is a vital and thriving part of the UK economy, and questions about our access to the single market in financial services are a highly contentious component of discussions about the UK’s future relationship with the EU. In undertaking this inquiry, we were conscious of the position of the United Kingdom as the pre-eminent financial services centre and the threat that Brexit poses to this very special ecosystem. Therefore, in assessing the future of financial services in the UK, regulation and supervision seemed to us to be key. Although we recognise that the UK will start its future relationship with full regulatory alignment, the nature and extent of maintaining that alignment and managing divergence to the extent that it might occur are vital to the UK’s interests.

In our inquiry we heard evidence from a range of academic experts, industry practitioners and the UK regulatory authorities. Given the EU’s decision to designate Michel Barnier as the sole negotiator, we were unable to take evidence from EU institutions directly. However, we are particularly grateful to Brussels-based economic and financial think tanks, which recognise, perhaps more perceptively than the Commission, that dialogue will need to be an essential element of future co-operation and which therefore freely offered us their insights into some of these issues and challenges. I particularly want to put on the record our thanks to the Centre for European Policy Studies, whose CEO, Dr Karel Lannoo, travelled to London to give us evidence—but of course we are grateful to all those who contributed to the inquiry.

Almost immediately, the agreement of a transition period emerged as an urgent priority. We considered the matter to be of such importance that we chose to write to the Chancellor part way through the inquiry, in November 2017, to emphasise that any agreed transition period was, in his own words, a “wasting asset”—in other words, a delayed agreement would be scarcely better than no agreement at all. Andrew Bailey, chief executive of the Financial Conduct Authority, put it even more bluntly when he told us that an agreement needed to be reached “PDQ”. I think that that needs no interpretation. Catherine McGuinness of the City of London Corporation told us that financial services firms need three things: certainty, stability and proportionality for business.

During our inquiry and in the period since, we have repeatedly been promised a White Paper on financial services by, not least, the Secretary of State for Exiting the European Union. It is therefore disappointing that this has yet again been postponed. This is surely a first and, frankly, minimal step towards providing the industry with an indication of what the Government will seek in a future relationship.

Returning to the transition period, we are pleased that the Bank of England has had the foresight to allow firms to plan on the assumption that a temporary permissions regime will be put in place in the event of there being no deal. However, without an equivalent assurance from the EU authorities that UK firms passporting into the EU 27 can plan on the assumption of a withdrawal agreement being in place, it appears that firms based in the UK passporting into other member states are indeed having to plan on a no-deal scenario. So transition offers little, if any, comfort at the moment. This puts firms in the unfortunate position of implementing costly plans that may be economically and strategically irreversible at the point at which any agreement is reached, thereby negating much of the value of such an agreement.

Another important consideration emerged during the inquiry—that of contractual continuity. In many cases, firms have written contracts that may entail liabilities extending potentially for decades. This is a special concern for the insurance industry. For that industry, agreeing a transition period merely postpones the problem. If firms cannot maintain or service their contracts because they are legally prevented from carrying out licensed activity in another member state, individuals and businesses both stand to lose.

Mr Sam Woods, deputy governor of the Bank of England, told us that the maximum penalty for UK firms conducting a regulated activity without a licence under the Financial Services and Markets Act 2000 was a two-year prison sentence or an unlimited fine. As he put it,

“boards may have some appetite for legal risk, but I do not think many are going to have that kind of appetite”.

Contractual continuity is not just a problem for large, cross-border conglomerates. Consumers, pensioners, drivers and travellers all face the risk of being effectively uninsured. Moreover, the problem of how to treat existing cross-border business overall cannot truly be resolved except within the context of an agreement on a future relationship. Otherwise, firms will remain exposed to risks on their books that they might not be able to mitigate on a continuing basis. Mr John McFarlane, chairman of Barclays, was clear that,

“transitioning is most valuable if it is to somewhere worthwhile at the end”.

Our witnesses were also clear that the effects of no agreement on mutual market access would be negative for both the UK and the EU. The UK is, after all, the single biggest provider of financial services to EU member states. The market fragmentation that would result from a loss of access would harm EU businesses and consumers as well as those in the UK. Indeed, market fragmentation will likely increase financial instability, reversing the improvements put in place as a result of the post-crisis regulatory developments of the last decade.

One key finding emphasised by many of our witnesses was the inadequacy of the EU’s current equivalence framework—that the process of granting equivalence status is political and capable of being unilaterally withdrawn by the Commission at very short notice. The recent experience of Switzerland is telling in that regard. Switzerland negotiated over a considerable period for an open-ended equivalence ruling from the Commission similar to that given to Australia and the US. At the 11th hour, it was granted a single year until the end of 2018. The UK’s vast financial services industry, with the plethora of services that it offers, cannot depend on such a tenuous, politically driven and insecure form of access. An agreement to base market access on a bespoke and genuinely mutual equivalence agreement is far preferable.

In that regard, we took evidence from the International Regulatory Strategy Group comprising senior financial services leadership in the United Kingdom. It recommended that the most suitable form of relationship between the UK and the EU was mutual regulatory recognition. We understand that this is now the Government’s own position, which is why we would have wished to have seen some detail on how they expect the negotiation to proceed.

Until it is clear what form of access the UK and EU will agree on, it is impossible to say with any certainty what opportunities will arise for regulators and firms. Many witnesses were keen to emphasise the considerable resources that they had devoted to complying with EU requirements, however onerous they might have been, and were therefore not necessarily in favour of making changes to the regulatory regime post Brexit. That was especially the case where regulatory divergences might endanger market access. Nevertheless, we heard from some witnesses about possibilities to tailor and strengthen the UK’s regulatory framework once we had exited the EU. Those possibilities must be explored against the background of international standards developed by organisations such as the Basel Committee on Banking Supervision and the International Organization of Securities Commissions.

Indeed, the EU’s regulations are to a large extent merely the European implementation of these internationally agreed standards, and the UK has played an outsize role in their development. This has depended on a deep pool of exceptional talent within the UK regulators. As Andrew Bailey pointed out,

“the work that has been done by the G20 and the Financial Stability Board which Mark Carney”

the Governor of the Bank of England—

“chairs, has been fundamental in putting stronger global standards in place”.

As the UK leaves the EU, it must continue to play an active role in these organisations. Can the Minister tell us what conversations he is having with UK regulators to ensure that their pre-eminent role is maintained?

Some areas where change might be targeted include those where the EU has gone beyond international standards. We heard evidence from witnesses such as Mr Stephen Barclay, the now former City Minister, that the EU has done so in applying prudential requirements to all firms, not just the large cross-border institutions that Basel has traditionally focused on. We believe that there is scope to apply a more proportionate and risk-based prudential framework to smaller domestically focused firms. Indeed, this may encourage the competitiveness that has always been the UK’s strength. It may need to be accompanied by a reconsideration of the regulator’s mandate, but that will be dependent on future developments.

The primary instrument of the offshoring process, the withdrawal Bill, has now been debated by this House. The complexities of transposing the aspects of the acquis relevant to financial services into UK law were raised by many witnesses but not really addressed in the Bill. The sheer volume of statutory instruments that will need parliamentary scrutiny is enormous and we await the detail of how that work will be done. This only highlights the importance of finalising a transition period as a no-deal scenario would place enormous burdens on Parliament’s ability to pass the necessary legislation.

There are also questions about the Government’s proposed approach, specifically to financial services. Several witnesses highlighted the inappropriateness of transposing level 1 EU legislation into primary and secondary legislation. Some of the rules are technical and should, we thought, be left for regulators to make, because they possess the necessary expertise to ensure that they are fit for purpose. Amending them at the speed necessary to keep the UK’s framework adaptive and responsive to change is incompatible with the timescale of parliamentary processes.

In conclusion, I want to highlight that a productive and fruitful relationship between the UK and the EU based on mutual market access is to the benefit of both sides. Without this, financial instability will increase and we will jeopardise the UK’s economy, financial stability and global leadership. I beg to move.

My Lords, as a member of the committee I am delighted to follow our chairman, the noble Baroness, Lady Falkner. In doing so, I echo her thanks to our excellent clerk and to our then policy analyst, who sadly is no longer with us. I should also take this opportunity to commend the noble Baroness as our chairman. She has been very effective at chairing us as members and indeed the many witnesses with whom we have engaged over the course of preparing this report.

I want to highlight two important issues raised in the report, both of which were anticipated by the noble Baroness in her speech. They are challenges, but equally they should be seen as opportunities. The first relates to what the final Brexit deal needs to achieve in respect of the future regulation of the financial services sector in the United Kingdom. The challenge as I see it is as follows. Without exception, all the witnesses we heard from, along with the submissions we received, agreed on the continuing need post Brexit for the United Kingdom to have a robust and internationally trusted regulatory framework to promote financial stability and underpin confidence in our financial services sector. Equally, all agreed that the processes of our departure from the EU and the nature of the post-Brexit regulatory arrangements must not compromise the UK’s continued participation with international standards and the globalised financial system that this country has been so instrumental in shaping. Fragmentation should be avoided as it is likely to undermine financial stability and increase costs.

Our witnesses and the evidence also agreed that the UK and the EU should seek a post-Brexit outcome that allows mutual market access in financial services between the UK and the EU 27, underpinned by broad and deep supervisory co-operation between the UK and the EU. At the same time—here lies the challenge—none of our witnesses and none of the evidence submitted could envisage that a post-Brexit outcome based on the EU’s current equivalence framework would be reliable or realistic, as the noble Baroness said. None wanted an outcome that sees the UK as no more than a passive rule-taker, given that aspects of future EU financial regulation may not be appropriate to the needs of either the United Kingdom or the global client base—including customers in the EU 27 served by the UK financial services sector.

Furthermore, our witnesses saw the merit of the United Kingdom having the ability to tailor and evolve the regulatory framework post Brexit as an important opportunity. They saw it as enabling, where appropriate, the UK to improve the design or detail of former EU regulations so that they are more efficient and effective and better aligned with UK circumstances and international standards, better adhere to the UK’s well-developed principles of better regulation and, importantly, are fit for the future in anticipating the regulatory requirements of the fast-developing fintech industry and other areas of innovation.

The challenge is squaring the post-Brexit circle between the United Kingdom’s ability to evolve its own regulatory framework at its own discretion and the parallel need to maintain mutual recognition, trust and market access with the EU. To a number of our witnesses, the challenge can be resolved if the Brexit negotiations are clear-headed and arrive at an arrangement that would serve both UK and EU interests. We summarised this opportunity in the last paragraph of the summary at the start of our report:

“Furthermore, international standards could provide a bridge between the UK and the EU in defining a future relationship based on shared outcomes, rather than the literal interpretation of rulebooks. We believe that a future relationship can be secured that is to the benefit of both the UK and EU, provided that a mutual commitment to effective regulation and supervision is maintained”.

The opportunity to achieve such an eminently satisfactory and desirable relationship should obviously be the objective of the UK Government and our Brexit negotiators. Common sense suggests that it should also be an objective of the EU negotiators. The continuing importance of London and the UK financial services sector to customers and clients across the EU 27 suggests that they should have as much of an incentive to achieve that outcome as us.

Likewise, the second issue I want to raise is both a challenge and an opportunity: whether the United Kingdom has in place the right regulatory architecture and processes, the right checks and balances and the right accountability and parliamentary oversight for financial regulation post Brexit. This question falls not just to the Government and regulators—although they are key in leading the discussion and consideration —but to Parliament, the industry and its stakeholders. Underlying this issue is the need, as we have heard, for the UK to transpose the EU’s body of law relating to financial regulation into UK law. Careful and intelligent judgment is needed on how that transposition is best achieved between primary legislation, secondary legislation, regulators’ rulebooks and binding guidance. As we say in our report:

“The Government will need to adopt a nuanced approach towards the translation of EU regulation into domestic law”.

Flowing from this transposition is the devolution of significant powers from the EU to our domestic regulators, namely the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority. Pre-Brexit, those powers have been defined and overseen by the EC, various EU bodies, a relatively well-resourced European Parliament and a very strong committee structure. Should additional and better-resourced parliamentary oversight be developed in the UK post Brexit to avoid what our report refers to as,

“an unintended deficit in democratic scrutiny and accountability”?

The committee believes the answer to that question is yes and it makes three recommendations in the report to this end. In doing so, it anticipates not only the significant increase in the powers of UK regulators but the need for future changes to financial regulation in the UK to be subject to the appropriate scrutiny. The committee acknowledges that the much greater flexibility that the UK will have post Brexit to revise and reform financial regulation, regulators’ rulebooks and so forth, including regulatory enforcement, is an opportunity that none the less needs the appropriate checks and balances.

The committee was not alone in recognising this need. It was also the conclusion of a recent report from the IRSG—the International Regulatory Strategy Group, which the noble Baroness mentioned—produced with Linklaters in December 2017, just as our committee was finishing its report. At the launch of its report, The Architecture for Regulating Finance after Brexit, the IRSG stated that,

“Brexit will require the UK to update its regulatory structure for financial services, creating new checks and balances to ensure the system remains proportionate, coherent and fit for purpose”.

It is an interesting report. It sets out five principles for an effective regulatory framework and makes some useful recommendations for consideration. These recommendations cover powers, resources, responsibilities, scrutiny and oversight of UK regulators; the legislative and regulatory process; consultation and review mechanisms; and, importantly, it includes proposed checks and balances that should apply where regulatory change in the UK would produce material divergence from the EU 27.

The challenge that both our committee and the IRSG report recognise is that while the current regulatory landscape may have served the UK effectively in a pre-Brexit world, it will need to be reformed to be fit for purpose in a post-Brexit world. However, as the IRSG states in the foreword to its report:

“There is … an opportunity for targeted reform following the UK’s withdrawal from the EU in order to maintain and enhance the UK’s position as an international financial centre underpinned by a trusted and globally leading regulatory system, that delivers the best possible outcomes for customers and clients”.

Updating the United Kingdom’s regulatory landscape in anticipation of Brexit is an opportunity that the Government, regulators, Parliament, the industry and others must be thinking about now. Any necessary reforms ought to be put in place for when they are needed, not thereafter.

My Lords, I too pay tribute to the clerks of the committee and to our distinguished policy adviser, who was so good that she was pinched by one of the people giving evidence to us. That is a sign of the excellence of the background briefing we received. I also pay tribute to the noble Baroness, Lady Falkner of Margravine, for her chairmanship of the committee, her great technical knowledge, her commitment and her discipline in getting us through what is a complex and technical piece of work.

As we have heard from the noble Earl, Lord Lindsay, there are a lot of technical conclusions that have come out of our deliberations. However, it is important to stress that there was unanimity on the committee on the conclusions that we arrived at—cross-party, including the Cross-Benchers—and so the committee did not look at these issues in a partisan way.

Although this is very much a technical piece of work, as I have said, we must not lose sight of the fact that some 1 million people in this country work in the financial services industry. Now, lots of people may think of “financial services” as meaning bankers in Mayfair, but that is not the true picture of British financial services. There are financial services companies throughout the country, certainly in the great historic centres such as in the City and in Edinburgh and, more recently, in Canary Wharf, but there are also thriving financial centres in Glasgow, Leeds, Bristol and other places.

What we are talking about here is not just academic issues of regulation but how we create an industry that will protect, and magnify, those jobs into the future. They are good jobs; they are, by and large, well-paid jobs; and they have become very much a cornerstone of our economy, creating a surplus of £60 billion. I cannot think of any other industry that can create a surplus such as that. As the noble Baroness, Lady Falkner, pointed out, our financial services industry is a global asset, which we must be very careful to protect. It has not happened by accident; it has happened because of innovative ideas, sound regulation and ambition, and we must make sure that we do not destroy that.

I am concerned at the extent to which many of our witnesses, especially those from the industry, exhibited real frustration. There was a sense that no one was listening to them or taking them into their counsels. The decisions that are being taken at the moment will have an impact on the industry, and indeed on the country, for generations to come. We cannot allow a situation to continue where such a key industry feels that it is out in the cold. Any well-run business—and there are some very distinguished businesspeople in your Lordships’ House—can cope with change; in fact, they make their money out of the ability to cope with change. What they cannot cope with is uncertainty, and that is what we have seen again and again.

When we began our inquiry, the business leaders were telling us in public and in private that, if they had some idea of what was going to happen by the autumn, they could start planning. Then we were told it would be by Christmas. And then we were told it would be by the end of March. None of that has happened. Instead, the Prudential Regulation Authority has now asked the major businesses to prepare their plans for the worst possible outcome. Those plans are all done now, and increasingly it is becoming obvious to us that businesses are considering what to do with them. Now, regulated businesses do not have a choice. Regulated businesses have to ensure that they are operating within an environment that is regulatorily sound and where they can continue to do business. Here we are with a real global asset, where we have been global rule setters, and we seem to be in a state of stasis. That is not good enough.

As the noble Baroness pointed out, we were expecting a White Paper, but we have been told that it has been delayed yet again. There is a general White Paper due, but there is also supposed to be a financial services White Paper due. People need these answers, not because they just want to make mischief but because they need them to do their day-to-day work. Crucial decisions need to be taken now, and there seems to be little realisation within the Government—and, indeed, within the Commission as well—about the necessity to ensure that these decisions are taken.

Few people realise the scale and complexity of the issues. I commend the report for going into the scale and complexity involved, much of which I did not know—and I have spent a fair amount of my life kicking about in City circles as a Minister and otherwise. This is complex. The Brexiteers may not like it, but the UK has played a key role, in many cases a pivotal role, in establishing the strength of EU regulation and in putting in place the kinds of structures that allowed us to come through the 2008 financial crisis.

As one of our witnesses, Karel Lannoo of the Centre for European Policy Studies—the noble Baroness has already referred to him—said, the growth of the single market is in almost direct correlation with the growth of the City. It is impossible to overstate the need for the UK to ensure that we continue to have pre-eminence in shaping standards. Both the Chancellor of the Exchequer and the Governor of the Bank of England have said that we must be rule makers and not rule takers. I would love the Minister to explain how we can maintain our role as rule makers. Not only has that been for the good of this country but Britain has been in the lead when it comes to the personnel involved in global negotiations. Global negotiations are even more important than EU negotiations because they set the framework and parameters within which UK companies can trade around the world. I have seen some of our negotiators work in intense international situations. One concern I have is that so much is down to the talent of the people who do that negotiation. We must ensure both that their talent continues to be heard and that we grow the next generation, as this is an issue not just for our generation but for the next one as well. The emphasis must be on good standard-setting and we have to ensure robust democratic accountability.

The noble Earl, Lord Lindsay, talked about the urgent need for us to revisit how we deal with the regulatory and legislative framework as a consequence of our exiting the European Union. It will not be simple; it will be extremely complex. We need to ensure that no one drops the ball between the day we leave and the day we start doing it for ourselves again. We must be rigorous; we must also be competitive.

A seat at the table is essential for all that. I see no indicators that a mechanism has been put in place to ensure that we retain that seat. Sir Jon Cunliffe, an outstanding negotiator of ours over many years and now Deputy Governor of the Bank of England, has said that,

“we need the strongest international governance relationships”.

That needs to be a priority. There are those in the industry who are equally concerned about us losing our international clout. We need to give signals as to where our thoughts are and in what direction we are about to move.

I turn to a slightly more contentious issue. In the past few days we have seen business leaders meeting the Prime Minister and saying that they are losing faith in the handling of Brexit. We cannot afford that to continue. The clock is ticking. We have less than a year until exit day. There is a need for us to come together to ensure an open and credible discussion about where we go from here. The situation that we are in at the moment is tantamount to coming to the edge of a cliff and saying, “Let’s take one step forward”. We cannot afford to do that. International business leaders have already made it clear that they will not invest in Britain as long as Brexit-driven uncertainty exists. I cannot put it any more strongly. The clock is ticking, as I say. I ask the Minister to make representations on our behalf in the strongest possible terms. Whenever the Government responded to our paper they did so in a very positive way and the Minister expressed his satisfaction that a transition period had now been agreed. However, as John McFarlane of Barclays pointed out when he met us, a transition period is of value only if you know what you are transitioning to and how long it is going to take to transition there. All that needs to be sorted out.

A lot of people have great hope for a free trade agreement. There was one recently with Canada. There have been three free trade agreements recently: one with South Korea, one with Ukraine and one with Canada. Only one, with Canada, had any element of financial services in it. It was only a very small reference and, frankly, it is not much better than—in fact, it is not even as good as—what WTO rules would be. There is not a history of including financial services in free trade agreements. We find ourselves in a situation where we have to show our interest and our vigour in ensuring that we remain world leaders. There is no short cut to this. If the Government are not prepared to share with your Lordships’ House or with the wider community where their thoughts are going, please share it with the leaders of the industry, take their advice and listen to what is feasible and possible.

I thoroughly enjoyed working on this report. I became depressed on quite a few occasions, as noble Lords may have gathered, but it is an intensely interesting piece of work. We have all seen our financial services industry take a kicking in the past few years, but there is little doubt that we lead the world in our integrity, our sense of responsibility and our regulation. It is the Government’s job—indeed, it is our job—to ensure that we continue that.

My Lords, I am also a member of the sub-committee and I echo the complimentary opening words of my noble friend Lord Lindsay about those who run us and those who help us. It is the responsibility of the regulators and supervisors to regulate and supervise, so that the financial services markets are safe and fair for those who participate in them and, in particular, for those who rely on them. This is a country with a reputation as a safe place for investors and retail banking customers that predates our membership of the EU. Indeed, as the noble Baronesses, Lady Falkner and Lady Liddell, said, our experts have taken a disproportionately large part in designing the EU regulatory and supervisory framework precisely because of their experience and fine reputation.

I think I can safely say that our meetings with the Bank of England and others did more than enough to convince us that our regulators and supervisors are capable of designing and operating systems to maintain the stability of our financial system and investment markets. However, there is an opportunity here, perhaps in the medium to longer term, for systems which are purpose-designed for the United Kingdom. We would benefit from systems which, while keeping our investors and retail bank customers safe, at the same time avoid a bureaucracy that stifles the appropriate risk-taking we need if we are to benefit from new technology, new opportunities and new potential trading partners.

Our report covered a number of important matters, all of great complexity and all of which require a great deal of work and a co-operative attitude on both sides of the channel to achieve them. I acknowledge that the negotiations under way will need both sides to compromise if we are ultimately to agree. I also acknowledge the issues raised in the debate so far by other noble Lords, but I want to focus on where we discovered scope for the United Kingdom to regulate our financial services sector better and more appropriately than the EU currently regulates it. Both the noble Baroness, Lady Falkner, and my noble friend Lord Lindsay referred to this.

Our report provides examples of where EU regulation and supervision, which of necessity has to cater for widely differing markets, fall short. In paragraph 189, for example, we say:

“Some areas of the EU’s current regulatory framework have proved problematic in the UK context. The EU, according to UK Finance, ‘has always faced the challenge of regulating a market with an exceptionally diverse set of financial services businesses’, resulting in compromise solutions on legislation that are not always coherent when applied to domestic markets. Lloyd’s accordingly concluded that ‘the process of arriving at a level playing field can have disadvantages .... Brexit may, therefore, present an opportunity for the UK to amend its regime in order to make it more fit for purpose’”.

In paragraph 39 we say:

“Furthermore, Professor Moloney stated that by virtue of its decision-making process, the EU’s policies may not always be optimal. One benefit of Brexit may be ‘a breakaway from groupthink about financial regulation. The EU is a monolith and it has big structures designed to produce compromise positions. That is not necessarily good for the global financial governance system’”.

Looking at specific areas of business within financial services, I will take investment management first. In paragraph 35 we say:

“TheCityUK criticised asset segregation rules in the Alternative Investment Fund Manager Directive (AIFMD) and Undertakings for Collective Investment in Transferable Securities (UCITS), and the Short Selling Regulation (SSR) on trading practices, as areas where the EU has taken unwelcome action, commenting that ‘the overlap of these pieces of legislation are a central cause of the reduced liquidity in the market but critically are not based on international standards’”.

On insurance, we say in paragraph 194:

“There are areas of the UK regime that have incorporated EU standards in ways that may have been detrimental to the UK’s domestic market … Julian Adams of Prudential told us: ‘There are a number of aspects of Solvency II that not just the industry but the regulator does not think work appropriately’”.

On fintech, an area where the UK has taken an early lead, in paragraph 42 we mention that the regulatory sandbox had,

“demonstrated the FCA’s greater commitment to flexibility and supporting innovation compared to other regulators”.

In paragraph 209 we say:

“The UK’s innovative approaches to FinTech regulation have served as a model for other regulators. In the words of Charlotte Crosswell, the sandbox ‘has been successfully copied across the world’”.

But in paragraph 43 we say:

“While the UK currently possesses a degree of autonomy in FinTech, which it uses to put in place innovative supervisory practices, there is the potential for EU intervention. Karel Lannoo, Chief Executive of the Centre for European Policy Studies, told us that ‘The EU is now working on a regulatory approach to FinTech. Is it needed?’”.

Turning to the mainstream business of banking itself, in paragraph 32 we say:

“Deloitte’s written evidence argued that the EU’s proposals for the CRD ‘demonstrated a growing willingness to depart from implementing global post-crisis banking rules’, in particular by discounting risk weights derived from the fundamental review of the trading book … by 35% for the first three years of application’. The EMIR review is, as we have noted, a matter of concern for the clearing industry”.

In paragraph 38 we point to some of the risks of membership of the EU:

“The Financial Services Consumer Panel made a related point, suggesting that a ‘weakness of the EU regime has been a lack of consistent supervision across Member States. Regulatory expertise and resources across the EU28 vary greatly’, which in turn ‘creates risks for all consumers and undermines trust in the market, especially for passported products’”.

As we say in paragraph 201:

“The second aspect of the UK’s current regime, as derived from EU regulation, that was cited as problematic was the regulatory treatment of smaller firms operating domestically rather than internationally. As the ICAEW”—

the Institute of Chartered Accountants in England and Wales; I declare an interest as a fellow—

“pointed out, this has been especially problematic in the context of prudential standards, as ‘the approach to bank capital is an area where there have been differences between the international and EU approaches’. They explained: ‘The Basel Accord was originally intended for internationally active diversified banks. In the EU (CRD IV, CRR) we have elected to apply the same Basel rules to all banking and investment firms. The US, in contrast, has not. It applies the Basel rules only to its international banks’”.

It is often said, with truth, that one of the benefits of membership of the EU is that we can influence it from within. But in paragraph 46 we say:

“There have, though, been a few failures of UK influence at the EU level. One of the most notorious concerned remuneration rules in CRD IV, which impose a bonus cap for bankers. Deloitte noted that the UK had opposed this measure, on the grounds that it ‘fails to link risk-taking with variable remuneration, increases fixed pay at banks and consequently makes those banks less able to reduce their salary costs in times of stress, potentially contributing to financial stability risks’”.

In paragraph 186, we also say:

“However, proposals to demand the relocation of systemic CCPs within the eurozone will not achieve the Commission’s objectives of bolstering financial stability”.

While no one should be under any illusions that this is going to be easy, it could in the long term also present opportunities for us. I hope my noble friend the Minister will tell us that the Government intend to grasp these opportunities, to the benefit of businesses in the financial services sector and, in particular, to the benefit of their customers.

My Lords, this is another excellent report from one of our EU sub-committees. It owes a lot to the quality of the clerks, and the quality of the chair and other members of the committee. However, I want to make one central point about the report which greatly worries me. I think it takes for granted the Government’s present commitment to withdraw from the single market and not to seek membership of the European Economic Area. For the City, that will have pretty awful consequences. I do not really agree with the noble Lord, Lord De Mauley, on that.

Let me make three broad points. First, services are our economic future. This is where we have a trade surplus and are very strong. The City has benefited enormously from being the financial centre of the European single market. I am very worried about the way that the debate is going on Brexit. As evidenced by the piece by the noble Lord, Lord Wolfson, in the Financial Times on Monday, the argument is, “Let’s have regulatory alignment in goods but let’s go our own way in services”. This could do grave damage to the service sector in Britain, which I regard as a key part of our economic future. When we had the report on non-financial services, virtually all the people from all the different parts of the service sector—from broadcasting, the law, accounting and architecture—said that the three fundamentals of the single market were fundamental to their business model. They are: the freedom of establishment, which we lose when we leave; the mutual recognition of qualifications, which we may just about manage to hold on to; and, most important of all, free movement of labour, which is absolutely fundamental to service businesses including the City.

My second main point is about the hope that we can negotiate a mutual recognition arrangement through a free trade agreement, which is basically what we will be doing if we are not in the single market. The idea that this is possible is very misplaced. I can tell your Lordships about it in EU terms. I worked in the Commission for three years and the EU will see us as a third country. You cannot have mutual recognition with a third country but that is the position we are putting ourselves in. That is not the EU being dogmatic and difficult but a question of where we have chosen to put ourselves. Think about mutual recognition and the contribution it made to the start of the deepening of the single market—for example, in the Cassis de Dijon decision. That was because people were in a common regulatory area governed by a single court, the European Court of Justice. How can you have a system of mutual recognition when you have a separate system of adjudication, apart from the European system? That is the fundamental logical flaw in this position.

My third point is that I have grave doubts about the position that the Bank of England is taking: that there are no circumstances in which, in financial services, Britain could be a rule taker. This could be very damaging to our national interest in the long run because it implies that if we are not to be part of the EEA, we will go our own way and there will be gradual divergence between the City and the EU. The very fragmentation of the financial services market that we are trying to avoid will actually start to take place. That is based on a misjudgment about how much influence Britain could have as a member of the EEA in various areas. True, we would not have a vote but I believe that we would have influence. We would certainly have influence on questions of free movement and I think that we would also have influence over the future of the City which, if we remained in the EEA, would be seen by our continental partners as a vital asset to them. Once we leave, that mutuality of interest disappears. I have very serious concerns about the way that this whole debate is going.

My Lords, as a member of the committee, I too thank my noble friend Lady Falkner for the way that she chaired it and for her succinct opening speech, summarising both the report and its recommendations. I think we all acknowledge the staff who contributed to it in really quite difficult circumstances. I should say to the noble Lord, Lord Liddle, that I very much take many of his points but the committee took the view that we were taking evidence from the City on the proposition that we are leaving. How were we to explore how we leave and what we do? However, I also agree with the noble Baroness, Lady Liddell, that in the evidence we got month after month of no clarity, no sense of purpose or destination. We still do not have that and it is a matter of great concern.

In this House and the other place, but certainly across the wider community, there may not be much sympathy for a sector which many people thought brought the house down, took reckless risks with other people’s money and rewarded itself handsomely. It is therefore easy to say, “Who cares about the financial services sector?” But the answer is that we all have to care, and also to hope with some justification that lessons have been learned—although probably not all of them. To put it in a positive framework, we first need to recognise that financial services are a crucial part of our economy. At 7.2% of the economy, it has over 1 million jobs and a £60 billion trade surplus in a country that has the biggest balance of payments deficit in recorded history. It is the biggest contributor to minimising that and we are about to undermine it. It also delivers £24.4 billion in tax revenue each year. I do not suggest for a minute that, because of Brexit, all that will disappear but there is a lot of confusion and uncertainty. Much of the sector will migrate. The question is: how much?

The second important thing is that even if people are sceptical about the value of the industry in its own right, it is important. I echo the point about the dispersal of the jobs as I think there are 160,000 people employed in Scotland in financial services, which is more by a significant margin than are employed in the oil and gas industry. Much more importantly, it is also the lubricant of the entire economy and, when it works well, partly the lubricant of an international economy. Many people complain that the City or the financial services tend to think big, so it is much easier to raise £100 million than £100,000. The reality is that a lot of this business is for small businesses and individuals managing their savings and pensions, and creating the liquidity for investment at home and abroad. We know that domestic investment and inward investment have collapsed. The money has got to go somewhere, so it is going to leave the country. That is a matter of grave concern if we do not get it right.

We also heard consistent concerns about the future of contracts—insurance contracts and others—if there is no continuity agreement. The Bank of England Financial Policy Committee report stated that insurance contracts representing £55 billion of liabilities, involving 38 million policyholders across the EEA and with bilateral derivatives of £26 trillion and cleared derivatives of £70 trillion could all be affected. These are phenomenal numbers, even beyond telephone numbers, for which there is no clear contractual future as of the end of next March. I find it mindboggling that people calmly contemplate this and say, “It’ll be all right. It’ll be fine”, when we have absolutely no sense of progress. When people say we could be heading for a cliff edge we are told, as I have been told in a few cases, that we are fine. Nothing has happened. The economy is still functioning. We have to keep saying to people that we have not left and that we are still a member of the European Union until the end of March. That is when the cliff edge is approaching, not now. It is amazing how many people think we left the day after the referendum because they do not engage in the detail. Why would they? They have got lives to live, unlike us here who have to engage in the detail.

If we get to that situation, rule taker or rule maker becomes purely academic because we are either completely shut out of the European Union or we have to take its rules. There is nothing in between if we do not have an agreement, and there is no history of a financial services agreement. We know that mutual recognition is not going to be acceptable, and we know that all the alternatives fall far short of what is needed. The irony is that the financial regulatory arrangements of the EU have substantially been driven by the United Kingdom over the past 25 years to the benefit of both the European Union and the United Kingdom, yet in nine months’ time it will lose our expertise and we will lose its protection and access to its services if we do not get an agreement. That is the “if”, but many people will be forgiven for assuming that we may not get an agreement, given that two years down the road we have no inkling in any kind of detail of what kind of transitional arrangement we will get and when it will finish. Witness after witness said that they had no alternative but to do what the Bank of England has asked them to do, which is to assume that at the end of March next year we will be outside the European Union with no agreement, and that they were planning on that basis.

We know that jobs are going, investment is going, offices are being rented and people are being served notice. All this is happening. Companies will not put out press releases about this; they will just do it because they have businesses to run. They will get on and do it, as they are doing. That makes me concerned that it is worse than the maxim that people talk about—nothing is agreed until everything is agreed—because it is “nothing is agreed because nothing is agreed and nothing is going to be agreed”. I wonder when people will realise when we have fallen off the cliff. Will it be two-thirds of the way down—so far, so good—or will it be when we hit the rocks at the bottom?

The Government have not delivered the White Paper, but they have seen this report based on extensive evidence from all the senior players in this sector who have calmly and clearly told us of their concerns and their needs but who have heard nothing significant back from the Government in terms of outcomes. On a positive note, they all say that they believe that civil servants and everybody engaged in the sector know what can be done and that it could be done, but they do not know whether the Government will do it or are capable of doing it. One very senior player in the sector said to us, “We believe there is a basis from which we can manage the future of our financial services sector and maintain a connection with the EU and our international pre-eminence. We could negotiate this. We think we know how we could do it. Our only problem is that we do not know whether the Government think we are more or less important than the fishing industry”. That is a pretty savage indictment of the relationship in practical terms between the Government and this crucial sector.

I found how the financial services sector is regulated through Parliament interesting. Our sub-committee is part of the process for the UK. Obviously the Treasury Committee and the European Affairs Committee in the House of Commons are part of the process. The role of the European Parliament is also interesting. It has far more resources, in terms of people, money and powers, to shape the regulations and the legislation, as it has done over many years. It is way beyond anything that the UK Parliament provides, needed to provide or needs to provide as long as we are a member of the European Union. We are, after all, participants in the European Parliament, although I am told that British MEPs are now relegated to the back row along with supplicants and are no longer treated as if they are Members of the European Parliament. Be that as it may, the UK is still a member of the European Parliament. Once we are not, we will not have the benefits of scrutiny by a European Parliament which has an obligation to us, as well as the other 27 members.

The Government should understand that the industry has given us quite detailed evidence, without being too prescriptive, that there are decisions that will need to be made by the regulators, there will be some decisions that might need to be made, particularly in the short term, directly by Ministers, but there are many other decisions, particularly in terms of legislative or regulatory changes, which will need to be made by a proper parliamentary process that will require resources far beyond anything that has been provided to our Parliament in the past. That is something the Government should take on board, not least because it is in the Minister’s interests, I would have thought, to have a parliamentary dimension to a sector which is so complicated and so wide reaching in its impact.

I plead with the Government to recognise that if we leave the EU—I notice that Gordon Brown said yesterday that he thought we probably will not and that if we did we would be applying to rejoin immediately afterwards—we not only need to negotiate a working agreement and to have a clear idea of how we manage regulation but we need to demonstrate and understand that Parliament has to have a much more substantial role in protecting our interests.

My Lords, the noble Baroness, Lady Falkner of Margravine, has summarised our report with her usual dynamism and clarity. She has been a skilled and dedicated chairman and I echo the warm words from fellow members of the committee. I also warmly thank our clerk Matthew Manning, his assistant Claire Coast-Smith and our former policy analyst Holly Snaith, whom I wish very well in her career at the Bank of England. I take this opportunity to express particular regret that the noble Lord, Lord Woolmer of Leeds, is now leaving the committee. He is a wise owl. He helped me a lot in my first year on the committee, and we have benefited greatly from his contributions.

Much of the ground in the report has been covered. I think I am more in the school of my noble friend Lord De Mauley than the school of the noble Lord, Lord Liddle. I am very concerned by the risk-taker/vassal state implications of the EEA option. It is one of the key reasons why the Swiss voted against being in the EEA all those years ago, despite them having a strong financial services industry, as we do.

I am going to focus on two issues: the impact of the changes that the fintech revolution is ushering in and the future of international co-operation on standards and stability. I believe that fintech—that is, business providing financial services by making use of software and other modern technologies such as AI and blockchain—is becoming ever more important. It was pioneered by a number of small and rapidly growing firms, but is now changing the way that traditional financial institutions operate. In my view, this revolution could be more important than Brexit to the future of the sector, so we need to continue the positive climate that the UK has provided for such innovation. There is also a competitive threat: a growing fintech dynamism in the United States and indeed in Asia, especially in Singapore. We need to ensure that the UK companies retain their edge and remain at the heart of this important revolution.

So what do we need to achieve that? First, we need the right regulatory regime, as witness Andrew Bailey, chief executive of the Financial Conduct Authority, told the committee, in paragraph 42 of our report:

“FinTech, interestingly, is very little subject to regulation at the moment, and that is a good thing”.

His own contribution on fintech has been important and the FCA’s regulatory sandbox has been widely praised, as my noble friend Lord De Mauley emphasised. However, as he also said, there is a risk that EU plans to take more control in this area could change things for the worse. In particular, if we were to become a rule-taker of new controls on fintech under any Brexit deal with the EU, that would bring risks to our vibrant industry here. Perversely, the rich tech entrepreneurs would probably move outside the EU and European competitiveness would be eroded.

Secondly, fintech also needs access to talent. The biggest concern of tech entrepreneurs is to continue to attract top people. It is now clear that existing employees can stay, but a smooth and efficient Home Office system for future talent will be vital. The sector may also need to improve apprenticeships and training for locals. That is something that it should already do.

Thirdly, it needs access to capital. The majority of capital for businesses of this kind is raised privately or by venture capitalists in London. They themselves are a source of innovative finance, such as peer-to-peer lending. However, there will no longer be access to ECB funds and the British Business Bank will have to fill the gap. This was recognised in a very good session with the then City Minister, Stephen Barclay MP, who was immediately promoted. I am glad to say that the move to the British Business Bank is now the subject of forthcoming work by our committee.

Lastly, fintech needs to be able to export and to grow outside the UK. Many UK companies in the sector have set up or are setting up in Dublin, Amsterdam, Paris or Berlin. They may need a bit more government support in a post-Brexit world. More importantly, the Government’s post-Brexit focus on global Britain and on international investment is good news for fintech. Their leaders now form a significant part of overseas delegations, as I saw for myself on a visit to India last year when I was Commercial Secretary. However, the UK also has fintech agreements with Singapore, South Korea and China.

The second area that I want to highlight is the future of international co-operation on standards, stability and supervision. As our report says:

“UK regulators have been highly influential at both technical and political levels within the international standards-setting bodies”.

Indeed, I would say that this has continued throughout the history of financial services. However, the future will be different. The UK will at best have some sort of observer status in the various EU financial bodies and, given the economic importance and interconnectivity of financial services, we must hope that any free trade agreement includes arrangements for deep ongoing co-operation between the UK and the EU 27. This must include parliamentary relations, which, as I know from my own experience, have the long-term benefit of involving politicians of all parties.

The Chancellor will not be present at ECOFIN, and Mark Carney’s chairmanship of the Financial Stability Board is coming to an end. Unless his successor as chairman is also the successful candidate to succeed him as governor next year, which is unlikely, we will see a serious decline in influence. What can we do about this? I shall build on my noble friend Lord Lindsay’s comments by posing some questions. Do the Government have a plan for influencing internationally in these much less favourable circumstances? Should we second more key people to the international financial institutions that we list in the committee’s report—not only the FSB but the Basel Committee on Banking Supervision, the International Organization of Securities Commissions, the International Association of Insurance Supervisors and the International Accounting Standards Board? All are important, but perhaps most important of all is the question of whether we can use the opportunities of the G7, the G20 and the OECD to better effect in the financial standards and supervision area. We will be in a different world where new forms of influence will be important. Several of us have expressed concern on this vital issue, and I hope the Minister will be able to give us some reassurance about what is planned and indeed about resourcing, which was raised by the noble Lord, Lord Bruce.

This is an important month for the Government, and I wish the Prime Minister great success at the European Council. Britain has great strengths, including some that I have touched on in financial services. We have a stronger hand than we sometimes realise, and we should be ready to use it.

My Lords, I served on this committee in the last Parliament and I was delighted to do so. I was not at all surprised that the noble Baroness who chairs the committee has received all these compliments from the current members because she really was a formidable chairman in my time and I am sure she has remained so. I do not think I have ever seen a chairman of a committee in either House who does his or her homework quite so thoroughly, and that starts the committee off on exactly the right foot because everyone else feels they have to live up to that kind of example, which probably none of us did. Her direction and leadership were always stimulating and sometimes very demanding. As the noble Baroness, Lady Falkner, also knows, I am very blunt, and I am going to be quite blunt about this report. I hope I shall be forgiven by colleagues but I think it is important to have a frank debate on these occasions so that we expose different perspectives to any members of the public who might be interested in our proceedings or our views on these subjects, rather than just the perspective that is enshrined in the report.

The report contains a lot of very good work. I found most interesting the examination of the costs to us of Brexit in the financial services area, which I think is in appendix 4 of the report and is something that should be widely read. However, I have three problems with it. First, on the whole it tends to be too kind to people. I was very amused to see that Prudential apparently got away with arguing that it left the annuity market because of Solvency II. It is nothing to do with that; it is because the fall in interest rates means that annuities are an even worse deal than they ever were in the past. People are better advised now anyway, thank God, so a much lower number of people have been inclined to put their savings into that particular form, and very happily so. Solvency II has actually been a considerable success; the general insurance field is not complaining about it. Both the companies and the Lloyd’s market are generally overcapitalised in terms of Solvency II. It would not make any sense at all to revise the Solvency II criteria as the committee has suggested.

Secondly, and more significantly, I thought the report was far too kind, dangerously so, to the financial regulators in this country. It said what a wonderful reputation we have and that our financial regulators are respected worldwide and so on—I paraphrase because I do not have the exact words in front of me, but they occur several times in different contexts in the report. Historically, that was probably true, but sadly that reputation was eroded about 20 years ago by a series of banking scandals such as Barings and BCCI, and there is very little left of it at all after what happened during the Lehman Brothers collapse, when we had the notable collapses of banks that obviously had not been properly supervised either on the liabilities side of their balance sheet, like Northern Rock, or on the assets side of their balance sheet, like RBS and Lloyds.

What happened in the RBS case was an appalling failure of elementary supervision. Mr Hector Sants at the FSA had all the power required to stop the AMRO transaction. He never used it: he was out to lunch. How he has managed to make a continuing career for himself in the field of financial supervision and regulation, I do not know. That itself worries me, and is not a commendation of the British financial supervisory and regulatory system. One needs sometimes to be quite harsh in examining our treasured institutions in the hope that they will, over the long term, improve their performance. They certainly need to in this respect in this country.

What a contrast between us and France. The British love to run the French down, but BNP Paribas, Société Générale and other big continental banks—German banks and Spanish banks such as Santander—sailed through the crisis. We literally had the worst record of anyone. That is my first problem with the report.

My second problem with the report is that a fundamental contradiction runs through it. At times, it says that it is in the self-interest of the continentals to accommodate us, to have mutual recognition, and so forth; at other moments, that it is in their selfish interest—but I suppose that that is the same thing as self-interest—not to accommodate us but to keep us out. We must make up our mind what is in the mind of the people who we are dealing with.

I will give my answer to that question. I think there are two fundamental motivating views on the part of our counterparties in these negotiations. One is the sense that if you have a club and someone wants to leave it, that is fine: they leave it. If they want to leave it, remain fully engaged but somehow juridically leave, that is problematic but something that you can talk about. If they want to leave it but actually want to keep all the benefits but not have any of the disciplines or costs and have special new rules crafted for them, that is insufferable. That is ridiculous. I think that we would react that way if the boot was on the other foot.

The second thing which has not come out in the report, which I think is the major motivating factor on the other side of the table, so it is important to consider it, is the issue of financial stability. If, as a banking regulator or supervisor, you are concerned about financial stability, as you must be, you want to be in control. You want to decide who is a fit and proper person to be dealing in your markets. If you have a crisis, you need to give orders to people and tell them to change their behaviour rapidly. You cannot have people who operate in your market, creating assets, lending money or whatever—perhaps contributing to the crisis, who knows?—who suddenly put their hands up and say, “We’re British. We have special rules. We have a different adjudication procedure. We do not have to obey your demands”. That is a hopeless situation. If you were Mario Draghi, I think that you would reasonably not want to accept it.

I come to my third difficulty with the report, which is most fundamental. It is far too optimistic and sanguine. It starts off by saying, “We need to continue to do our financial services business”. Quite right: of course we do. “Equivalence is certainly not sufficient for our needs”. Quite right: I totally agree. “Therefore we need mutual recognition”. But it never says that mutual recognition is fairyland, cloud cuckoo land—what other cliché can I use? It is absurd. It will not happen. I am happy to put money on that if any Member of the House on either side wants to take me up on it. We are not going to get passports unless we stay in the single market, when of course the whole range of activities will be open to us.

Of course it is true that during the transition period, we continue to have full access, as we do today. That is not that much of a help, you know. What does it mean? It means that until the end of 2020, we can carry on with the false—self-deceiving—situation in which we think everything is all right and nothing will change. It means that we postpone the so-called cliff edge for 12 or 18 months, or whatever. Perhaps we can negotiate a longer period. It now looks as though we will go into this transition period not knowing what its terminal date will be.

Europhiles such as me would be happy for it to go on indefinitely, if we cannot go back fully and juridically into the European Union, which I would like to do and which is far and away the best solution. Of course the Eurosceptics in the Tory party will fight like cats about that and threaten to overthrow Mrs May if she does that, so what she will do if she is running into the deadline of next March and does not have an agreement on the terms of transition nor the period of the transition, heaven only knows. When the period of the transition is known, we are heading for another cliff edge, and the uncertainty which businesses in the City are complaining about now, which is well recorded in the report, will simply be carried forward for a little longer. That is unhelpful. We will have had a major structural uncertainty in this country for three, four or five years. That is not a very clever thing to do. I think that that is my understatement of the evening.

I am worried, because I fear that anyone reading the report will get a false impression of the situation into which we are headed. Barnier is quoted as saying that we cannot get financial passports unless we stay in the single market—and if people do not listen to Barnier, they are unlikely to listen to Quentin Davies; I quite understand that. It is no consolation when you think that we are walking into potential disaster that we have a blindfold over our eyes for the time being.

My Lords, if I may I will speak in the gap. I am a member of the committee but, by some muddle, my name does not appear on the list. I join everyone else in thanking our chairman for her excellent work—and our staff. I shall concentrate on one thing, because the report has been summarised very well by my fellow committee members. We all agree that the City is not only a great contributor to our economy but one of the best financial centres in the world. There is no doubt about that. We also know that access to the City is of great benefit to EU countries. But I say to my noble friend Lord Liddle that we could not write a report on any assumption other than that Brexit will happen. We had to work that out. If it does not happen, who knows what will happen—but we had to do that.

My doubt is this: yes, it is a fact that we are a very good financial centre, we make a great contribution to European prosperity and Europe needs us. In a world of rational, self-interest pursuing agents, it would be recognised by both sides that it is in our mutual interest to arrive at a good agreement—be it equivalence, mutual recognition or whatever. My fear is that we do not live in that world in this context. Given the way that the Brexit negotiations have gone, I increasingly suspect that neither side really wants to pursue rational self-interest. Indeed, had we wanted to pursue rational self-interest, we would not have got into this in the first place.

Given that we are champions in the financial industry, it of course makes sense for the other side to use what in the old days we used to call import substitution to keep us out as far as possible—because their industry can develop only if ours is stopped from competing in their market. This is the history of all developing countries and, if you are a financial centre such as Frankfurt or Paris, you look forward to the time when you can make it difficult, if not impossible, for the City of London to compete.

My conclusion from this is rather pessimistic, but I think it agrees with a lot of what our witnesses said. Assume the worst. That is the only ground on which you can plan the future. It is most likely, unless we are very lucky, that we will not get a good agreement in finite time and that we will have to adjust to a situation after Brexit when we will have to use our ingenuity and innovation to do better elsewhere.

My Lords, I start by congratulating the committee and my noble friend Lady Falkner on what is a very meaty report—I fully accept that. But I am afraid that I find myself in the camp of the noble Lords, Lord Davies, Lord Liddle and Lord Desai, and my noble friend Lord Bruce in this debate.

I start by trying to find at least a little bit of common ground. We can all agree that the financial services industry is absolutely crucial to this country. My noble friend Lord Bruce quoted the number of employees and the tax that it generates, and 30% of that is generated from an EU client base—the client base within the 27. A very significant part of the financial services industry that we have here and which underpins so much of our economy is essentially generated out of the 27. We access that, as others have described, through a very diverse set of regulations and directives, from direct passporting for the banking industry and much of the insurance industry, and rights of delegation for asset management. The reason why we can have the London Stock Exchange acting as the global foremost CCP which clears virtually all euro-denominated derivatives as well as many in other currencies is because of liquidity provided by the European Central Bank and underpinned by a location policy. Many of the fintechs that the noble Baroness, Lady Neville-Rolfe, talked about survive because they were pan-European from the day when they were born and function across borders through the e-commerce directive. Many of them have based their future plans and what they expect and hope for on the single digital market. So we are deeply embedded in this process.

There are two other big issues for our financial services industry. I am not going to address them here, but let me mention them by title. There is freedom of movement. So many of the staff—one-third of all those in our fintech operations, for example—come from continental Europe. They are not going to come here under visa terms, because why should they live with those restrictions when they can live without them elsewhere. Then there is the whole issue of data exchange.

I want to go back and pick up the point that the noble Lord, Lord Desai, made. The British-to-British conversation that takes place all the time, about how we manage to keep financial services thriving at the current level and growing in a post-Brexit world, comes without any recognition of where the European Union is coming from—and positions that we ourselves would take if we were in its position. I hear so often, “They need us more than we need them”. You hear that almost on a continuous basis. But there is a lack of capacity in the rest of Europe. Over the last 10 or 20 years, nearly all financial services capacity has been sucked into London. It has thrived in London and has come to this financial centre, particularly with regard to the wholesale markets. That is where things are today. If you are sitting in the EU, you recognise that as a reality, but it is a reality for now. Five years or 10 years from now, why should that continue to be so? Surely, you look for an arrangement, when the UK decides that it is going to step out of the club, leave the EU and become a third country, and you look for an opportunity to bring that business back into the EU, perhaps salami slice by salami slice, and build capacity gradually.

We often hear from the British the threat that, “If the business doesn’t thrive in London, it will move to New York”. That is just from one third country to another third country—perhaps a less attractive third country, and perhaps one where the time difference is more of a problem. But it is frankly not a major issue, if you are sitting within the EU and what you are looking to do is to over time build that capacity. To think that the EU 27, which by purchasing power is the second largest economic bloc on the globe, would allow its crucial financial centre to be outside its supervision and control, is fairly extraordinary. We would have to make an exceptional case to argue that that should happen. I do not think that any of that is recognised in the discussions that we constantly have about the solution that we would like.

That leads me to the issue of what is often called bespoke dynamic mutual recognition. We will have mechanisms where we recognise them as acceptable players and they recognise us as acceptable players, but when we dig beneath that we find that it requires fundamental change in the EU to achieve it. This is an organisation that lives in a rules-based society and has a legal framework structured through the ECJ, and all that would have to be reconfigured to meet the requirements of mutual recognition. New institutions would have to be created, staffed and funded, and the EU would fundamentally have to change how it operates. Why would it do that?

I am afraid that the very unsatisfactory third-country equivalence that is on offer—and I agree that it is very unsatisfactory—works perfectly well for the EU. Nobody in the UK is going to stop them coming to use London markets and say, “No, you can’t come here and have access, we’re going to take it away from you”. We need their business. It is perfectly acceptable for them to work on a basis whereby, essentially, on 29 days’ notice the European authorities can simply remove the business or set in place new requirements or new rules—and it works very well with that strategy of moving attractive pieces of business salami slice by salami slice back to continental Europe as the capacity develops and as it is capable. We delude ourselves in thinking that the EU is going to go through extraordinary contortions and change its fundamental way of working to accommodate a mutual recognition framework, even though we think that for us that would be ideal.

The same thing could be said of a free trade agreement. I would love to see a free trade agreement that contained services. I was at an event today at the City of London where the speaker said, “If the EU wishes to prove itself to be the leading free trader in the world, it would be an excellent opportunity to create the template to include financial services in a free trade agreement”. I just do not see that that is where the EU is at this moment in time. It is not on its priority list to identify itself as the leading free trader and start to create a framework that redefines global trade and WTO rules. If it does have that ambition, it is certainly not going to be doing it in the next 12 months or two years. That is the kind of thing that you might develop over five or 10 years. It would be long and tough and, obviously, it would have to be framed as an arrangement that has served not just an arrangement with the UK but with all the other various financial centres around the globe. So it is not something that is going to be immediately available, which drives us back to this very unsatisfactory arrangement of—I am now losing the terminology. What is the word that I want? It begins with “e”.

Equivalence. I do have this problem.

The other issue that I have heard discussed here and which bothers me hugely is the discussion about how, after we leave, we can reframe our rules to allow more risk-taking. To pick up exactly the point that the noble Lord, Lord Davies, picked up, if you were sitting in the European Union and looking at the UK in 2008, you saw a financial crisis to some significant degree attributable to light-touch regulation—and how we touted light-touch regulation and told everyone that it was the way to go. It is exactly a return to that language of light-touch regulation. We have mistrust within our own country—people mistrust the industry and the regulators, so it is wrong to suggest that in the European Union they are going to say, “No, no, no—these people have changed completely. When they talk about reducing regulation it will be in the context of being absolutely safe”. It is not—it is in order to create competitive advantage.

As noble Lords know, Barney Reynolds is a great promoter of that particular approach. I took some quotes from the report that he submitted, where he talks about a “market-friendly” financial services framework. That sounds very good, if you believe that market forces are the answer, but not if you believe that market forces ran rampant and out of control in 2008. International competitiveness should be a “statutory objective” for all our UK financial service regulators—that is the kind of language. That is a race to the bottom. This is precisely the accusation that is being levied: international competitiveness means that you always have the least-regulated structure. We are seeing in the United States, again, that a lot of the regulation that was put in place following the 2008 crisis is now being pulled back. That creates an added level of discomfort with this kind of Anglo-Saxon approach and framework. I do not think that we should underestimate how much we are caught in that particular view.

I also have to say that, when I ask those at any financial services entity, “Where are you looking for a change in regulation?”—the noble Lord, Lord De Mauley, hit on it exactly—they say that it is on remuneration: lifting the cap on bankers’ bonuses. If ever there were an example that inspires mistrust and a sense that we are returning to the bad old days, it is that. It is always represented as the key and most important regulation that the financial service industry would like to see lifted.

I am desperate to keep the financial services industry here to the extent that we can, but I think we have to be realistic. A lot of it has already left. As my noble friend Lord Bruce said, this is not done with press releases and open discussion; no company wants to create concern among its customers, suppliers or regulators by saying, “We are at risk if we stay within the UK”, but these companies are very quietly moving and we are beginning to see a series of announcements. It was also an iconic moment when Lloyd’s of London dropped “London” from its title. It is now established in Brussels. It has 600 staff in London; 100 of them are moving to the Brussels office—it is just the beginning. Insurance companies, because of the reasons of contractual continuance that have been raised here, have all been moving over the last 24 months. I just say to the noble Baroness, Lady Neville-Rolfe, that the fintechs are moving as well. I have talked to so many of them that are applying or have applied for a licence in Dublin—but the real risk is Paris. She spoke about the innovative approach that we have to regulation of the fintech industry, and I agree, but it has spread rapidly and she perhaps does not know that the Paris equivalent has an MoU with the FCA to make sure that it takes an equivalent approach to regulation and sandbox to Paris. It is to Paris that a lot of the fintechs are moving; it is an attractive lifestyle and many of them are fans of Macron. They see a future there and there is real competition for that particular industry.

What do we do under these circumstances? I, like others, think that the only route we can take that leaves us with something other than this unsatisfactory third-country equivalence is, frankly, to stay within the single market one way or another. Without that, it seems to me that we will be on the outside. If we are going to be on the outside and trapped within just equivalence, our whole negotiation has to be focused on trying to make sure we have a voice at the table. I do not see the Government doing that; I see them going down the mutual recognition route, basically with pages of demands that require the European Union to restructure the way that it works, to change everything that it does, to shift its principles and to have 27 countries operate under a rules-based system and the 28th without that. If we can get the Government to pull back from that and to pursue an opportunity—I would prefer it to be in the single market but it has to be an equivalent to try to get us a voice at the table through some mechanism or other—we might have some possibility and some hope. The complexity around this industry more than illustrates the fact that there are only downsides to Brexit. One can find a few upsides but, my goodness, weigh them on the scale and they are very small.

My Lords, I, too, congratulate the committee on its report, under the obviously effective chairmanship of the noble Baroness, Lady Falkner. I congratulate her on her speech, too, because she spent a great deal of time accurately depicting what the report contained but also added some reservations of her own, which might just have passed us all by, had not some of those themes been developed later in the debate. For instance, she emphasised the problems with the insurance industry and the limited progress that has been made. She also mentioned the concept of equivalence, which, as we all recognise, is an easy term to use but a very difficult one to realise when making decisions.

No one doubts the significance of securing the right framework for the crucial sector of financial services. The opening paragraph of the report emphasises the level of interdependence that must not be lost as the UK leaves the EU. The problem, of course, as identified in the report, is the range of issues where it is so easy to lose that concept of interdependence. My noble friend Lord Liddle indicated that, when we are talking about technical issues, we also have to work out who is in fact taking the decisions. It is a great weakness for the UK if, instead of being the rule-maker—which we have been used to in so many areas of financial services—we become a rule-taker. Yet, as the report indicates, the UK has so much to offer, as well as to benefit from, the European Union, particularly in the field of financial services, where we have considerable expertise. My admiration for the report lies in the clarity with which it identifies areas of real difficulty that the Government need to address—the difficult negotiations, and the difficult decisions to be taken. We cannot be too optimistic about progress so far.

Of course, my party made some progress in this debate only yesterday in tabling a fresh amendment to the withdrawal Bill, seeking for us to continue in the single market. That will not please many Members on the other side of the House. They should not worry: it will not please my noble friend Lord Liddle either, because he wants full membership of the EEA, and what was offered yesterday is much more marginal than that. But such developments as this are bound to put this report into a developing context; that is the problem. The committee had to report as it saw things at that time. We are all too well aware of the march of time and of crucial periods ending. The report certainly succeeds in identifying the key issues that require resolution, and we should greatly appreciate the work of the committee for that clarity. But how often does the report refer to difficult issues? How often does it present the challenge of what is to be done, rather than the solution?

I am not critical of the report for that; we live in an age of great uncertainty. It is clear that the Government contribute to that uncertainty by not contributing much at all in the way of substantial advance. Quite a long time ago, we thought that certain crucial, fundamental blocks had been agreed by the Government. Can one recall how many months ago it was that the Irish border issue was “under control” and had been resolved? And what have we had subsequently? Almost continuous anxiety about the Irish border issue— it colours a great deal of the whole debate. The Government’s record is therefore somewhat less than encouraging when it comes to negotiations.

The report warns of the fragmentation that would result from ending passporting, which would clearly increase costs for companies and firms and reduce financial stability. The relocation of clearing activities to the EU would increase those risks. The report sees no reason why they should diverge from EU standards; the answer should be regulatory alignment. How far have we got with any fulfilment of that objective? I do not blame the report for analysing a problem and saying what the solution should be; it is in the hands of others to make progress towards a solution, but progress seems to be very limited indeed. There is clearly a need for international standards to be enhanced, and the UK can make a substantial contribution to that. However, that means that the UK has to stay in a significant position with regard to these issues.

The report emphasises the significance of the financial services industry, which makes up 7.2% of our economy, the jobs involved and its contribution to the Exchequer, which is not likely to be ignored by the government Front Bench. But the great danger is the prolonged uncertainty. Almost every speech this evening indicated less than certainty about where we are going—not defining what is going to happen, but expressing what needs to happen against a background where nothing is certain. The great danger is that this prolonged uncertainty will cause firms to take the only action they can. They will take decisions to relocate within the European Union—not with bombast, advertising the fact, but quietly going about the process of safeguarding their interests as they see power drift away from London towards other parts of the present European Union.

No one has mentioned this in the debate, but we should all have responded to the fact that the report spends quite a bit of time talking about the burdens Parliament will carry and the challenges it will face. The report does not pull any punches on this. It describes the legislative load upon Parliament to transpose the European Union body of law—the acquis communautaire—into British law. Clearly, that is an absolutely massive task that will fall upon this Parliament. In addition, the powers of British institutions are bound to increase, because they will no longer be part of the more general regulatory framework but will be the sole regulatory framework in crucial areas. That means that Parliament will have to take a much keener interest in the key regulatory bodies in this country. I will come on to the reason why that is necessary in just a moment.

I am glad that the noble Baroness, Lady Neville-Rolfe, referred to fintech. After all, that is a crucial success story for the UK financial services. The report pays particular attention to the fintech industry, in which the UK has played such a leading role. The report says that those concerned with the development of fintech must be in crucial positions to ensure that international standards are of the highest as it develops. But how? In which capacity will they be able to fulfil that role? The report is optimistic about certain opportunities, although it goes on to identify the difficulties facing the Government.

There have been several contributions in this debate with undertones of anxieties and reservations about our position, and concern about the limited progress we have made so far—from my noble friends Lord Davies and Lord Desai but also from other speakers, and certainly from the noble Baroness who spoke just before me. Are British regulatory systems fit for the situation we face, with its fresh challenges? I have heard today, and in this report too, many congratulations on certain aspects of our regulatory control. However, can we just recognise that we have 29 overlapping regulatory authorities at present? There are doubts about all of the four big accountancy firms because of the role they played in the colossal financial crash of 2008, or in more recent debacles; one thinks only of Carillion, for example, and the role the accountants played in that. How good will our institutions be at fulfilling this role, when they are going to take on so much more? It is clear that public institutions such as the Bank of England and the PRA will need extra resources to carry out the significant roles that will be imposed on them.

We have one success from the Government—I may be able to think of two if I try hard, but one will do for the moment. They have succeeded in negotiating a transition period, which gives a little more breathing space—but not much. We have no time to waste. The successful negotiation to create a transition period takes us only to December 2020 to resolve many of these issues. What is more, the reason why we need to resolve them as quickly as possible is that those outside, whose interests are affected, are bound to act from their perspective. If the Government do not achieve solutions to these problems, they will have to make the judgment that they will not succeed and will have such a limited relationship with the European Union that everything will fall upon the commercial and economic interests involved.

There is still time for the Government perhaps even to produce a White Paper, but we may be beyond the White Paper stage. We need a pretty clear indication—I am sure that the Minister is bound to give it—of just how much progress has been made in meeting the issues that have been raised in this report and by almost everyone who has spoken in the debate this evening, and we need him to reassure us that great progress has been made.

My Lords, I join other noble Lords in paying tribute to the noble Baroness, Lady Falkner, for this report. I came in, having read the report, thinking that it was an outstanding piece of research and teamwork, that the level of support that had been secured was outstanding and that its conclusions were clear, as were its questions. As the Economic Secretary, John Glen, made clear in his 18-page response to the report on 19 April, it has been extremely helpful. However, when I heard what I will call the varying views of the committee that have been articulated during the course of this debate, I grew in admiration for the noble Baroness and the way in which she had managed to corral these views into such a concise and clear report.

I am also conscious that this is the second report that the sub-committee has produced on this issue. I was delighted that my noble friend Lady Neville-Rolfe was able to take part in this debate, because she responded to the debate on the previous report in February last year. I am not sure whether the analogy should be poacher cum gamekeeper or gamekeeper cum poacher—

I will not go there, as my noble friend Lord Hunt urges—I always follow his advice.

It has been an extraordinarily good debate. The noble Baroness, Lady Falkner, led us off by looking at the regulatory and supervisory architecture. My noble friend Lord Lindsay then looked at market mutual access and spelled out how it was in the UK’s and EU’s interests that that should continue. The noble Baroness, Lady Liddell, reminded us that the financial services industry extends way beyond the City of London and that Edinburgh is a major centre, as is Leeds. The Chancellor of the Exchequer recently visited both those cities and met people involved in financial services. It also extends into places such as Bristol, Norfolk and Bournemouth. The industry really is a focus of strength for the whole UK.

My noble friend Lord De Mauley pointed out that regulatory challenges can also be opportunities, and he cited developments such as the adoption of the FCA regulatory sandbox. I felt that at points the noble Lord, Lord Liddle, dragged us back to a Second Reading of the European Union (Withdrawal) Bill and I got deeply—no, perhaps I will not say what I felt about that. However, I want to focus on a point on which we do agree, which is the vital importance of the industry, with the £60 billion trade surplus in financial services and the mutual benefit that it brings. The noble Lord, Lord Bruce, raised a very important point about the continuation of existing contracts which many consumers rely on, and I will come back to that later.

My noble friend Lady Neville-Rolfe talked about international co-operation and reminded us that the global architecture extends well beyond the EU. Of course, we can play a major role in the G7, the G20 and the OECD. The noble Lord, Lord Davies, talked about issues such as Solvency II and passporting, which, in his view, had been working particularly well, but his challenges to the report’s conclusions were heard. The noble Lord, Lord Desai, pondered whether rational self-interest would have a determining effect and questioned whether EU negotiators would recognise the importance to the EU of the City of London as a venture. The noble Baroness, Lady Kramer, talked about the potential challenges for the continuation of financial services and regulatory supervision. The noble Lord, Lord Davies of Oldham, concluded by reminding us of the burdens which taking back these regulatory powers will have on Parliament and how that regulation will be undertaken. I will come back to some of the questions that were raised, but it has been an extremely helpful debate.

The UK is home to the world’s pre-eminent global financial and professional services centre, in part because of smart regulation and supervision that have tread a careful line between allowing businesses to flourish, and protecting consumers and financial stability. In the latest iteration of the Z/Yen Global Financial Centres Index, produced in March 2018, London again ranked first. That was not pre but post the referendum and post the triggering of Article 50. No other European city was in the top five. We want to preserve the world-leading position of our regulatory architecture and of our regulators. We are committed to high regulatory standards, and Brexit will never mean ripping up the rule book or a race to the bottom.

To sustain the level of cross-border activity between our firms and Europe’s businesses and consumers, we need a relationship that is robust enough to give confidence to those on both sides. We cannot rely on the EU’s existing equivalence framework, as has been mentioned. It is unilateral, piecemeal and unlikely to preserve and deliver much regulatory comparability over time. We need to agree a more comprehensive and stable bilateral deal that recognises the unique nature of the UK-EU future relationship. Paris and Frankfurt will not be the winners of market fragmentation; the winners will be centres such as New York and Singapore. We are aiming to shape a regime to manage future regulatory change that ensures that, although our rule systems might evolve separately, we deliver fully equivalent regulatory outcomes, maintaining commitments to support open markets and fair competition.

The Chancellor has set out a clear vision for our future relationship with the EU on financial services. This has been well received by the industry, and we are beginning to hear voices within the EU recognise the value of our proposition. Our vision is grounded in mutual recognition of equivalent regulation, with a dialogue on setting regulatory requirements and having supervisory co-operation arrangements that are reciprocal and reliable, and an independent arbitration mechanism to provide durable dispute resolution. Reaching agreement on this does not need to be a challenging objective—our rule books are already aligned and our markets are already deeply interconnected. We continue to ensure that our exit from the EU will be smooth and orderly. We made a big step forward in agreeing the legal text on the implementation period, which will keep market access on existing terms for firms and consumers.

Looking to the future, as the report notes, there are opportunities for the financial services sector to become more outward facing. 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. A recent report cited the prime centres for fintech around the world as Silicon Valley, Shanghai and the City of London, again underscoring the strength of our position.

We are world leaders in green and sustainable finance, or 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, including our economic and financial dialogues with China, India, Brazil, Korea, Hong Kong, Singapore and Japan. There are enormous growth opportunities for the future.

I shall now turn to some of the questions raised during the debate. The noble Baroness, Lady Liddell, and my noble friend Lady Neville-Rolfe referred to international bodies and standards. The Government remain committed to the full, timely and consistent implementation of agreed international standards. The UK is an active member of several international standard-setters, including the International Monetary Fund and the Financial Stability Board. The Government believe that continued participation in these organisations is essential to ensure the consistent adoption of international regulatory standards.

My noble friend Lord Lindsay and the noble Baroness, Lady Liddell, made a point about rule-taking or rule-making. Because of the size of the UK’s financial services market, the complexity of the products traded on it and the consequent risks to our taxpayers, we cannot sign up to accept automatically as yet unknown future rule changes. We must have the ability, if necessary, to deliver an equivalent outcome by different means while protecting UK taxpayers from potentially unacceptable risks. The noble Baroness, Lady Liddell, and my noble friend Lady Neville-Rolfe talked about continued access for skilled workers. We have repeatedly made it clear that we do not regard the referendum result as a vote for the UK to pull up the drawbridge. On the contrary, the UK will remain an open and tolerant country—one that recognises the valuable contribution that migrants have made to our society, especially in the realm of financial services.

The noble Baroness, Lady Falkner, asked about the transition period. We have now reached an agreement on the implementation period. This agreement and the statements made by the Bank of England and the FCA give business confidence about the future arrangements that will apply immediately after the UK’s exit.

Furthermore, our regulators have announced that they are prepared to act to enable firms accessing the UK from the EU to continue to operate in the UK without having to apply for UK authorisations for the duration of the implementation period. But we cannot provide full reassurance to firms on our own; we need a bilateral solution with the EU to resolve hugely important issues such as continuity of contracts.

The noble Lord, Lord Bruce, raised particular points on contracts. The Financial Policy Committee estimates that 10 million UK policyholders and 38 million EEA policyholders could be affected by these changes. There is a shared interest for both the UK and the EU in ensuring that we avoid outcomes that impose unnecessary costs and disruption on individuals and businesses. That is why we are focused on agreeing a deep and special future partnership with the EU. But of course, as a responsible Government, we continue to plan for all scenarios. It is vital that we work with our EU partners to put technical arrangements in place to avoid market disruption. Furthermore, the Treasury announced on 20 December 2017 that it would legislate if necessary to ensure that contractual obligations of EU firms with UK-based customers, such as those in insurance contracts, can continue to be met.

The noble Baroness, Lady Kramer, questioned whether it was unrealistic to include financial services in a free trade agreement. All the EU’s recent free trade agreements make provision for financial services, from CETA to Japan, and the need for a close relationship is even more important for two markets as intertwined as ours. In the TTIP negotiations, the EU even pitched a relationship based on mutual recognition of regulations and a dialogue on aligning future regulation.

Financial services firms across the UK have confidence that the Government are committed to leaving the EU in a way that underpins prosperity and avoids unnecessary disruption and dangerous cliff edges for businesses across the UK. We are making significant progress, and this has been well received by the industry. Since December we have reached agreement with the EU on the implementation period. We have agreed a technical dialogue on cliff-edge risks, to be led by the Bank of England and the European Central Bank, and the Chancellor has set out a clear vision for our future relationship with the EU on financial services. These measures have been well received by the industry in the UK. We continue to work closely with businesses located throughout the United Kingdom to ensure that they are prepared for a smooth and orderly withdrawal from the EU. We will continue to do that and remain grateful for the quality and contribution of this report to that effort.

My Lords, I thank all noble Lords who spoke in this debate. Naturally, noble Lords would expect me to be extremely grateful to members of the sub-committee who spoke, but I am also particularly grateful to noble Lords who are no longer members of the sub-committee and to those who have never been members. Their remarks are truly the important ones. I also know that there is another debate and many noble Lords have been sitting here patiently waiting for that to commence, so I will restrict my closing remarks to non-members of the sub-committee —and I will keep them brief.

The noble Lord, Lord Liddle, was extremely critical. I think he is no longer in his place but I will continue.

For the record, the noble Lord was critical that we took for granted single market withdrawal. All I would say is that he should read our 2016 report, Brexit: Financial Services, chapter 2, where we cover all the alternative arrangements. So in that case he was shooting the messenger unnecessarily.

The noble Lords, Lord Liddle and Lord Davies of Stamford, and my noble friend Lady Kramer did not at all like our identification of mutual recognition as a solution that had been raised by our witnesses, not least by the IRSG and several others. They, too, are shooting the messenger. If they had glanced at paragraphs 60 to 63, they would have seen that we have our own reservations about achieving that. We say, in terms, that we need more detail and decisions from the Government on how they intend to proceed—if in fact that is the Government’s position. With his usual objectivity and fairness, the noble Lord, Lord Davies of Oldham, acknowledged that.

The noble Lord, Lord Davies of Stamford, warned us that he was extremely blunt. He knows me well enough to know that I will reciprocate, although rather more softly. I will pick up two points that he made. He said that we were too kind to our regulators as they were tainted by scandals. In the examples that he gave, he omitted to mention that they took place under mainly the watch of a Government whom I believe he was a part of until 2010. They persistently seemed to believe in light-touch regulation. Our belief is that the old tripartite system that has now been replaced by the twin peaks of dual regulation by the FCA and the PRA is rather more robust and resilient. But that is not to say that I believe that banks will never fail. All I am confident of is that the new system will prevent wholesale contagion and a risk to the UK economy overall in terms of the risk to financial stability. In that respect, we should be much more confident of our new system.

Indeed, I know that Members of this House who served on the Parliamentary Commission on Banking Standards helped to create the new system. I believe that my noble friend Lady Kramer was a member of that. So let us have a little more confidence in the new architecture that we have put in place. It has been going for some years and we took our evidence in light of the current framework, not the framework that existed before 2010.

Both the noble Lord, Lord Davies, and my noble friend Lady Kramer commented on how UK institutions were somehow worse than others in terms of the UK institutions’ lack of probity and prudence. I did a quick Google check and I will not detain the House with my findings—we can have a bilateral meeting outside the Chamber. But I can say to the noble Lord rather confidently that Société Générale and BNP Paribas, to mention just two—I am leaving aside Deutsche and all the others—have had whopping fines imposed on them in the period since. So let us not just call out our own institutions. Let us accept that a financial system under a capitalist model will always carry some risk. Let us try to see where regulation can be improved and where it needs to be more resilient and sustained. That is what we were trying to do in this report, in looking forward to how supervision and regulation will take place after we leave the European Union.

It has been a pleasure to take part in this debate. But, above all, it was an incredibly stimulating experience to have conducted this inquiry as chair of the committee. I would just remind the House of the words of the noble Baroness, Lady Liddell, who said that, in deliberating what we found in this report, we were unanimous as a committee in coming to the conclusions. That is the way it should be. It is a very grown-up committee, where the members recognise that and behave accordingly. It has been my pleasure to chair the committee. I beg to move.

Motion agreed.