We have two debates to get through in three hours and 20 minutes, so brevity will help everybody.
I beg to move,
That this House
has considered the effect of the UK leaving the EU on financial and other professional services.
I start by thanking the Backbench Business Committee for granting this debate and for giving us time on the Floor of the House to discuss this important issue.
The UK’s financial and related professional services are critical to our economy. Together they account for almost 12% of GDP, employ more than 2 million people and contribute £66 billion a year in tax revenues. That is 11% of the total annual tax take, which is the largest contribution of any sector and essential for funding our public services.
While London benefits hugely from those sectors, two thirds of the jobs in financial and professional services are based outside Greater London. Some 160,000 people are employed in Scotland, with Edinburgh’s economy more reliant on financial services than any other UK city, including London. More than 54,000 people are employed in those sectors in Wales. Elsewhere, major employers include Citigroup in Belfast, Deutsche Bank in Birmingham, Aviva in Norwich, American Express in Brighton, and J.P. Morgan in Bournemouth. Overall, there are 22 towns and cities in the UK that each employs more than 10,000 people in financial and professional services, including Manchester, Leeds and Liverpool, Sheffield, Reading and Bristol, and Norwich, Portsmouth and Poole.
Does the hon. Lady agree that keeping the financial services passport is vital for many people who work in the sector, not least a lot of my constituents, and that people in business would be the first to say that in financial negotiations it is not wise to give a running commentary?
I agree with the hon. Gentleman’s first point and I will come on to the issue of passporting later. I believe that businesses really want certainty, which is why it is right that hon. Members raise issues in the House.
In my own fabulous city of Leicester, almost 7,000 people are employed in financial and professional services, including by HSBC, Santander and Hastings Direct. Those people are not the extremely wealthy bankers or hedge fund managers that we often read about in the papers. They are ordinary people on modest wages who work in customer services, call centres and office administration, and who pay their taxes and spend their money in the local community.
I do not want to diminish the importance of the financial sector, particular that which operates, and needs to continue to operate, in Europe, but, overwhelmingly, domestic financial services have no involvement with the continent at all. Their export potential is virtually nil, in the words of the Commission itself. To what extent does the impressive list of employees that the hon. Lady has given divide between those that are involved entirely in the domestic market and those that are involved in transactions overseas?
The businesses in my constituency and those that I have talked about so far are deeply concerned about losing their membership of the single market and their passporting rights. I care about those jobs and the contribution that those companies make to our economy. It is right for us to raise questions, and it would be wrong to suggest that leaving the European Union does not give rise to serious concerns.
Does my hon. Friend agree that today’s excellent ruling in the High Court gives the Government a chance to reflect on the invocation of article 50 and the impact that it is already having on the financial services employers to which she refers, particularly with regard to the uncertainty about our future membership of the single market?
My right hon. Friend is right. Many companies have been planning for months, even before the referendum, to try to mitigate the risks of Brexit. There is a mandate to leave the European Union, but there is no mandate about the terms. The Court’s decision today should allow this House to have its say, to raise the important issues and to hold the Government to account, and I hope that the Government listen.
In answer to Sir Desmond Swayne, does the hon. Lady agree that this is not just about passporting rights, but about the vital regulatory framework that the EU provides for the financial and banking sector?
I agree with the hon. and learned Lady, and I will come on to that point later in my speech.
As well as playing a crucial role in our domestic economy, the UK’s financial and professional services have an unrivalled reach and influence across the globe. The UK is the world’s leading exporter of financial services. We have the world’s fourth largest banking sector, third largest insurance industry, second largest fund management sector, and second largest legal services industry.
Many people believe that the British economy is too dependent on financial services and that, despite the significant number of jobs outside the City, that predominantly benefits London and the south-east. I agree. I have long argued that we need to rebalance our economy, develop a modern industrial strategy, and devolve power to our cities, towns and counties to boost jobs and growth in every region, in every part of the UK.
However, strong and effectively regulated financial services are crucial. They directly create jobs and growth, and support employment in related sectors such as legal and accountancy services. They are the bloodstream of the wider economy, pumping money through the country by lending to local businesses. They attract huge levels of inward investment, including about £100 billion over the past decade—more than any other sector—and they are crucial for our pensions and mortgages, and for funding the public services on which we all rely. That is why I am so grateful to the Backbench Business Committee for granting today’s debate, because the decision to leave the European Union has serious implications for the future of this vital sector.
Membership of the single market has brought huge benefits. In particular, it has entitled financial services to use the passport—the mechanism that gives companies the legal right to provide services across the EU, without having to obtain separate authorisation from other member states. Those passports are the foundation of the single market for financial services, and they are essential for investment banks and international insurance companies. Many are now deeply concerned about losing their passporting rights, but I am afraid that some leading hard-line Brexiteers have poured scorn on the idea that we need passporting at all and say that third-country equivalence will do.
Equivalence is when the European Commission recognises that a country’s rules and oversight of a specific area of business are as tough as its own. It is true that some countries outside the EU have been granted equivalence in some areas of financial services, but the Commission is under no obligation to grant it. It can also take years to negotiate, be time-limited, and withdrawn at short notice, and it does not cover areas that are crucial for UK financial services, such as insurance, bank lending and bank deposits.
The new Under-Secretary of State for International Trade and envoy for financial services—I am disappointed that he is not here today—admitted the problems with equivalence in his recent interview with Bloomberg. He said that the UK will probably lose its current legal rights to provide services in the EU after Brexit, and that equivalence will not be “good enough”. He told Bloomberg that the Government want a better version of equivalence, but that in return we may have to accept future EU regulations handed down from Brussels. The problem with that is that we will not have a seat at the table when the EU decides how to regulate our financial services. We will therefore lose our ability to influence regulatory decisions for the better.
The risks of losing our membership of the single market and our passporting rights for financial services are clear. While passporting is permanent, equivalence is precarious. The UK will move from being a rule maker to being a rule taker, and that is not what our financial and professional services want. Although they may hope for the best, they must plan for the worst, and they cannot wait until the last minute to find out what deal they might eventually get. That would not be right for their business, their employees or their customers, who expect them to take action to mitigate any potential risks now. It takes three to five years to move operations to a different country. That is why most international banks, many asset fund managers and other financial services are now working out which operations they might need to move to ensure that they can continue to service their customers, how best to do it, and by when they should do it. The chief executive of Morgan Stanley has said:
“It really isn’t terribly complicated. If we are outside the EU and we don’t have what would be a stable and long-term commitment to access the single market then a lot of the things we do today in London, we’d have to do inside the EU 27”.
Other countries have not been slow to try to exploit the uncertainty. France and Spain have already launched campaigns to lure companies to Paris and Madrid after Brexit. The more likely risk is that some jobs will move to Dublin, Luxembourg or Frankfurt, and even more will move to New York or Asia, unless the Government get their strategy right.
The impact of losing passporting rights and the risks of relying on so-called equivalence are not the only major worries for our financial services. They are also deeply concerned about the Government’s plans for freedom of movement.
I congratulate my hon. Friends the Members for Leicester West (Liz Kendall) and for Nottingham East (Chris Leslie) on instigating this excellent debate. Of course, people want financial services to make a bigger contribution to the Exchequer, but they already make a massive contribution, which is why it is right to have this debate.
In respect of the point that my hon. Friend the Member for Leicester West just made about the benefits and other issues beyond passporting, the desire of other EU member states to take part of the City’s market is illustrated by the fact that we have already had a tussle with the European Union over the City’s role as the clearing house for euro-denominated transactions. That has already been the subject of court action. If we leave the single market, it will not simply be a question of access; the likelihood of our losing the ability to be the clearing house for euro-denominated transactions is only likely to increase.
My hon. Friend puts that point extremely well. There are a huge number of risks on the issue he raised as well as on access to services, but the Government have so far had virtually nothing to say. Businesses cannot wait to get that certainty. Their regulators, their boards, their customers and their clients want to know what will happen. This will have a huge knock-on effect on the rest of the economy.
My hon. Friend is making a very important case. If the Government get this wrong and we lose substantial financial services business, is not the likelihood that that business will go to New York? New York has the capacity to take it on and already has the equivalence agreement in place.
I cannot read the minds of those in charge of the many companies that are considering those options, but my right hon. Friend is probably right to say that there may be a greater likelihood that New York will benefit, although I think some jobs will move to the EU, too.
Financial services greatly rely on employing people from across Europe and the rest of the world. Many people in the sector were dismayed and, quite frankly, appalled by speeches made during the Conservative party conference. They do not care about where people come from; they care about what people can contribute. They understand that the success of their business depends on getting people with the right skills in the right place at the right time. They know that we cannot somehow separate freedom of movement from what is best for businesses and the wider economy, because the two are inextricably linked. Companies in the sector are clear: if they lose their ability to get the best person for the job, when and where they need that person, they will simply take their work elsewhere.
Even worse, young people just starting out in their careers, such as the 700 apprentices that HSBC takes on each year, may no longer have the chances that they currently do to travel and develop their skills. Brexit risks placing an unnecessary limit on our young people’s ambitions and opportunities.
The hon. Lady makes an important point. Is she aware of the particular importance of freedom of movement to the so-called Fintech sector? In the region of 30% of chief financial officers and chief executive officers in one of the major expanding areas of our financial services sector come from countries in other parts of the EU. Does that not illustrate what is at stake?
It absolutely does. The right hon. Gentleman raises an extremely important point. This growing and developing sector is driven by skilled people from across the globe, and we do not want to miss out on those possibilities.
The hon. Lady referred to the rhetoric at the Conservative party conference. Does she agree that such rhetoric causes a reaction, and that the reaction across Europe was wholly negative? That makes the politics all the more difficult as we try to secure a good deal for this country.
The right hon. Gentleman is absolutely right. It was a huge strategic mistake for the Prime Minister and the Home Secretary to say what they did at the Conservative party conference. That has not helped us to work better with our EU allies, with whom we need to get a deal. It has made people across the world think that Britain no longer wants people to come here to live and work. It has put off many people who already work in this country and are now thinking about going home.
Businesses in all parts of our economy want certainty, above all. There are things that the Government could be doing to give businesses greater certainty during the inevitably complex, difficult and lengthy process of leaving the EU, and I shall conclude by outlining three of them for the Minister. First, Ministers should set out the broad framework and priorities for their negotiations. Is the objective to secure for financial services their existing rights to trade in the single market; or have Ministers already accepted the loss of passporting rights, as the Trade Minister said in his Bloomberg interview, and do they seek instead to secure a different or hybrid version of passporting or equivalence? What are their objectives on freedom of movement for people working in financial and related professional services? Is this a priority area for the Government in reducing the number of people coming into this country? Do the Government seek to set quotas in this sector, require people to have visas, or both?
Secondly, the Government must commit to a transitional agreement—this has been raised time and again by those who work in financial services—to ensure that there is no cliff edge at the end of the article 50 process. It took four years to reach an equivalence deal on one small aspect of commodity futures dealing with the United States, so it will be impossible to agree a deal covering all the many complex areas of the UK’s financial services industry with the remaining 27 EU countries within two years. Without transitional arrangements, companies may have their passporting rights suddenly removed with nothing put in their place, which would create legal doubt for huge parts of their business. A transitional agreement is therefore essential, and it must come soon. We need at least a joint statement of intent from the UK and the EU before article 50 is triggered to give financial services the certainty they need. That should happen before politicians in France and Germany inevitably start focusing on their own elections next year.
Finally, the Government must make it a priority that they ensure that the remaining EU countries understand the benefits of maintaining an integrated market in financial services. Some £1.1 trillion has been lent to businesses in the remaining 27 countries by banks based in the UK. Putting up barriers to trade would be a self-inflicted wound that would make us all worse off—not just in the UK, but in mainland Europe.
One of the most important complaints I have heard during the past seven years is that nurses and teachers did not cause the financial crisis. That is true, but it was also not the fault of the call centre worker in a big insurance company or the bank teller in the local building society. Plenty of British people do a decent job working in our financial services, and they could be on the front line when it comes to Brexit. The Government must provide more clarity about their plans so that businesses can plan for the future, and so that we protect jobs and growth, and get the best possible deal for Britain.
Order. I advise hon. Members that the speaking limit will be five minutes. I hope that we will not have to reduce it, but that might happen as we have very little time left.
I should say at the outset that I am chairman of the all-party group on wholesale financial markets and services, and that I worked in the industry for a few years before I entered the House.
I congratulate the hon. Members for Leicester West (Liz Kendall) and for Nottingham East (Chris Leslie) on securing this incredibly important debate. We are concentrating on an industry in which we have the greatest comparative advantage. It is important for the economy not just because it means that we can help public services, but because, as the hon. Lady pointed out, it is the lifeblood of many other industries. She has set out the facts about how many people it employs. It is the largest taxpaying sector and the largest exporting sector.
The sector is also the one with the largest trade surplus with the European Union. It is absolutely clear that one reason for that is that we have had access to and membership of the single market. London was always a financial centre, but membership of the single market has allowed it to become the undoubted capital for financial services not just in Europe, but arguably in the world. We have had a common set of regulations, we have broken down barriers, we have attracted huge investments, and global operations have moved to Britain. Leaving the single market or losing access to it would be calamitous for the financial services sector.
Some colleagues have argued that immigration was a key reason why we voted to leave the EU on
Last night, I attended a meeting of the National Institute of Economic and Social Research. Its most recent analysis shows that if we leave the EU on just WTO terms, which exclude most financial services, London would lose 60% of financial services business with the EU. I do not think that anyone, whatever their view, would regard that as anything other than a calamitous result.
The hon. Lady was right to concentrate on passporting. Passporting is necessary. It is not just a case of putting up a brass plaque on a door somewhere else in Europe; since the change in financial regulations, there is much more to it than that. It would be much more difficult to establish trade functions across Europe if we gave up passporting. The Chancellor told the Treasury Committee two weeks ago that he accepted the importance of passporting, and I hope the Economic Secretary will assure us that the Government recognise that.
Passporting is not only important for the banking industry. The Association of British Insurers put out a brief this week—I also met its representatives this week—about the ability of businesses throughout the UK to carry out insurance business across the world, and how they will be unable to do that if we lose passporting.
I am sure my hon. Friend is aware that there is not a single market in insurance, and that 87% of all insurers operate through subsidiaries in the EU, rather than in branches dependent on passporting?
My hon. Friend would be right to claim that about asset management, but I think he is confusing the two industries. The London Market Group said this week that although the number is not as high as that for banking, the amount of business done in the EU is substantially higher than the number my hon. Friend cites. I am happy to ask the LMG to come and discuss that with him.
If the Government are prepared to be rational, a solution can be negotiated, and that is what many people will want to get out of this debate. We might be able to have cross-industry work visas that would involve some limit on access—that would fulfil the requirement of those who want to control freedom of movement—but would also allow us some access to the single market.
As the hon. Member for Leicester West pointed out, an equivalence regime would need to be established, but such regimes are fraught with difficulty. The issue is whether we could establish a bilateral equivalence regime similar to what we have with America. A regime dominated by the European Court of Justice would not be satisfactory for the financial services industry and would wind back our prospects substantially. I would have liked to have said more about that, but I will heed the strictures of the Chair.
It is absolutely clear that the Government must give some guidance on transitional arrangements. The industry cannot wait for the end of the article 50 process. This is a bridge: the Government might not be able to set out exactly where we are going, but they must show that they understand the importance of financial services to this country and our position globally by giving the sector some certainty that after the article 50 period—it is unlikely we will be able to do a deal within two years—they will have transitional arrangements in place. That would mean that wherever we end up, the financial services sector can start its journey over the bridge.
I have no doubt that the Prime Minister and the Economic Secretary understand the importance of this industry to our country. I also have no doubt that we can negotiate a hybrid deal through which we can retain jobs and maintain London as Europe’s financial centre.
I congratulate my hon. Friend Liz Kendall on securing this debate. It is most important that we set the right tone for it: we must not let the events of 2008, with scandals about bankers’ bonuses and so on and so forth, detract in any way from the economic significance of this sector for this country.
My hon. Friend outlined many of the economic statistics underlining that argument, but we must be quite clear that, with more than 2 million people employed in the sector—not least the 300,000 people in my neighbouring town of Birmingham in the west midlands, where about 10% of jobs are dependent on this and related industries—it is hugely important for employment. It is also hugely important to the many people who benefit from the financial and insurance services that this industry delivers, and to the recipients of domestic or business loans who depend on it for the quality of their standard of living or for the economic performance of their area.
My hon. Friend has outlined the significance of passporting. I would like to amplify that. It is very interesting that a country such as Switzerland, which is synonymous with finance and financial management, has no passporting rights in the EU and, as a result, bases many of its companies and activities in London in order to get that access to the EU. The fact that one of the historical major global financial centres of the world is working through London to access the system underlines the sheer strategic importance of our maintaining our access in the negotiations.
I have heard the argument that because more EU companies use passporting to gain access to the UK than the other way around there is an equivalence of interest—the “we’ll be all right on the night” argument. But that does not take into account the fact that the negotiations will be carried out by politicians looking at political issues rather than company representatives looking at the bottom line of their finances. It could well be that issues such as the single market will be debated and negotiated in such a way that other EU countries will use them as the justification for refusing access to passporting.
My hon. Friend the Member for Leicester West outlined the significance of the free movement of labour in the financial services industry. We could end up hitting ourselves twice—first by objecting to free movement of labour, which would be damaging to the financial services industry, and then by having that objection used by EU negotiators as a justification for ending the passport regime. The Government have to handle this incredibly delicately, with maximum support from the financial services industry, to arrive at a solution that will not be doubly damaging to the industry.
In the short time remaining I will mention something that is perhaps not so directly relevant to passporting within the EU but is relevant to financial provision in this country. The mutual sector contains companies that are often small and do not have or need passporting because they do not trade in Europe. Those companies have often been burdened by what they perceive as an EU-level of regulation. Now, I often think that it is our own regulators who needlessly apply the regulation, but that is a different debate. However, on coming out of the EU the argument about EU regulation can no longer be used. I look forward to seeing this country looking at its regulatory regime for those companies that trade only domestically and do not have or need passports, to ensure that we develop a regulatory system that is far more proportionate, and enables small financial services to thrive and provide better consumer options.
There seems to me to be a great deal of overstatement and exaggeration in this arena. The media have tended to overstate difficulties in this area to a very significant extent.
This is about confidence. For nearly 400 years, up to our entry to the EU under the European Communities Act 1972, the United Kingdom was able to run one of the most effective—if not the most effective—financial services centres, the City of London. The idea that somehow or other, because of the intervention of the European Union, things will get better is completely outweighed by the disaster area and dysfunctionality that the EU now represents.
Only a few days ago, in Bratislava, I heard the chairman of the European Parliament’s Committee on Budgets saying that the EU needed an “electric shock”, that there was far too much regulation, that it was far too intrusive, and so on. The chairman of ECOFIN said that the EU was facing the biggest economic and political crisis in modern political history. All that is true. The idea that we would not have to leave the European Union—thank heavens the British people made their own judgment about that—and the construal of our leaving the European Union as a disaster in itself simply belie the facts.
The reality is that EU legislation is deeply embedded in the financial services sector. Just to state the obvious, not only are we obliged under sections 2 and 3 of the 1972 Act to absorb all the legislation—I warned in a letter to the Financial Times in 2008 that that would lead to the kind of difficulties we are now experiencing with regard to financial services—but because of the Court of Justice we have to obey all the regulations. The massive regulatory overkill of the whole of the financial services sector as a result of that arrangement is an undoubted disadvantage. There are huge benefits to be gained by being outside the European Union, which I will come to in a moment.
Surely the hon. Gentleman is aware that most EU bank regulation—especially since 2008—has been at the behest of the G20, so we will be subject to it whether we are in the EU or not.
The problem that the hon. Gentleman has perhaps not taken quite on board is that because of the European Communities Act there is a legislative requirement for us to accept those rules. Outside, we will, I hope, be able to benefit not only the United Kingdom but the EU, as I will come on to in a moment.
We only have to look at places such as Singapore and Hong Kong to understand that one does not have to be in the European Union to have a successful financial services sector and compete in the global marketplace. The same applies to New York. The objective must be to keep the financial markets open throughout the European Union as a matter of mutual concern throughout the UK and the other 27 member states. Breaking up the London system would involve much greater costs for everyone. Europe would end up far worse off, in my judgment—and that of many others, too—if the financial sector migrated to New York, Singapore or Hong Kong.
The passport is not specific to any one aspect of the financial services field. It works best in relation to banking accounting for about a fifth of annual banking sector revenue. It works less well in relation to asset management, which my hon. Friend Stephen Hammond mentioned. It is vital to understand that there are subsidiaries set up all over Europe carrying on the business of other countries irrespective of a passport. A significant amount of EU assets are already in Dublin and Luxembourg and their management—this is the key issue—is run from the UK. Indeed, on a recent assessment I have read, only 7% of assets managed in the UK are thought to be threatened by the loss of the passport.
There is not a single market in insurance at all. I appreciate that my hon. Friend might wish to come back to me on that, and I am very happy to talk to the people he mentioned in reply to me, but I simply make the point that we are not always dependent on the passport. There is a special problem regarding Lloyd’s of London, but I am informed that the pool of underwriters across the EU amounts to only 11% of the market’s gross written premium, and only 3% is directly reliant on the passport.
We have three main alternatives: equivalence, bespoke agreements and local arrangements. Equivalence is granted by the European Commission. The Commission is guardian of the treaties and has the legal clout that we will get away from when we vote to leave, so equivalence would not apply to us if we left the EU. But we have the same regulations as the EU, and under the repeal Bill, which I put together just before the referendum and am glad the Government are so interested in, we would be able to run parallel operations where it was in our mutual interests to have regulatory arrangements in the UK equivalent to those elsewhere in the EU—and, indeed, internationally, as well.
As regards bespoke agreements, we have the potential to secure an agreement similar to that with Switzerland, for example. If no cross-border access arrangement is made, firms will still be able to set up subsidiaries. That would, I have to admit, cost money, but it would not be disproportionate. I do not want to go into the details of a private conversation so I will simply say that I got that straight from some very senior bankers the other day. It boils down to this: we can arrive at an arrangement similar to Switzerland’s or at a free trade agreement. Of the two, I must admit I prefer the latter.
I congratulate my hon. Friends the Members for Nottingham East (Chris Leslie) and for Leicester West (Liz Kendall) on achieving this Backbench Business debate. Unsurprisingly, I agree very much with the contribution made by the latter.
I shall speak specifically about financial services outside London and the south-east. [Interruption.] I seem to have infinite time, which is fine.
I want to say three things: first, to correct an impression about who we talk about when we think of financial service; secondly, to correct an impression about globalisation and trade; and finally to correct an impression about what is required of the Government in face of Brexit in financial services and the broader economy.
As my hon. Friend the Member for Leicester West said, too often there is an easy, knee-jerk reaction when we think about financial services. People bang on about bankers, but people who work in financial services are not who we might think they are. They are ordinary working people from around the country. I was blessed to be able to find that out in person when I served as shadow City Minister for my party last summer. Several financial services companies were good enough to welcome me through their doors to shadow members of their workforce. It was absolutely fascinating. In cities, none of which was London, I sat with people working in financial services, including insurance and pensions, and talked to them about their daily lives. They worked incredibly hard serving their customers—the British public and exporting businesses.
I was struck by the story told to me by one set of workers who were recalling the global financial crisis. They were told by their manager: “Just don’t mention what you do when you go down the pub after work.” Nobody in our country should have to do that. Nobody should be made to feel ashamed of what they do. I am Labour MP for a reason, and that is it. We should never engage in language that seeks to condemn people simply because of their employment.
I was also struck by the passion with which those in the insurance industry fought fraud and tried to get people a better deal. Those people deserve Members’ support and backing. This is not a London issue. We might call it the “City of London”, but 11,000 people in Belfast; 54,000 people across the north in Leeds, Liverpool and Manchester; 58,000 people in Edinburgh and Glasgow; 10,000 people in Sheffield; and 4,000 people in Norwich do a good day’s work for a good day’s pay and need our backing.
My hon. Friend is absolutely right that this is a national issue, but I hope she acknowledges the work the Mayor of London has done in drawing attention to the importance of financial services. It would be curious if London were not represented on a Brexit Cabinet sub-committee but the other countries and regions were.
Thank you, Madam Deputy Speaker. I will do my best.
I thank my hon. Friend for his intervention. I am happier to support the words of the current Mayor of London than those of the previous one, who said that no one could deny that London is the engine of our economy. In financial services, as with everything else, our regions should be on equal footing. One should not be over another. It is a fact that London has extra lobbying capacity because Parliament is located in the city, so a corrective is necessary.
The second point on which I want to correct people’s impressions is that, although Stephen Hammond is right to talk about competitive advantage, which matters, when we talk about globalisation and international markets, not least in the financial service sector, we are talking not necessarily about increased trade but about increased multinationalism. Companies stretch themselves much more over borders, which is why I still believe that our membership of the European Union was important. I accept the result of the referendum, but when we have multinational companies, we need to be involved in global governance so that we can protect the people who work for them in our country. The 1,000 people who work for Santander in Bootle and the 1,000 people who work for Merrill Lynch in Chester work for global companies. They therefore need global protection and global response. I hope that goes some way to answer the points made by Sir William Cash, although no doubt he will not agree.
Finally and very briefly, we need to correct the impression of what is required. Passporting is absolutely crucial, as has been described by several Members, but it is not just that. The concentration of financial services in our country’s economy has meant that London has overheated for far too long. Financial services outside London have another crucial role. Building societies and the mutuals sector have been mentioned. We need to use our financial services outside London and the south-east to partner with Government to improve infrastructure investment and investment in small and medium-sized enterprises. Forty-two per cent. of start-ups happen in London and the south-east, which is simply not good enough. That is why I ask the Government not only for passporting but for rebalancing by supporting our financial services.
The clock is back. The excitement! The hare is running!
I should briefly declare an interest. I have at times worked in the financial services industry. I draw Members’ attention to my entry in the Register of Members’ Financial Interests.
Like so many other hon. Members, I am here to talk about financial services outside the capital. I pay tribute to Liz Kendall, who spoke very powerfully about that. In my constituency, I drive past the Fidelity asset management centre, which is based in Hildenborough and employs nearly 1,000 people. Financial services also support economies such as the legal economy, accountancy and various other innovators. As we have discovered from the success of start-ups in the United States, access to financial services is often a trigger for improvements in the tech sector.
I apologise for not being in the Chamber earlier because of Select Committee duties. Does my hon. Friend concede that it is important that we link access to financial services with access to other professional services including legal services, which are critical to building the infrastructure backing up the financial services sector?
My hon. Friend makes an extremely good point and I will let it rest there.
Access to financial services is not just about the financial services industry but about all industries. Finance greases the wheels of the whole economy. It is important that we maintain the access we have in the UK. I therefore urge hon. Members to see Brexit not just as a threat, which sadly so many people do, but also as an opportunity. The United Kingdom used to be extremely good at taking the opportunity to innovate. Too often we have limited ourselves. Many people will look at the potential loss from the eurobond clearing and various other elements, but we should also look at the potential openings in financial technology, where we have already seen such innovations in the UK, to which I hope we agree we can add.
Services here in the UK are built on the foundation of skills that support the current industry and that will support future growth. Tomorrow’s growth will be based on those same skills, which come from a highly educated, highly literate and highly open population of people across our islands, whose languages, ethnicity and cultural links tie them around the world. They are able not only to do deals but to finance and enable entrepreneurs and businesses around the world. That is why I am less concerned than some about the potential closing off in markets in the European Union. We must remember that the EU itself depends on the City of London and that the depth of asset pools in the City gives the industries of Germany, Italy and France a reach they would not get from their own domestic markets. It gives them an opening to other financial sources around the world, including east Asia, that they would not get from Milan, the Paris Bourse or the Frankfurt exchange. I know that the Minister, who is in his place, will see this as a good deal for both parties, as all good deals should be, because the EU and Britain have a common interest.
Having that common interest requires us to remember who we are. It requires us to remember that we, here in the United Kingdom, are in so many ways more than the sum of our parts. We define ourselves not by the nations we come from, but by what we give together. I mean this very seriously. In so many countries in the world, people define themselves as a “something-something”. In the United States, for example, people often define themselves as a Polish-American or an Irish-American. I, who am the son of a French woman, the grandson of an Austrian man and an Irishwoman, do not define myself by that. I define myself as British, as so many people here do. It is that openness and inclusivity that has made Britain the home for so many and the centre for so much.
That is why, when we look at the financial industry, we must not look at it alone, or indeed just consider the legal and accountancy aspect. We should not even consider its enablement of other industries. We should consider the ethos it requires. That ethos is the ethos that we have promoted on these islands for a thousand years. It is one that defines people by the breadth of their experience, skill and knowledge, and not in a narrow sectarian definition of origins or passports. It is much greater than that.
I will leave it there and urge the Minister, as he takes the negotiations forward and sits around the Government table, to see that the financial services around our whole country, particularly in the great kingdom of Kent, are not just a simple route to enrichment, but an avenue to openness, growth and the support of what the UK has always been: a beacon to other nations, an island of safety and in many ways an example to all to enrich all.
I rise to speak about the impact of leaving the European Union on the financial sector and the legal profession, with particular reference to my constituency.
An estimated 7,000 of my constituents are employed in the financial services sector. Across the whole city of Edinburgh, there are 34,800 people employed in financial services. Edinburgh is the UK’s second-largest financial centre. It is a major European centre for asset management and asset servicing, and home to the global headquarters of the Royal Bank of Scotland and the UK headquarters of the Green Investment Bank. Edinburgh is the UK’s largest financial capital centre after London by both gross value added and employment. The financial sector in Edinburgh also supports many other jobs in the service sector. Some of the best coffee shops, sandwich shops and restaurants are in my constituency, supplying constituents who work in the financial and legal sectors.
Very worryingly, earlier this week an independent report for the Scottish Parliament’s Economy Committee revealed that Edinburgh’s reliance on financial services is greater than that in any other city in Europe. Therefore, Edinburgh is at most risk of being affected if we lose the protection hon. Members have been speaking about. I pause to pay tribute to those hon. Members who secured this debate.
There are serious concerns about the potential for lost jobs and business if there is a loss of full access to the single market. Leading economists gave evidence to members of the Scottish Parliament on Tuesday on the impact that Brexit and leaving the single market would have on Scotland’s economy. Across Scotland, the financial sector directly and indirectly employs almost 200,000 people, 20,000 of whom are European Union workers. It contributes £8 billion to the economy of Scotland. In fact, Edinburgh’s economy is more reliant on financial services than London’s economy, or indeed any other city’s economy in the UK. As I said earlier, if we look at Edinburgh’s share of financial services, we see that it is markedly ahead of most large European cities.
Is my hon. and learned Friend concerned that the Scottish asset management sector is bigger than that in Frankfurt and in Paris put together? We stand to lose out significantly.
Yes, I am concerned about that. Edinburgh’s reliance on financial services is 23.8%, compared with 18.9% in London, 17.3% in Brussels and 17% in Amsterdam. By comparison, Glasgow’s financial services sector is worth about 12.4% to its economy.
This is not fearmongering. Paris and Frankfurt are already angling for some of the jobs that may leave London and Edinburgh if we leave the single market. I attended a briefing last week at which the Irish ambassador spoke. He pointed out that while Britain leaving the European Union poses some problems for the Republic of Ireland, it will also provide some fantastic opportunities for Dublin to attract jobs that we really need in our financial sectors across the UK. In Edinburgh, we really want to hang on to those jobs.
I am happy to say that a lot of people in my constituency are employed in legal and accounting services, which is what I used to do before I came to this place. More than 3,000 of my constituents are employed in the legal services sector. Across Edinburgh, that figure for the legal and accounting sector is closer to 10,000. The Law Society of Scotland has its headquarters in my constituency, and the Faculty of Advocates, of which I am non-practising member, has its headquarters in the neighbouring constituency of Edinburgh East. A lot of lawyers and other people who work in law firms live in my constituency and are worried about the impact of Brexit on legal services. There are many aspects of EU law that have particular relevance to the legal system and professions, including the directive on the mutual recognition of diplomas, the lawyers establishment directive and the lawyers cross-border provision of services directive.
Does the hon. and learned Lady recognise—I imagine she might—that there is a certain circularity in her argument? It is not surprising that the legal profession inside the European Union, which is concerned about European law, would want to protect that particular part of their activities. She could perhaps be a little more generous in understanding that those who want to leave might actually end up with laws that are made in this place.
That is not what I am actually talking about. I am talking about the way in which European Union law has enabled Scots lawyers, English lawyers and lawyers across these islands to practise across Europe not for their benefit but for the benefit of their clients. That is the point. It is also to the benefit, as earlier speakers pointed out, of the financial services sector and to the British economy in general. This is not naked self-interest on the part of the lawyers. Lawyers depend on their clients to make a living. If lawyers are not able to practise across Europe easily, they will not be able to provide such a good service to their clients. That does not just apply in the financial sector. It covers all sorts of areas, including, very importantly, child and family law.
In Scotland, the Law Society of Scotland will be urging the UK Government and the Scottish Government to argue in negotiations that the current arrangements for lawyers to be able to practise in the European Union should be retained. It would be very disappointing if the only route for lawyers to be able to practise in Europe in future would be to requalify in other EU jurisdictions and go through the cumbersome processes that we have done away with as one of the many benefits of being in the EU.
Clearly, the best way to protect the legal and financial services in my constituency and in the city of Edinburgh is to remain part of the single market. That would be the easiest way to give comfort to those sectors. Of course, we are not able to give any comfort to those sectors, because the Government “do not want to give a running commentary”. However, it appears, as the result of a legal decision today, that the Government may in due course be forced to come to this democratically elected Chamber and tell us a little bit more about what their plans are. It is worthy of comment that that is not as a result of European judges sitting in Brussels, Luxembourg or Strasbourg. It is the result of English judges sitting in London. As a Scots lawyer, I wish to pay tribute to those English judges for the decision they have reached.
Ultimately, it will be for the Supreme Court of the United Kingdom to decide, and it includes, of course, two very senior Scottish judges. I believe that the Supreme Court has already allocated a few days in December. I read that the full Bench will sit, so the Scottish judges will be there as well. The Scottish Government have said that it is very likely that Scotland will intervene in that case, and I have every confidence that the Supreme Court will reach the right decision.
Order. I am afraid that I shall have to reduce the time limit to four minutes: everyone has taken considerably more than five minutes because of interesting interventions.
I begin by congratulating my hon. Friends the Members for Nottingham East (Chris Leslie) and for Leicester West (Liz Kendall) on bringing forth this timely debate. They are both known as having been huge talents, and their absence from the Front Bench is unfortunate.
I come to this debate with a sense of frustration. Like Tom Tugendhat, I worked in financial services for a number of years before I came to this place. I get frustrated when I hear politicians characterising bankers as greedy, yacht-going men who live in high-rise apartments, looking for ways to rip off the British public to make themselves even richer. That is not my experience of the banking system, and it is not the experience of the people I meet in my constituency, such as those who work on the high street in Blackwood or people such as Jonathan Brenchley from Barclays, a community relations manager who works hard to improve community relations. I recently had a meeting with NatWest, which is trying to improve IT and promote small IT businesses so that they can grow in Wales.
It is true that financial services are the largest exporters in the world. Some 11.8% of our GDP is in the financial and related sectors. The financial industry employs over 2 million people, and not all of them are based in the City of London. It employs one in 14 people in the UK on average, and two thirds of them are based outside Greater London. In Wales, for example, 54,300 people are employed by the financial and professional services industry. These are people who really believe in their companies; they have a buy-in, and they want to provide the best possible customer service. That is why I am concerned.
Before the referendum of April 2016, PricewaterhouseCoopers conducted an analysis of what effect leaving the European Union would have on the financial services sector. The outcome was grim, forecasting that leaving would result in the loss of 70,000 to 100,000 jobs by 2020, with a slight recovery over time, but remaining with a loss of 10,000 to 30,000 jobs by 2030.
As we have heard, work in the financial services industry involves helping businesses to grow and individual people to reach their potential. Suffice it to say, it is the base industry for everything in this country. The prospect of the UK leaving the EU is a real threat to the financial services industry. Our financial services industry does not operate in a vacuum; rather, it relies on international trade and the flow of capital around the world and particularly the EU.
At the moment, the sector makes extensive use of passporting, as we heard from my hon. Friend the Member for Leicester West. The Treasury Committee’s publication of figures from the Financial Conduct Authority shows that 5,476 companies registered here in the UK depend on these passport rights to do business with the EU.
In the light of the hon. Gentleman’s condemnation of the vote to leave, will the hon. Gentleman remind us how his constituents voted in the referendum?
The hon. Gentleman has spent 30 to 40 years in this House going on about the European Union. All his birthdays must have come at once on
Essentially, we need to ask whether this will mean the loss of passport rights. What structures will be put in place to allow people to continue doing business and paying their taxes? Banks and the financial service industry simply need to know that.
I am short of time, but let me say that my second key concern that generates uncertainty is the extent of EU-originated law that now governs financial services. The law itself, of course, is not the issue, but what replaces it and the process by which it will happen is still a mystery. It is hard to find reliable information to quantify the extent to which EU law governs the UK financial services sector. However, since the EU implements many international regulations and agreements relating to the financial services sector and the UK relies on that body of law, leaving the EU can raise questions.
Ultimately—I am running short of time—it is no good for the Prime Minister to come here and, when she is challenged, to say every week, “Brexit means Brexit.” It is no good her saying that she is not going to give a running commentary on the negotiations either. The financial services industry needs certainty. It needs to move on, and it is time that the Government came up with some answers to the questions I have raised today.
Members may be surprised to discover that I am not going to focus on what happens outside the City of London. It is important to talk about the City of London, and not just the areas outside it. What happens in the City of London benefits the whole of the UK’s economy. Whether or not Scotland is independent by the time that Brexit happens, it will still be really important for us that there is a strong financial services structure in the UK.
Not right now; I do not have much time.
I have a couple of points to make, starting with the issue of capital flight and passporting, which has been widely mentioned. As Liz Kendall said, passporting is important because banks have to make these decisions now. They have to make them today. They cannot wait for the Government to mess about while they come up with deals on Brexit. The structural decisions have to be made now, because it takes a number of months and years for these things to happen. Banks do not have the luxury of being able to wait until two years down the line when the Brexit negotiations are concluded to discover whether or not there is a cliff-edge at that stage. They need to make those decisions now. When we hear that the Government are not going to give a running commentary, it means that banks have to take those decisions now, and it is disadvantaging the whole of the UK as a result.
I understand that it is difficult for the Government to provide certainty. They do not yet have certainty even on what language the negotiations will be conducted in, let alone anything else about them. It is unlikely that we will reach a position where we have certainty by the end of the two-year period. That is why organisations such as the London Market Group are suggesting that what the Government need to do as a matter of urgency is to agree transitional arrangements. It represents insurers, who generate over 20% of the City of London’s total income. What it says they need is financial regulatory certainty and transitional arrangements for five years post-Brexit in order not to severely disadvantage the insurance industry. Five years post-Brexit is a very long time, and the Government have not given them any certainty at this point in time.
Clearing is the other really important issue that I want to talk about. The London Clearing House is a huge success story for the City of London, and it has become very important. Clearing is the process through which risk in the financial markets is managed. It catalyses growth by helping to manage that risk, and it is central to the UK’s delivery of the G20 post-crisis legislative framework. Our financial markets are less risky and better regulated as a result of having so much of the clearing house function based in the UK.
There are conversations about euro-denominated currencies moving from London, but we will lose not just euro-denominated currencies. The London Stock Exchange Group and the London Clearing House work in 17 currencies, and the only reason the London Clearing House has such a large market share and is so successful is its access to all those currencies. If euro-denominated clearing is moved from London to New York—and let us not kid ourselves that it will move anywhere else—we, the United Kingdom and the whole of Europe, will lose out. As a matter of urgency, the UK Government need to secure agreement from the European countries that euro-denominated clearing will not be removed from London. The clearing house function supports 100,000 jobs in the United Kingdom. It is not true that, as the Chancellor said recently,
“in terms of…jobs and value…it is a relatively small part of the total.”—[Official Report,
Vol. 626, c. 149.]
A huge amount of the market, and City of London services, rely on the clearing house function, and the Government must prioritise it.
Let me begin by welcoming the ruling that Parliament should be sovereign in this area as in others. That does not mean that Brexit will not proceed; as was pointed out by my hon. Friend Liz Kendall, we have a duty to honour the will of the British people. However, as elected representatives, we also have a duty to ensure that article 50 is triggered in the right way and at the right time, safeguarding the best interests of this country. The referendum was clear about the act of triggering article 50, but it was silent on when that should happen and with what safeguards. I think that it is important for us in Parliament to stand up, as we are today, and, rather than leaving these issues to the Crown prerogative and to Ministers, to do our duty when it comes to this particular question.
I do not believe that there can be many other sectors as large as the financial services sector. It produces 12% of our economic output and millions of jobs: in Nottingham alone, 500 firms deal in financial services. Many Members have drawn attention to the significance of the sector, whose scale is very obvious. However, I think that there is some confusion among Conservative Members, particularly Sir William Cash. The hon. Gentleman seemed to be saying, “Oh well, we can leave the European Union and it will all be fine. We will just muddle through. We will find our way to a sort of happy equilibrium where everything will be fine.” He is wrong, because the other 27 countries in Europe are massive markets for our industries and for those who are employed in the financial services sector in this country. The hon. Gentleman and others need to realise that it is not just a question of leaving the EU and then facing tariffs of 10% or 20%; it is a question of whether we will have a legal right to trade in those products at all with those other 27 countries.
I do not have time to give way to the hon. Gentleman. Well, I may do so if I am tempted. The clock stopped after he spoke, and it felt like the 19th century.
Let me read out to the hon. Gentleman a list of the products that will be banned after April 2019, the time at which we would be out of the European Union. It will no longer be possible to trade in these services with the other 27 countries unless we secure a transitional arrangement or some solution from the Government.
There will be no deposit taking, regulated commercial lending services, trade finance, finance leasing, regulated receivables financing such as factoring, derivatives, hedging services, credit card services, payment services, consumer credit, mortgage lending, equity and debt capital markets, fixed income secondary market trading, regulated foreign exchange spot and forward trading, securitisation, regulated commodities trading, or clearing and executing brokerage. It will be illegal for British-based firms to trade into those 27 countries after April 2019 unless the Government manage to secure a decent deal.
The challenge to the Minister, who has already heard it from many Members on both sides of the House, is yes, to focus on the right solutions—automatic access rights to the single market must be our goal—but before we reach that stage, in January or February, he must start to ensure that we have some evidence on the transitional arrangement talks. A transitional arrangement must begin before we trigger article 50, in the reporting season, so that banks and other financial institutions can plan ahead. If the Government do not give a clear commitment to seeking a transitional arrangement, we will find that those financial institutions have a “stick or twist” option. Do they stay and risk it, hoping that something will crop up after 2019, or do they twist, leave the UK and try to locate elsewhere? That is too much of a gamble. It should not be so binary. I hope that Ministers will think very seriously about doing the right thing for the sector and those who are employed in it.
Let me begin, as others have, by commending Liz Kendall for securing the debate. Let me also commend her for summing up everything that I think Opposition Members, as well as many Conservative Back Benchers, believe about the nature of the problems that will face the financial sector post-Brexit. If there were any political justice, the moment that the hon. Lady had finished speaking the Minister would have stood up and agreed with everything that she had said. That would have been the end of it, and we could have gone on to actually solve some of these problems. Sadly, though, the Minister did not do that. We are faced with a situation in which the UK’s major industry, in terms of employment, taxes raised and the nature of our links with the rest of the world—it is a key strategic industry—is left blowing in the wind, waiting to find out what happens.
I always listen with great interest to what Sir William Cash says because he is forensic and thinks things through. He came up with a whole series of fixes—sticking plasters—that could be applied so that the financial sector could legally maintain its markets in Europe. However, I put it to him and those who agree with his line of argument that there is a problem: since 2008, the UK financial sector has been in a special place compared with many other industries. It has had to undergo massive regulatory change, which has produced massive uncertainty in the industry. That process has not yet fully played out. We still have to get to 2019 before we will have implemented all the Vickers proposals on ring-fencing, so the banks are in a major process of reorganisation. Many Members have been to bank headquarters in the City and know that the situation on the ground is very complex. To add to that process of uncertainty, we have another period of uncertainty when the institutions will not even know whether they have the right to trade any longer in the rest of Europe, and that is a step too far.
We all know what the Minister will say when he makes his speech as he has come along to a number of such debates. He will done a fine job of not telling us anything. He will say we cannot have constant reporting on negotiations, but we are not asking for that. Instead, we are saying that given the unique uncertainties in a major industry that is undergoing massive regulatory change, the Government must put forward a transitional period. It must tell the financial institutions, “Yes, we have a transitional period. We will put down a time period, and it will go beyond 2019, when the Vickers proposals bed in.” That would allow everyone to calm down. If the Minister will not do that and instead maintains the silence, the Government will be adding to the regulatory uncertainties that are piling up on the industry.
My hon. Friend talks about the uncertainty that is caused by the Government saying that they will not give a running commentary. Does he agree with the First Minister of Scotland that the Government are refusing to give a running commentary and to allow a vote in this House not for reasons of high constitutional principle, but because they do not have a coherent position, and they know that if they come to this House, that fact will be exposed?
It would be my guess that the Government’s silence may just cover up a lack of strategic vision.
I also want to address a point raised in an intervention by Sir Desmond Swayne. He said that only about a fifth of revenues from the UK financial sector come from Europe and that we have a huge domestic sector, particularly in retail banking, so we should not exaggerate the crisis in the financial sector that might emerge due to Brexit. I have an answer to that: the problem is that the strategic sectors of banking, particularly high-value investment banking, which is where the profits are, do relate to Europe, and the threat is not from Paris or Frankfurt, but from Wall Street.
I have no wish to force US banks out of the City of London, but the banking community that has gained most since 2008, and that has consolidated and expanded its market share, is the major US banks, particularly the five big investment banks. They have increased their market share in London and Europe while European investment banks are in major decline—Deutsche Bank is in financial trouble, as are the Swiss investment banks, and all we are left with is the European champions, Barclays. If we break up the European financial family in another period of uncertainty, all we will do is strengthen the arm of the US investment banks, and behind them is a whole series of other US financial institutions that are coming into Europe.
US private equity has driven a coach and horses through traditional German bank lending at a regional level. For example, Cerberus is coming in and using a network of Cerberus companies across Europe to buy its way into European property by buying distressed debt. It is using the fact that it can play off one of its divisions against another through transfer pricing to take a gain in taxation. The real threat to our banking system is that, unless we get a grip, Wall Street and the American banks will dominate it. The right hon. Member for New Forest West suggested that the British domestic market was strong enough to survive whatever happens in the next few years, but that is not true. As we weaken the entire European banking family, we open up the possibility that the British retail banking system, which has retreated into its own domestic market, will be very much weakened when it comes to further American competition.
We need a solution to the passporting issue. The Minister will probably not respond to my proposal today, but I will put it on record anyway. The Scottish Government are seeking to maintain Scotland’s position within the single market, and I want to make it very plain that we would do that while being part of the United Kingdom. The UK Government have already done a side deal with Nissan and said that they will keep an open border between Northern Ireland and Ireland, so side deals—by industry and by region—are already out there. If Scotland were allowed to stay in the single market as part of the United Kingdom, that would give us a solution to the passporting problem. British banks could use their offices in Edinburgh and Glasgow to continue to trade with Europe because they would have the passport, and the Treasury would still be able to tax their profits because they would still be in the UK. The alternative is that the major European and American banks will move their nameplates to Dublin and Frankfurt, and the bulk of the business will be run from New York. We need a solution, and one solution would be to accept the Scottish Government’s proposal—or at least give an assurance that it will be thought through, rather than instantly dismissed—that Scotland should remain within the single market.
It is a pleasure to contribute to what has been an excellent, thoughtful and timely discussion. I congratulate my hon. Friends the Members for Leicester West (Liz Kendall) and for Nottingham East (Chris Leslie) on securing this debate to discuss one of our most important industries at a critical time for its future. The financial services sector and its related professional services form part of the backbone of the UK economy. According to a report published earlier this year by TheCityUK, these sectors together represent nearly 12% of UK economic output. They contribute £66 billion in taxes and generate an annual trade surplus of £72 billion.
We have heard from several hon. Members today, particularly from my hon. Friend Alison McGovern in her eloquent speech, that it is wrong to misinterpret the term “the City” as simply meaning London—it does not. The financial sector’s presence and contribution are felt throughout the UK. TheCityUK’s report also highlighted the fact that, when related professional services are included, the industry employs 2.2 million individuals across Great Britain, two thirds of whom are located outside the capital. For each of those workers, the value added to the economy is £87,000, compared with the annual average of £52,000 for workers in other sectors. It is evident from those figures that financial services go far beyond a handful of well-paid jobs in the square mile. This is an association that we need to break down to ensure that the future of the industry is given the careful consideration it demands in the Brexit negotiations in order to safeguard stability for the rest of us.
Next year will mark the 10th anniversary of the early stages of the global financial crisis. In the intervening decade, the City has made measurable progress towards becoming a fairer and better functioning sector through the combined efforts of regulators and the industry itself. None the less, public trust in financial services remains at an all-time low, in some cases for understandable reasons. There is still some way to go for the sector to rebuild its reputation and regain that trust. For that reason, the fact that financial services might suffer disproportionately as a consequence of Brexit might not elicit sympathy in some quarters. However, if the financial crisis proved anything, it is that the success of our economy and nation is inextricably linked to the performance of our financial services sector. Arguably, that relationship had become too dependent in several ways before the crisis, but it is still true that it is challenging for the UK to achieve its full potential if our financial sector is not in good health. The positive flipside is that when the City does succeed, it brings a raft of accompanying benefits.
Our financial services sector is world leading. There is good reason why centres such as Frankfurt and Paris are vying to capture a slice of our thriving activity. The Financial Times revealed this week that the French Government are on the cusp of launching a cross-party initiative to lure businesses across the channel, while local financial regulators have simplified the process for new financial companies to register in Paris. The city’s business district has unveiled new adverts that are designed to entice companies to move with the inventive strapline: “Tired of the fog? Try the frogs!” The tone may be light-hearted, but we must take seriously the hard-headed commercial motivations. These existential threats do not mean giving the sector preferential treatment at the expense of others; it is about recognising the sector’s value and ensuring that we can build the environment it needs to continue to grow.
The £72 billion trade surplus, as mentioned in TheCityUK’s report, represents more than that for all other net exporting industries in the UK combined. We are discussing the future of our largest export industry. Getting Brexit right is fundamental to the overall success of our financial services sector and our continued economic prosperity. We need to focus on three main outcomes for financial services to ensure that, at least in the interim, the Government do not inflict damage on one of the most productive elements of our economy.
The first is clarity. Markets loathe uncertainty. While the Government fail to deliver a clear outline of their negotiating plans for financial services, investment and key decisions will continue to stall among domestic and international financial institutions of all sizes because they lack the information that they need to plan properly for the future. Equally, the outline needs to be fair and then effectively communicated. We do not want a bank-by-bank process of deal making similar to the approach that appears to have been offered to Nissan under which one institution receives mystery assurances while another is kept in the dark. Coherence and transparency—not a system of discreet concessions to those who shout loudest—will be critical. The eventual agreement must not cover just one industry, but the whole British economy, to make sure that Brexit works for everyone.
Secondly, the City is heavily invested in and dependent on the principle of free movement for its workers. At the very least, the sector needs basic guidance on what will become of the EU nationals upon whom it relies to function. London in particular boasts a cosmopolitan financial services workforce, attracting talent from the EU and beyond that helps to fuel its success. There is ambiguity about what the status of these individuals might be in the eventual negotiations. Once again, that stalls companies’ ability to plan for the future and make the right hiring choices. Equally, it will discourage people from coming to this country. It is unacceptable to use the personal circumstances of individuals working in financial services as a bargaining chip, so I call on the Government to guarantee their ongoing residency rights.
Thirdly, one of the central goals of the Brexit negotiations must be to guarantee freedom of trade for UK businesses in the EU, which is critical to financial services. The industry’s exports to the EU represented £18.5 billion in 2014. We will strongly argue for the rights of UK financial services companies to win business across the EU. In a world where global markets are becoming ever more connected, it makes no sense to put up barriers. The fact that we are already compliant with EU standards and regulations puts us in a position of strength, because we should at least qualify for equivalence on the day we depart. I second the view of my hon. Friend the Member for Leicester West that passporting—the right to do business across the EU—is a deal breaker in the negotiations.
The scale of this task must not be underestimated. In the lifecycle of a typical equity trade, there are around 100 different stages at which EU laws have an impact. When we discuss passporting, it is important to recognise that we are talking about not one simple directive, but a bundle of legal instruments that stretch across myriad items of regulation. They include the markets in financial instruments directive, the European market infrastructure regulation, the market abuse regulation, the prospectus directive—the list is long. Each financial market component and participant contributes to a complex ecosystem that is made up of many co-existing businesses. Inhibiting or obstructing a single part of the ecosystem could have a significant unforeseen impact. The Government must therefore consider carefully how to provide clarity and equal access for every single link of the chain.
I want to conclude by sharing two scenarios that underline the importance of today’s debate. We are operating in an environment of extreme uncertainty that seems to be benefiting no one except currency speculators. Despite that, a recent report by consulting firm Oliver Wyman managed to produce two reasonable forecasts of what might happen, depending on which type of Brexit we can achieve. Its analysis suggests that an exit from the EU that can deliver passporting and equivalence, alongside access to the single market in a similar scenario to that enjoyed currently, would prompt a decline of about £2 billion in revenues from EU-based activity and put 3,000 to 4,000 jobs at risk. That is the best-case outcome. In the worst-case scenario, with the UK moving to third-country status, without equivalence, and our relationship with the EU being principally through the World Trade Organisation, the implications could be severe. That framework puts up to 35,000 jobs at risks and could cost approximately £18 billion to £20 billion in revenue each year.
I am most grateful for this debate, which has taken place at a critical juncture for the UK economy, and I thank hon. Members for the valid points they have raised. I urge the Government carefully to consider this sector, which sits at the heart of our economic health, and to take on board the arguments that have been made about protecting future jobs, future revenue and the future prosperity of the United Kingdom.
I am grateful to the Backbench Business Committee for allocating time for this debate, and to the hon. Members for Leicester West (Liz Kendall) and for Nottingham East (Chris Leslie) for requesting it.
Earlier this year, the British public made it clear that they want a new relationship with the European Union. Although we are under no illusions that this will not mean hard work and adjustment, we are committed to getting on with the job to make Brexit a success for people across the UK and for businesses across our industries. That includes, of course, our world-leading financial services sector, because it is clear, both from the many points raised today and the regular discussions I have with Members on these issues, that we are all in agreement on the importance of this industry to the British economy and of making sure this sector remains robust, highly competitive and open for business after our withdrawal from the EU.
First, it is worth reflecting on why this sector is of such importance to our economy. We have heard many statistics today, and they tell a compelling story. Last year, this industry contributed more than 7% of the value of all goods and services produced in the UK. The industry also exports £63.7 billion of services worldwide every year, making it the world’s largest exporter of financial services. From a Treasury perspective, the sector also brings a huge amount of money to our Exchequer. Let me give hon. Members a sense of the scale: in 2015, the banking sector alone contributed £24.4 billion through just corporation tax and PAYE. Recent analysis suggests that if we look at the broader financial services sector, we find that the tax contribution increases to £67 billion.
Leaving aside the enormous value this industry adds to what we produce, the services we export and the taxes we receive, we also have to remember how many jobs this industry gives to British workers. Across the country, more than 1 million people have jobs in this sector, with two thirds of these outside London, and in addition more than 1 million people are employed in jobs related to the financial services sector. To give just one example, the north-east has more than 50,000 people working in financial services.
What are the Government doing to ensure the continued success of an industry of such huge importance to our economy? First, since the referendum result we have been engaging extensively with companies across the financial services industry, to understand how we can make sure that our withdrawal from the European Union is a success for the financial services industry.
Secondly, the Prime Minister has made it clear that we will invoke article 50 no later than the end of next March to begin our formal negotiations with the EU. The Government are determined to continue with that plan. Finally, we have said that the European laws and regulations will be transferred to British law on our exit from the EU to provide continuity for businesses that operate in the EU.
On the points that have been raised, Liz Kendall asked me for some clarity. I am very pleased to say that, hopefully, I can do just that. She asked about passporting. I can say that the Under-Secretary of State for International Trade, my hon. Friend Mark Garnier, was not correct on this matter. Passporting, or rather the access to EU markets that comes with it, is one of the key areas under negotiation. The UK is looking for a sensible discussion on how our two markets can continue to serve one another, and on what is needed to support that. She also mentioned freedom of movement. It might be helpful if I were to quote the Chancellor of the Exchequer, who said:
“I see no likelihood of our using powers to control migration into the UK to prevent companies from bringing highly skilled, highly paid workers here.”—[Official Report,
Vol. 616, c. 134.]
The hon. Lady mentioned transitional arrangements. We are determined to secure the best possible deal for UK goods and services, and that is very much in the interests of both the UK and the EU. Given the strong level of interconnection between our economies, continuity of service and an orderly withdrawal from the EU are also very much in the interests of both sides,
The hon. Lady finally asked me to agree with her that the best possible Brexit for the UK was also the best possible Brexit for Europe. I do agree with her, and that is a message that we should all do our very best to persuade others of: it is in everyone’s interests that we get the best possible deal.
I thank my hon. Friend Stephen Hammond for his thoughtful and sensible contribution. Mr Bailey asked about the impact of withdrawal on smaller businesses. It is a very important point and we must always remember that companies involved in financial services are not necessarily all huge firms in the City of London. My hon. Friend Sir William Cash obviously knows a great deal about Europe and I am always very pleased to hear from him. He made an interesting contribution, and I can reassure him that it is our intention to secure the very best possible deal.
Alison McGovern made the good point that not all financial workers are fat cats in the City. Indeed, they are hard-working people up and down the country, two thirds of whom operate outside the City of London. From Edinburgh to Brighton, and from Belfast to Bournemouth, the financial services industry is a very important employer, and I pay tribute to all those people who work so hard in it.
My hon. Friend Tom Tugendhat made an excellent point about the benefit that the UK offers to all of Europe, and it is in our common interest to get the best possible deal. Joanna Cherry might be pleased to know that I am planning to visit not only Scotland but Northern Ireland and Wales in the near future to look at financial services and to demonstrate the Government’s interest in all parts of the country. Chris Evans will also be pleased to hear that Wales is an important part of the solution. Kirsty Blackman sought certainty. What I can say is that I am certain that we will seek the best possible deal, and the clearing function is an important element of that deal.
As usual, Chris Leslie made some thoughtful points. I can assure him that I listened to them carefully. George Kerevan thanked me and said that I was doing a fine job. Who am I to disagree? I can tell him that Brexit does mean Brexit, we will not be giving a running commentary, and we do intend to get the best possible deal. I thank Jonathan Reynolds for his sensible and constructive contribution. We all want Brexit to work for everyone and I look forward to working with him where we can to make sure that we get the best possible deal.
In conclusion, it is important that we retain our reputation for excellence in financial services and remain the most competitive place in the world to do business. It is not only about doing what is best for the British economy, but about doing what is best for everyone throughout the country, maintaining the quality of financial services available to British customers and taxpayers.
Once again, this has been a useful debate. I thank everyone for sharing their thoughts. We are very much in listening mode and I look forward to listening as things progress.
Once again, I thank the Backbench Business Committee for granting this debate. We heard many excellent contributions. I am only sorry that we did not have more time and that some Members could not speak for as long as they wanted to.
I do not think we learned any more from the Minister’s comments than we knew before the debate—[Interruption.] My hon. Friend Chris Leslie says that the Minister may regard that as a triumph. I am glad the Minister said that passporting is important, but he did not say that the Government would set out the broad framework and their objectives for the Brexit negotiations. He did not say that it was a priority to get the same access as we currently have to the single market for financial services, and he did not commit to a transitional agreement, let alone such an agreement any time soon. That is a huge mistake. If we want to protect this vital industry as well as jobs and growth, the Government need to act now, because businesses cannot wait. They have to plan for the future. Their customers, their regulators and their boards demand it. I ask the Minister to think again.
Question put and agreed to.
That this House
has considered the effect of the UK leaving the EU on financial and other professional services.
On a point of order, Madam Deputy Speaker. It is 49 years today since my colleague Mrs Winifred Ewing won the Hamilton by-election and came to this House as a solitary Scottish National party MP, and of course that means 49 years of SNP representation in this House, although we are rather more than one now. How would it be appropriate for me to mark this illustrious occasion in the history of my party and have it entered in the record?
The hon. and learned Lady has just proved herself to be a very adept and clever lawyer. Coming from me, that is a compliment. She will appreciate, as the House appreciates, that the point she made is not a point of order and does not, fortunately, require any comment from the Chair. However, she has made her point and it will be on the record that an historic event occurred 49 years ago today. I am sure the House will note that and, in its own way, celebrate it.