Then I draw to the noble Lord’s attention the constant reaffirmation that we intend to stick to Basel standards. If we do not and we go for this broader deregulation, some honesty from the Government would be very relevant, frankly, at this point in time, and I will tell him why. The reason why I am so concerned about the lifting of the bankers’ bonuses cap is that it is a return to animal spirits and excessive risk taking, which we certainly cannot afford.
The noble Lord will know, if he talks to the asset managers and many of the other institutions that underpin financial services in the UK—I talked to the largest of those asset managers only a week ago—they will say that, if there is any move to deregulate, they will leave London for reputational reasons. They cannot afford the risk of being based and regulated in what is perceived to be an environment that is moving towards lighter-touch regulation. I understand that the reputation they have earned over the past years matters more than just about anything else.
I accept that financial services are complex and that different activities are impacted differently by Brexit. Purely domestic financial services—retail banking, for example—are pretty much untouched. But the opposite is entirely true for services sold from the UK directly to EU customers, and the White Paper makes it quite clear that these activities will move to the EU 27. They include commercial and specialty insurance, trade-related banking services—perhaps the noble Lord, Lord Forsyth, would add others to the list of banking services—and large parts of fintech that are very much tied to passporting and to the e-commerce directive. Ironically, when the UK has third-country status, because of the way local rules work within the EU, it will be less burdensome to sell to UK clients from the EU than it will be—not for all, but for many services—to sell to the EU from the UK. That is a powerful incentive to make that move—certainly for those core sales to EU companies, but more broadly.
Finally, we come to the capital and wholesale markets, which are at the heart of the City of London and underpin the financial services industry in the UK. These are, essentially, capital raising, and even more so because we are the global leader in FX trading and derivatives trading. We can easily forget that London is a global centre not despite but because of its role as the regional powerhouse for all the EU countries and for the euro. With the wholesale markets comes a further ecosystem of asset management and treasury operations, since senior managers prefer to be in one place, so they co-locate absolutely key operations.
I accept that no other capital or city in the EU could take London’s capital and wholesale markets away tomorrow. If the EU were to strip EU and euro activity out of London, it would go largely to New York. But that is day one. Read everything that Barnier says about financial markets, look at the rule changes put in place by the ECB and ESMA and it is clear that the EU has a 10 to 15-year strategy to build its capacity and leach these activities slowly into the EU. The battle is not really between London and the EU. It is a battle between Frankfurt and Paris to receive that business over the next 10 to 15 years.
One could say, “Why shouldn’t they?”. It is the EU economy—not the UK economy—that generates the core customers for so much of financial services that are, almost uniquely, wrapped up with financial stability issues. Could the EU rely on a UK regulator in a financial crisis when the whole point of Brexit is to put the UK interest first? If some businesses leave London and go to New York, why should the EU care? We are both third countries. So I believe that the consequences of any kind of leach are devastating over time—but financial services is an industry of the future, not the past, and it is key to opportunities for our young people, to our tax base and to our prosperity.
I quickly turn to two last issues. The first is timing. The political chaos in the Tory party, which makes a “no deal” prospect more likely, is having an immediate impact. Firms in the group that I described, which are selling services to the EU, have prepared for a move. They have licences in place, they have leased office space and they have optioned technology—but so far they have moved few people. Many pressed the go button after the Chequers fiasco and the disappointment of the White Paper. I hope, too, that we will look at this whole immigration issue. I would love to pick that up but I do not have time.
I urge the Government, even at this late stage, to find a way to stay in the single market for financial services. Nothing else will do and, quite frankly, if they cannot do it, they should tell people the consequences and let them have the final say.