Financial Services and Markets Bill – in a Public Bill Committee at 2:44 pm on 19th October 2022.
We will now hear from William Wright. We have until 3.25 pm for this panel. Would the witness please introduce himself for the record?
My name is William Wright. I am the founder and managing director of New Financial, a capital markets think-tank.
Q Thank you very much for being with us this afternoon. I am asking each witness a general opening question before handing over to colleagues. To what extent do you think the Bill fully unlocks opportunities? We have not had ab initio financial services regulation for nearly a quarter of a century. In that period, technology and trade flows have changed, and the imperative for us to remain competitive as an economy remains constant. How well does the Bill meet that objective, and who are our competitive set in the world?
Thank you for the question and for the invitation to join you. Overall, the Bill gets just about the right balance between, on the one hand, the opportunity to reframe, tailor and recalibrate the framework for UK banking and finance, and on the other, to address the post-Brexit imperative to do so.
Inevitably, now that the UK has left the EU, we have to rework the financial architecture around regulation—the processes—now that it no longer goes through the European Parliament, the European Commission, the ECON committee and so on. The FCA, PRA and the supervisory architecture need to change to reflect that. I would add that the Bill draws the right balance, broadly speaking, in terms of not going too far, not trying to intervene too much in the specific legislative briefs in different sectors, and focusing much more on setting the framework.
On the second part of your question, on competitors, it is important to divide—for want of a better word—the City into two; it is a tale of two Cities. There is no competitor to the UK domestic side of the City, which is all about providing the right support and finance for UK companies and investors, and oiling the wheels of the UK economy. On the international side, of course, the competitive environment has changed quite radically over the past few years. We are now competing simultaneously with the US, with rapidly growing markets in Asia, and with renewed competition—some of it motivated perhaps more from a regulatory perspective than a competitive perspective—from European financial centres.
Q Do you think there is a disconnect between the Government’s stated ambition to become the world’s first net zero financial centre and the actual levels of green finance in the UK today?
Part of that question relies on how you measure it, so I can only speak to how we at New Financial have measured it. We recently looked at and reviewed green finance activity—more specifically, green capital markets activity—in the UK and the EU. We found that, on two key measures, the UK is actually significantly behind the EU, which suggests that there is a disconnect between the widely accepted and widely stated position that the UK is already a global leader in green finance, and the widely received ambition to become the leading international green finance centre.
We looked at it in two ways. First, when you look at the UK’s market share of European activity in green finance, across equity bond and loan markets, it is about 14% of all EU plus UK activity. That is significantly lower—significantly lower—than the UK’s share of other capital markets and financial services activity. On a narrow definition of capital markets, the UK has a share of about 20% or 22% of EU 28 activity; on a broader definition of banking and finance, it has a share of just over 30%. Strictly in green finance, the UK has a share of half to two thirds of where you would expect it to be.
We also looked at the penetration: what percentage of equity capital raising—loan market and bond market capital raising—is green, in both the UK and the EU? In every single sector that we looked at, the UK lags behind in terms of green capital raising as a proportion of total capital raising. To give an indication of scale, last year roughly 20% of all capital markets activity in the EU was green; in the UK it was 9%.
There is a disconnect. I think there is an opportunity for the UK to catch up, but there is, shall we say, quite a lot of catching up to be done.
Q On the catching up or lagging behind that you have mentioned, would you recommend any legislation? Is there a role that the Bill we are discussing could play to strengthen us and pull us forward?
There is certainly a role for legislation; I am not sure that the right place for that role is this Bill in particular. It is important to step back and look at the huge amount of work that has already been done and is being done in and around green finance from a legislative perspective. The latest addition to that is the net zero review, and the green finance strategy is expected from BEIS early next year, maybe. There are sustainability disclosure requirements, the UK green taxonomy and the transition plan taskforce. That work, which is coming down the pipeline towards us, could contain a lot of the legislative impetus for the UK to close the gap.
More importantly, I think the industry is already beginning to fill the gap. Where the UK has a real opportunity in green finance in future is not so much in the level of capital raising by UK companies, but in the fact that it is in pole position to benefit from its existing expertise in markets such as risk management, derivatives and trading, as we see the emergence of a more sophisticated carbon market of green derivatives and green risk management, and in playing to its existing strengths, many of which have not been harmed or damaged in any significant way by Brexit.
Q I know that your website describes one of your key aims as developing a larger capital market across Europe. There is a trick to be pulled off in encouraging all the right kinds of people to come and invest in your financial markets while keeping the wrong kinds of people out. How effective has the UK’s previous regulatory regime been at keeping Russian money out of our financial markets?
On the substance of that question, I will have to put my hands up and say it is not an area that we have done a huge amount of work on, although we have recently hosted some events on that theme—for example with Edward Lucas, talking about Russia, Ukraine and links back to the City.
One point I will make is that back in 2007, in a previous life as a financial journalist, I was at the official launch of NYSE Euronext—this was the merger of the New York stock exchange and Euronext, the European-based stock exchange. The founding chief executive, John Thain, who was then chief executive officer of NYSE, said he thought that London would come to regret its campaign in the previous five or six years to attract Russian companies to list on the London stock exchange. If we look back on those comments with the benefit of 15 years of hindsight, he was probably correct.
Q A number of transparency and anti-corruption campaigners regularly say that London has become or is in the process of becoming one of the go-to locations of choice for money laundering and similar activities. Is that a concern that you think is grounded in fact? Or is it just an urban myth with nothing behind it?
I will have to fall back on saying that it is not something I have specific expertise on. I have opinions and views. I have recently read some of the works by Oliver Bullough on different aspects of this—“Butler to the World” and “Moneyland”—and it made me quite angry to read them, but it is not an area where I can claim any professional expertise to answer a question in this setting.
Q Good afternoon. I will pick up on a few things in respect of the competitiveness of the UK financial markets. Our competitiveness is really important for our economic growth; do you think the Bill goes far enough with regard to the deregulation of existing EU rules? When it comes to new regulation, does the Bill enhance the ability of Britain’s financial services to be agile and dynamic and to look at the best possible outcomes? We are very good in Britain at gold plating our rules and regulations, so we need to make sure we are not putting ourselves on the back foot and can be the most competitive, agile, dynamic market.
That is sort of the trillion-dollar question, isn’t it? On EU rules, the Bill and the huge amount of work that the Treasury and others have done over the past three years address the obvious low-hanging fruit—the obvious areas of EU regulation and the framework that were not appropriate for the UK market, which has a unique dynamic within the EU. Most of those areas have been well addressed in the Bill.
On looking ahead at competitiveness, the Bill does create a more agile and nimble framework. By definition, one would hope that the UK can act more swiftly than the EU, and we are already seeing some signs of that. Again, it gets the right balance by making competitiveness a secondary objective and not a primary objective. It gets the right balance to ensure that it is something considered by supervisors and regulators but not something that overrides the fundamental purpose of supervisors to ensure a stable financial system that is competitive within itself, and where customers get appropriate protections.
We need to be very careful, in the debate on competitiveness, about assuming that competitiveness is a mechanical outcome of regulation and tax. One of the lessons we can take from the last few weeks is that a very important element of competitiveness is credibility, predictability and the robustness of independent institutions. It is important to bear that in mind when we talk about competitiveness.
In the short term, the biggest competitiveness threat to the UK—this comes back to the Minister’s opening question—is probably from additional pushback and pressure from the EU as it requires more EU business to be conducted inside the EU. We have this interesting dynamic: the UK is increasingly focusing on making people want to do business in the UK because it is an attractive environment, whereas the EU in many areas is trying to attract business by requiring people to do it there. We also need to be very careful in this debate—
Order. I am afraid that brings us to the end of the time allotted for the Committee to ask questions. I thank our witness on behalf of the Committee.