That is a very interesting and important point. My hon. Friend will correct me if I am wrong, but my understanding is that when the Financial Services Act 2012 came in, there was significant debate about whether it should have included a duty on the regulator to promote financial services, both in the UK and abroad. The decision was taken not to put that in statute at that time. The Government should revisit that decision. Giving the regulator such a duty would not be inimical to ensuring that we regulate the industry properly; it would just ensure a balance, and that the regulator considered the impact on consumers—firms and individuals—as much as other impacts.
Recently, the EU has made many changes to the way it treats all non-EU firms that seek to offer financial services to European customers. Changes to MiFID II and large clearing houses are being considered, and I believe the proposals being discussed include setting the bar higher for granting equivalence for firms classed as systemic. It is proposed that the European Securities and Markets Authority—let us just call it ESMA to avoid getting tied up—be given greater powers to oversee the activity of those firms, including powers to open investigations, conduct on-site inspections and the like. It is also proposed that ESMA be able temporarily to restrict or prohibit those firms’ activities in the EU.
In recent months, the EU has shown that it wants to be able to give its supervisory agencies, such as ESMA, greater extraterritorial reach, so they behave a bit more like American financial services regulators often do. The EU wants to ensure that ESMA plays a greater role in overseeing when national regulators can allow EU-based asset managers to outsource or delegate portfolio and risk-management activities to entities outside the EU. At the moment, as the Minister will appreciate, many asset management funds based in Luxembourg and Ireland delegate those activities to London. Some fear that the initial review that is under way is the precursor to the EU seeking to ban those outsourcing and delegation models altogether, although I gather that in recent days an agreement has been reached between British and European regulators—that is what it said in the Financial Times, at least. Perhaps the Minister can enlighten us about that.
Those rather technical points matter, because they show that the equivalence regime—the regime that we are going to rely on under the Brexit deal—is being considerably narrowed. In my judgment, that may make it harder for UK-based firms to sell services directly into the EU in future than it is for, say, Japanese and American firms to do so today. If the Minister’s answer is that the UK will seek in large part to copy the EU’s regulation, does that not make us highly vulnerable to aggressive regulatory behaviour from the EU27, who have already shown that they are very capable of designing regulations that are deliberately inimical to UK interests? Just as importantly, as we look further afield to the huge growth in opportunities for financial services in places such as Asia, how will we be competitive with the centres of Hong Kong, Singapore and New York and ensure that the UK is best placed to attract that business?
On the other hand, if the Minister’s answer is that the UK will seek to diverge from EU regulations where we can—obviously, that is a perfectly legitimate outcome—do the Government have a strategy setting out the areas in which we will seek to diverge, how we might do that and what the benefit will be, bearing in mind that the consequence will be reduced access to the European market in the areas in which we seek to diverge? In my view, we can take that path only if we shift to a regulatory model that significantly increases our relationships with and footprint in emerging markets in Asia and elsewhere. In those circumstances, we would shift more decisively to being a global financial centre, accepting that a certain chunk of European business will move away to the European Union. How do the Government envisage managing that shift and balancing those two approaches?
The Asian powerhouse countries have increasing financing needs, which include servicing $26 trillion of infrastructure spend, providing the backing for the Chinese-led belt and road initiative, and the internationalisation of the renminbi. Over the past 25 years, emerging economies’ share of global activity has risen from 40% to 60%, and their share of global trade has grown from a fifth to a third, yet their financial assets make up only 10% of the global financial system. Things will not stay that way for long, especially as savings rates keep increasing and the Asian economies concurrently get richer and richer. Growth in those countries far outstrips growth in Europe and the United States, and London is not necessarily the automatic choice for Asian financing. Singapore and Hong Kong are redoubling their efforts to ensure that they are the financial services centres that finance that Asian growth. How will we ensure that the UK is the global hub for that work?
I have spoken mostly about regulation—hon. Members are all still awake; I thank them for bearing with me—but tax policy is also a major part of this. The sad truth is that we are no longer internationally competitive on taxes for financial services. A report by UK Finance and PwC published in December 2018 states:
“On an overall basis, over half the profits (50.4%) from participant banks are paid in taxes” in the UK. Some 43% of the taxes borne are not dependent on profit. In effect, they represent a fixed cost; the profitability of the bank is irrelevant. If we compare London with our major competitors—Frankfurt, New York, Singapore and Dubai—the overall tax burden for a model bank is highest in the UK, at just over 50% of commercial profit. In Frankfurt, that figure is 43%, in New York it is 34%, and in Singapore and Dubai it is 23%.
Putting all that together, given the regulatory challenges I outlined and the tax challenges I have just set out, are we still sure that the UK is in a position to dominate international financial services for the next 30 years, as it has for the past 30 years? Our financial services sector helps productivity and growth in our real economy across the country. Financial services is one of the most productive sectors in British cities, and while the average output per worker in a British city was £59,000 a year in 2016, that figure was almost twice as much in financial services. It would be foolish, however, to suggest that our financial services sector fully penetrates into some of our poorest regions, or that it is used by some of the poorest people in our country. I refer hon. Members to my entry in the Register of Members’ Financial Interests, because I am a commissioner for the Financial Inclusion Commission, and we have been working on this issue since our landmark report on financial inclusion in 2015. Since then, the Treasury and the Government have taken on board most of the commission’s recommendations, and I commend them for that.
What does financial inclusion actually mean? In simple terms, it means belonging to a modern, mainstream financial system that is fit for purpose for everybody, regardless of their income. It is essential for anyone wanting to participate fairly and fully in everyday life. Without access to appropriate mainstream financial services, people end up paying more for goods and services, and have less choice. The payday lending market grew from £330 million in 2006 to £3.7 billion in 2012, and it is probably now worth more than £4 billion. We are a country of about 65 million people, and 13 million people in the UK do not have enough savings to support themselves for one month were they to experience a 25% cut in income—one month! We save less as a percentage of our income than any other country in the European Union.
I have talked about banking, insurance, Asia, and the belt and road initiative, but for the UK to be an effective financial services hub internationally, we must ensure that we are No. 1 in the world for financial inclusion. All our people need the chance to create and develop wealth and savings. There is no excuse for us not to use the talent of the world’s finest firms and individuals involved in financial and professional services in the UK, and for us not making true financial inclusion a reality for all our people.