UK as a Financial Services Hub — [Graham Stringer in the Chair]

Part of the debate – in Westminster Hall at 10:37 am on 6th February 2019.

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Photo of Anneliese Dodds Anneliese Dodds Shadow Minister (Treasury) 10:37 am, 6th February 2019

It is a pleasure to participate in this debate, and I congratulate Bim Afolami on securing it. It has been an interesting debate, particularly when it comes to hearing about how Members’ professional experience has informed their approach to these matters in Parliament.

As many Members have said, financial and related professional services are an important area of the UK economy, and they contribute just over a twentieth of the UK’s overall economic output. There are interesting developments in the sector, which has traditionally not reflected the diversity of UK society. With the Women in Finance charter, changes are being made to reduce the pay gap. In relation to other characteristics, action is being taken to increase the number of people in the sector who have disabilities or are from black and minority ethnic or working class backgrounds.

We have discussed the fact that many people in the sector are not based in London or the south-east. I will add one statistic: there are more than 100,000 people employed in banking and finance in the north-west, which makes it the area with the third-largest number of people working in the sector, outside London and the south-east.

We have had an interesting discussion this morning about the sector’s tax contribution. Reference has been made to research undertaken by PwC that suggested that about 1p in every 10p of Government revenue comes from the sector. Let us be clear that that is counting the tax contributions of everybody who works in the sector, so it is not just looking at corporate taxation. As we all know, the corporation tax rate has been reduced. That has meant that the amount of corporation tax, in relative terms, has reduced. In absolute terms, it has gone up, but that is because these banks and so on have returned to profitability after the financial crash, so actually the burden has gone down in that area. Of course, it has also gone down when it comes to the bank levy, which has been scaled back. A surcharge has been applied as well, but when we look at both of them over time, we see that that burden is also going down.

Reference was made to stamp duty on shares. That stamp duty brings in about £3 billion of Government revenue a year. It is one of the most efficient and least avoided taxes, and for that reason Labour is considering extending it as part of a financial transactions tax. I would be very happy to talk to the hon. Member for Hitchin and Harpenden about how that would work.

As many hon. Members have said, financial services contribute significantly to Britain’s exports. In 2016, they were worth about £61 billion, with a surplus of £51 billion over imports of—yes, obviously—£11 billion. Of course, that is very significant in a situation in which other areas that traditionally were important for Britain’s export strength face tremendous headwinds, not least in relation to manufacturing, given the current uncertainty about Brexit.

As the hon. Member for Hitchin and Harpenden rightly mentioned, the UK is increasingly integrated into global markets. I would argue that the UK is already a very important hub when it comes to the Chinese financial markets, for example. About two thirds of renminbi payments outside mainland China and Hong Kong flow through London, so we are already catching quite a lot of that business. In addition, a number of Chinese firms have established themselves here. However, we need to be clear: yes, that activity is increasing, but, as others have said, we have to be sanguine about its current size. TheCityUK, in its report entitled “Key Facts about the UK as an international financial centre”, says that only about 0.4% of UK financial services exports currently go to China. That may of course increase in the future, but if we compare that with the 44% of our exports that go to the EU, there is a massive difference. As my right hon. Friend the shadow Chancellor of the Exchequer has intimated many times, it must continue to be possible for our financial services companies to win business across Europe and, reciprocally, for European companies to win business here.

As I have said many times during delegated legislation Committees on no-deal legislation, the UK Government have failed to prioritise sufficiently our financial services. I absolutely agree with the comments in that regard by Kirsty Blackman. We appear to have accepted an outcome whereby equivalence, rather than passporting, is the likely eventuating circumstance, and of course that equivalence will operate on virtually exactly the same basis as it currently does for nations such as the US and Japan, which are far less dependent on access to the EU27’s markets than the UK is. On the question of how equivalence would work in the future, the point is that it would work the same for all third countries. If there were to be a stricter regime generally, that would apply to us in just the same way as it would to Japan and the US—the point is that it can also be removed at any point, from the perspective of the EU Commission—rather than there somehow being a more onerous regime for the UK, which I think would not be the case.

I very much associate myself with the remarks by Robert Neill concerning the current legal services conundrums and how they can have some kind of certainty on many regulatory issues.

Only very late in the day did our Government start to stress the shared interest of the UK and the EU27 in maintaining access to UK financial services. That was an enormous shame, because we have a mutual interest both in financial stability and resilience and in ensuring that the EU27 can continue to access the deep pool of capital that is available via our financial services. That recognition came only after a much longer period, sadly, in which a very damaging zero-sum narrative had developed, with the cut in corporation tax suggesting an intention to race to the bottom on tax and regulatory standards. That was immensely frustrating. What Craig Tracey described in relation to the insurance industry is actually what I am finding right across the financial services sector. There is no appetite anywhere, from what I can see, for a bonfire of regulations. Actually, the concern is to try to prevent regulatory turbulence and ensure that there is co-ordination into the future, and yet a picture has developed of a zero-sum approach whereby the UK would seek to reduce those regulations. I think that that has been very damaging.

On that issue, although I agreed with much that the hon. Member for Hitchin and Harpenden said, I did not agree with his comments about EU regulation. Actually, one root of the financial crisis was the misalignment of risk with reward. That was targeted by the cap on bankers’ bonuses, and rightly so. A second root of the financial crisis was the lack of transparency in financial markets—dark pool trading and so on. That was targeted by MiFID, which encouraged many other countries to adopt the kind of transparency standards that existed in the UK before. I therefore think that we need to be very careful about mounting any kind of wholesale assault on those regulatory systems. When it comes to having robust regulation of systemic providers of market infrastructure, I think that that is a very sensible approach and, indeed, it is one that has been supported a lot of the time by UK actors.

Co-ordination of regulation will become ever more important with more innovation in delivery models of financial services. I strongly agree with the comments by John Howell, who is no longer in his place, about the need for regulations to keep in step with new developments—for example, in relation to digital currencies. I also agree with the comments made about the workforce, who are incredibly important. We need to ensure that we still have access to people from other countries who can contribute so much to our financial services.

I am a little surprised that we have not talked much in this debate about the contribution of financial services to investment, particularly in business. We need to be clear about what has happened over time. In 1988, almost a third of banks’ UK lending went to businesses. It is now less than a tenth, so there has been an incredible change over time. The Labour party thinks that we need to do something to deal with that. We need to learn from what other countries have done in relation to national investment banks—KfW in Germany, in particular. We need to look at the RBS branch network. I share the anger of Lee Rowley about the closure of some of that network.

Of course, we need to focus on vulnerable consumers as well. Although we have seen many positive innovations in that space, that often has not been the case for consumers on low incomes. I will add one statistic to this debate, which is that about one in three families in the UK do not have the financial wherewithal to pay for a new cooker if their current one stops working. That quite extreme lack of financial resilience is now very present in our communities. Consumer credit debt is still far too high, not least for people with overdrafts, credit card debt and/or hire purchase debt. We need to see much more strenuous activity on that. I was very pleased to hear the comments of the hon. Member for Hitchin and Harpenden about credit unions in that regard. Yet again, I urge the Government to focus on better integrating credit unions into the Help to Save programme. I also ask the Government to look again at having a proper tribunal process for the businesses that were dealt with so badly during the RBS Global Restructuring Group scandal, so that there is some redress for small firms that may have been impacted on by banks’ practices.