During yesterday’s debate on the effect of the UK leaving the EU on financial and other professional services, Sir William Cash made the following interventions:
Sir William Cash (Stone) (Con): 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?
Stephen Hammond: 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. (…)
Sir William Cash (Stone) (Con): 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.
George Kerevan (East Lothian) (SNP): 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.
Sir William Cash: 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 the Member for Wimbledon (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.
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Sir William Cash: 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.
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Sir William Cash: 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?
Chris Evans: 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 23 June—that is all I can say! [Interruption.] He knows the answer very well. I think he is trying to create a bit of mischief for me. (…)
The Economic Secretary to the Treasury (Simon Kirby): 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, the hon. Member for Leicester West (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 the Member for Wyre Forest (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, 25 October 2016; 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 the Member for Wimbledon (Stephen Hammond) for his thoughtful and sensible contribution. The hon. Member for West Bromwich West (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 the Member for Stone (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.
The hon. Member for Wirral South (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 the Member for Tonbridge and Malling (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. The hon. and learned Member for Edinburgh South West (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. The hon. Member for Islwyn (Chris Evans) will also be pleased to hear that Wales is an important part of the solution. The hon. Member for Aberdeen North (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, the hon. Member for Nottingham East (Chris Leslie) made some thoughtful points. I can assure him that I listened to them carefully. The hon. Member for East Lothian (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 the hon. Member for Stalybridge and Hyde (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.
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