Future Trade in UK Financial Services
This meeting considered the short and long-term impact of the Trade and Cooperation Agreement on the UK’s financial services sector. Witnesses were asked to outline the nature of UK trade in financial services, the impact of barriers to trade with the EU, and opportunities available elsewhere. Whilst the supporting professional services environment in London was referenced it was not the main focus of this session. The intention was rather to focus on the detail of the financial services sector, the nature of the change from member to third country, how this affects UK trade, and what practical steps can be taken with the EU and other markets to strengthen the UK.
Peter Norris, Co-Convenor of the Commission and Chair of the Virgin Group chaired this session.
Witnesses:
William Wright, Founder and Managing Director of New Financial LLP
Emma Reynolds, Managing Director of Public Affairs, Policy and Research at TheCityUK
Philip Wood CBE QC (Hon), Former Head of Allen & Overy Global Law Intelligence Unit & Visiting Professor in International Financial Law, University of Oxford
Nick Collier, Managing Director, City of London Corporation in Brussels
INTRODUCTION
According to a report by New Financial, the UK is the second-largest financial centre in the world after the US (from an analysis of 28 metrics of financial activity). This is particularly pronounced in cross-border activity, where the UK has a 15% share of all global international activity compared with 24% for the US and 8% for Hong Kong.
In trade terms the UK is a leading exporter of financial services, on most measures behind the US, and ahead of Luxembourg as the largest three. In 2019 UK financial services exports were estimated at £59 billion, with imports of only £18 billion. Of this number, 40% went to the EU, and 60% to the rest of the world. Financial services are therefore around 8.5% of total UK exports.
The financial sector employs more than 1 million people (around 3% of UK jobs) and in 2019 accounted for £125 billion or 6.5% of the value created in the UK economy. The latter figure reflects a decline from a peak of 8.4% in 2009. Around half of this is generated in London. A House of Commons analysis suggests the contribution of financial services to the UK economy is not unusual by developed country standards, being similar to the Netherlands, South Korea or New Zealand.
These figures are enhanced when considering related professional services such as accountancy, where the UK is similarly strong. The provision of financial services is heavily regulated worldwide. Barriers to trade in financial services are typically associated with these regulations, as there is little mutual recognition of equivalent supervision and the issues are not well covered in FTAs. However, the relationship between trade and regulatory barriers may vary considerably by country and sector. For example, while there may be direct restrictions on providing certain services, such as those related to the Euro, in other instances trade relates to money being brought into the UK.
SESSION WITNESSES
WILLIAM WRIGHT, Founder and Managing Director of New Financial LLP
EMMA REYNOLDS, Managing Director of Public Affairs, Policy and Research at TheCityUK
PHILLIP WOOD CBE QC (Hon), Former Head of Allen & Overy Global Law Intelligence Unit & Visiting Professor in International Financial Law, University of Oxford
NICK COLLIER, Managing Director, City of London Corporation in Brussels
ISSUES AND RECOMMENDATIONS
DIALOGUE BETWEEN THE EU AND THE UK:
• The UK should look to deepen the regulatory cooperation agreement, which would ease the path to mutual recognition of regulatory regimes and eventually equivalence recognition
• The UK Treasury and the EU DG FISMA should meet biannually to discuss regulatory alignment and policy.
NEGOTIATION GOALS:
• The only successful example of an FTA on financial services is the EU itself. Directly passporting through FTAs into other jurisdictions is unlikely with the EU or elsewhere
• The UK should instead pursue bilateral partnerships, regulator to regulator, to remove individual barriers to trade (Switzerland is a good model for the UK)
• Maintain data adequacy agreement with the EU and build on the MoU
• Optimise the movement of people and locality arrangements. As passporting is unlikely, it is vital that UK firms can logistically set up operations in EU jurisdictions easily. This is particularly important for satellite/support workers
• Agreements on sustainability/ESG.
LEVERAGING UK ASSETS POST-BREXIT:
• Fintech, innovative green finance and data are areas of global growth in the financial services sector, and should be prioritised by the UK Government
• Ensure a stable and welcoming tax, regulatory and employment environment and high standards of business practice to maintain the UK’s reputation
• This requires ‘joined-up thinking’ from Government departments like DIT, DCMS and DWP as well as the Treasury. Suggested policy: fast-track tech visas
• But there was a suggestion that the UK should choose competitors wisely, e.g. the UK should not try to compete with New York/NASDAQ on tech IPOs.
KEY QUOTES
"There are jobs in Bournemouth, Manchester, Glasgow, Belfast that could find themselves at risk of being moved to Estonia, Poland, Lisbon...because firms have to rethink their whole business model as a result of Brexit". About 10% of assets in the UK banking system have moved abroad, which could result in a hit to the public finances equivalent to around 1% of total tax receipts” - WILLIAM WRIGHT, Founder and Managing Director of New Financial LLP
“We’ve heard how the UK will likely remain a leading global financial centre, but the Government must not take this position for granted. The current lack of access to EU markets for UK-based financial services firms is already impacting on jobs and exports, including in regions outside of London. This risks causing a potentially significant hit to tax revenue. The Government should focus on reducing tensions and rebuilding trust with the EU, to create the political goodwill needed to improve current arrangements for financial services trade. This will benefit both our world-leading finance sector and businesses and customers on both sides of the Channel.” PETER NORRIS, Co-Convenor of the UK Trade and Business Commission and chair of Virgin Group,
“we are not operating in a vacuum” and that EU officials have raised concerns over issues such as the Northern Ireland protocol and fishing, adding that “none of this is helpful to the relationship.” EMMA REYNOLDS, Managing Director of Public Affairs, Policy and Research at TheCityUK
“While the risks of an acrimonious no deal had faded, the UK now faced the risk of ending up in an “acrimonious deal situation” which is in “nobody’s interests”. EMMA REYNOLDS, Managing Director of Public Affairs, Policy and Research at TheCityUK