Foreign Affairs CommitteeWritten evidence from TheCityUK

1. Preliminary

1.1 This Note sets out views on behalf of TheCityUK in response to the Select Committee’s Inquiry into the future of the European Union and UK government policy. TheCityUK is a membership body representing UK-based financial and related professional services businesses competing in global markets, both developed and emerging. It coordinates its work through its Advisory Council, its Board, and various Groups and Committees on which its member-businesses are represented.

1.2 In this evidence, TheCityUK will take all four principal Inquiry Questions together, and seek to give a combined response. Given TheCityUK’s remit, the evidence will focus on financial and related professional services and will be cross-sectoral in its approach.

2. Short Summary of Main Points of Submission

2.1 Service businesses including financial and related professional services play a key role in the UK economy, the UK’s international competitive advantage and in meeting the saving, protection and investment needs of its citizens. Financial services account for 8.9% of UK GDP—higher than all other major economies including the US (8.4%), Japan (5.8%), Germany (5.3%) and France (5.1%). A significant portion of this is made up from the contribution of financial services exports (2.9%). To safeguard this key economic interest, the UK must be fully engaged in EU financial services policymaking.

2.2 UK businesses and non-UK firms established in the UK rely on the Single Market. They take its “four freedoms” (free movement of goods, persons, services and capital) as the basis for conducting business in Europe. UK exports of financial services to the EU totalled £17.8 billion in 2010, 80% up on the £9.8 billion in 2005, although down from a peak of £21.8 billion in 2008. Main destination centres in the EU for UK exports of financial services in 2010 were the Netherlands £3.4 billion, Germany £3.4 billion, France £2.9 billion, Ireland £1.7 billion, Luxembourg £1.2 billion and Spain £829 million. The existence of the Single Market also partly explains the UK’s success in attracting foreign firms. A total of 1,442 financial companies were authorised by the FSA as foreign owned at end-2011 including 634 US companies and 78 Swiss companies.

2.3 The new UK regulatory authorities succeeding the FSA will need to remain engaged with the EU Institutions and European Supervisory Authorities (ESAs). Indeed we would argue that even greater focus and resources are needed today than before. First, UK participation in the staff of the EU Institutions and ESAs needs to be enhanced. Rulemaking powers will reside with the EU authorities. The new UK regulatory bodies will have a secondary supervision and enforcement role. This change in the balance of decision-making necessitates the establishment of a UK secondment/placement scheme for filling senior roles. Senior vacancies in EU Institutions and ESAs need to be mapped out, followed by an identification of suitable candidates whose candidacy can then be promoted. TheCityUK is keen to support this effort. Secondly, the UK authorities will need to co-ordinate their activities to ensure that UK interests continue to be seamlessly promoted in discussions with the EU Institutions and ESAs.

2.4 Financial services regulation and trade liberalisation both have key implications for EU economic growth. An over-emphasis on regulation is likely to act as a brake on jobs and growth-oriented policies. Regulatory policy should prize stability but not at the expense of economic growth, while trade policy should be a spur to business expansion and lasting job creation.

3. Breadth of TheCityUK’s Interest in EU Issues

3.1 TheCityUK’s member-businesses exist to service their customers’ needs in the UK and globally; and TheCityUK has an interest in those EU policies that impact on their ability to do so. The areas of EU policymaking with which TheCityUK is particularly concerned include EU regulation of financial services and related professional services, EU proposals for taxing financial services, the EU’s strategy for regulatory convergence with other global markets, and the EU’s trade and investment policy for market opening; as well as an interest in such other areas of EU policy as encouraging Small and Medium Enterprises (SMEs); finance for business including promoting alternative sources of finance; trade finance; corporate governance, competitiveness and innovation.

3.2 Services including financial and related professional services are integral to the UK economy. UK private-sector businesses in the services sector contribute around 60% of UK GDP and employment. The UK is the largest exporter and importer of services in the EU, with a third of total EU trade in services. More than 60% of all outward foreign direct investment (FDI) by UK business and around 70% of FDI coming into the UK is invested into the service sectors. Financial services account for 8.9% of UK GDP higher than all other major economies including the US (8.4%), Japan (5.8%), Germany (5.3%) and France (5.1%). A significant portion of this is made up from the contribution of financial services exports (2.9%). Consequently, UK engagement in EU policymaking lies at the heart of safeguarding these UK interests.

4. Promoting an Active EU Engagement Strategy

4.1 The UK benefits from being within the EU Single Market in goods (the stock-in-trade of many of TheCityUK’s members’ clients) and services (the business of TheCityUK’s members); UK businesses and non-UK firms established in the UK rely on the UK presence within the Single Market and the “four freedoms” inherent in the Single Market (free movement of goods, persons, services and capital) as the basis for conducting business in Europe. The UK also derives benefit from participating in the formulation of such EU policies as the Common Commercial Policy—the basis for the EU’s trade relations with third countries. UK exports of financial services to the EU totalled £17.8 billion in 2010, 80% up on £9.8 billion in 2005, although down from a peak of £21.8 billion in 2008. Main destination centres in the EU for UK exports of financial services in 2010 were the Netherlands £3.4 billion, Germany £3.4 billion, France £2.9 billion, Ireland £1.7 billion, Luxembourg £1.2 billion and Spain £829 million. The existence of the Single Market also underlies the UK’s success in attracting foreign firms. A total of 1,442 financial companies were authorised by the FSA as foreign owned at end-2011 including 634 US companies and 78 Swiss companies.

4.2 The UK seeks to shape EU policies in line with the principles of open and competitive markets. For financial and related professional services, this needs to be backed by a reinforced system of financial regulation which promotes financial stability and high levels of consumer protection and unlocks capital which is vital to economic growth.

4.3 It is also clear that many other EU Member States wish to work alongside the UK for policies that will promote the EU’s growth and global competitiveness. UK policymakers should use the UK’s resources across government, regulatory bodies and in financial and professional services firms themselves to champion the UK’s interests with other Member States.

5. Enhancing UK Engagement on EU Financial Regulation and EU Trade Policy

5.1 This part of TheCityUK’s response will not attempt a comprehensive itemisation of the details of every policy area in which the UK has an interest in full participation in EU policymaking. Instead two policy areas are highlighted as examples, namely financial regulation and trade policy.

Financial regulation

5.2 Changes to financial regulation are clearly required to address failures highlighted by the financial crisis. Protecting consumers, businesses and taxpayers from the costs of failures in financial firms is rightly the priority. A significant programme of change is already underway including via the Financial Services Bill, and TheCityUK’s members are willing partners to complete this programme of reform.

5.3 In EU terminology, financial regulation is not an EU “common policy” established under the Treaties (ie it differs from the EU’s Common Commercial Policy, Common Agricultural Policy or Competition Policy). It comprises a developing body of legislation and institutions. These have evolved to a point where the EU’s common legal framework for much of financial services is now a “given” in the international business of the UK as a global financial centre: indeed the provision of financial services in the UK by non-UK firms has become to a large degree dependent on the maintenance of that common EU legal framework and the UK’s part in devising it and operating within it. The evolutionary character of this common legal framework means that the UK must be engaged at all levels of policy development.

5.4 Nor is the process of widening and deepening EU engagement only a matter for Government. Financial institutions also have a role to play. TheCityUK and its membership in conjunction with the City of London Corporation have decided to promote a dialogue with other Member States. It is envisaged that this dialogue will encompass policymakers and regulatory authorities as well as business and trade associations, think-tanks and civil society. We believe this effort can complement UK diplomatic engagement with other Member States.

5.5 Nonetheless the main burden of maintaining constructive engagement with the European Institutions and international bodies will inevitably fall on the FSA and its successor bodies and other UK regulatory authorities. Further, we would argue that greater resources and attention are now required given the changing political and regulatory environment. The developing role of the ESAs mean that greater focus is required from the UK. This was highlighted by FSA CEO Hector Sants in February 2012 when he said “it needs to be recognised that currently in respect of prudential regulation, and increasingly in the future in respect of conduct, the rules will be made by the European Supervisory Authorities and the role of PRA and FCA will primarily be one of supervision and enforcement.” The example of the European Securities and Markets Authority (ESMA) emphasises the scale of the challenge for UK representation. The UK market accounts for between 60 to 80% of all EU securities trading, yet the UK has only 8% of the vote.

5.6 TheCityUK welcomes the Government’s commitment to establish an international co-ordination committee for the Treasury, the Bank of England, the FCA and the PRA (“the UK authorities”): its mandate should be to lead and co-ordinate UK engagement on European financial services policy issues and to:

establish clear ownership and responsibility for each European policy dossier: overlap or worse “underlap” is undesirable in the UK’s international representation;

enable strategic objectives and the full extent of “the UK position” to be agreed in advance of EU negotiations and during their progress;

harness the expertise and contacts of UK Government officials in Member States so that engagement on European dossiers is not seen through a narrow Brussels prism but takes into account the realities that views promoted in Brussels are determined in Member State capitals; the efforts of FCO officials in Member States to complement Brussels engagement are to be welcomed; and

harness the views, knowledge and skills of financial industry practitioners in the UK.

5.7 Two specific issues should be highlighted. Firstly, UK staffing of European Institutions, European Supervisory Authorities (ESAs) and international authorities: the UK needs to play a full role in the governance of the ESAs and other bodies, whose importance is forecast to grow. There is high level UK staff participation in ESMA, EIOPA1 and ESRB.2 Whilst these developments are helpful, greater depth of resource is needed. This necessitates the putting in place of a dedicated UK secondment/placement scheme for filling senior roles both in the European Institutions and the ESAs. TheCityUK is willing to support HMG in the establishment and promotion of this scheme.

5.8 Secondly, interaction of the new UK regulatory regime with EU Institutions and European Supervisory Authorities: the transition to a new UK financial regulatory regime will change responsibilities for representing the UK in European and international bodies. It is already clear that there will not be a perfect match between the responsibilities of the new UK bodies and those of the European Supervisory Authorities (ESMA, EIOPA and the EBA3 which are set up along sectoral lines). The Financial Services Bill should therefore make full provision for coordination between different UK bodies to ensure that the UK’s interests continue to be seamlessly represented. The Bill requires the preparation of a Memorandum of Understanding between the Treasury, the Bank of England, the FCA and the PRA (“the UK authorities”) and the establishment of a committee for the purposes of co-ordination. The Government should make it clear that the UK authorities have an equal voice and parity of status in agreeing the UK position. The Financial Services Bill, as currently drafted, lacks any requirement for UK financial regulators to have regard to the impact of their actions in an international context: TheCityUK considers that this requirement (which previously existed) should be reinstated.

5.9 TheCityUK believes that taking a holistic approach to engagement with the EU agencies and with other Member States should yield dividends over the medium term making it more likely that the UK achieves understanding and support for its views and positions when policy issues reach Heads of State and Government in bodies such as the European Council. We commend the work of UK Ministers in seeking to explain and develop support for the UK’s positions in the Council.

Trade regulation

5.10 Trade policy is different in character from EU financial regulation. It is a “common policy” whose ambit is set under the Treaties. The demands placed upon trade policy are now changing. Until recently, the policy focused on long-term, multilateral trade liberalisation. This has now changed. First, under the Lisbon Treaty, the EU trade policy now includes investment and investment protection (previously the province of Member States). Secondly, the focus is now on shorter-term bilateral approaches, reflecting both the global trend towards preferential trade and investment agreements between a limited number of parties and the EU’s own policy enshrined in the Commission’s “Global Europe” initiative (2006). This provides opportunities for the EU to engage with emerging economies.

5.11 This change in policy has had several important effects. First, EU trade policy, by focusing more bilaterally, involves prioritisation of markets to a greater extent than before. Secondly, the types of trade agreement being entered into (bilateral Free Trade Agreements (FTAs) for instance), are narrower and deeper agreements than before, embracing such matters as regulation and consultation mechanisms for resolving regulatory conflicts. Third, there are more linkages between trade policy and regulatory policy. Fourth, the importance of the EU’s trade policy for services in general, and highly regulated services in particular, is heightened as services liberalisation requires regulatory barriers to be tackled.

5.12 For all these reasons, the interplay of different Member States’ choices and priorities in policy-formation is even more marked than before. The UK has a well-respected position in the EU Trade Policy Committee, supported by the government’s wider commercial diplomacy initiative (which TheCityUK welcomes). It will be important for the UK to continue to have an influential voice. Trade policy is changing its nature, and the UK will need to see that its interests continue to be recognised and that the EU retains an outward-looking perspective drawing in emerging economies.

6. Financial Regulation, Trade Policy, and Growth

6.1 In developing its views on both regulation and trade policy, a particular feature of TheCityUK’s approach has been to emphasise the potential implications of both for EU economic growth. In the case of EU financial regulation, TheCityUK has consistently stressed that regulatory reform cannot be viewed in isolation from wider economic policies. True, sound regulation of financial services is important in itself. But financial services facilitate the functioning of the economy as a whole by channelling savings towards productive investments.

6.2 An over-emphasis on regulation is likely to act as a brake on growth-orientated policies. The EU’s current Proposals on CRD4 IV and Solvency II need to be carefully calibrated to ensure that they do not restrict lending to the real economy and investment in corporate bonds and infrastructure. Other Proposals such as MiFID5 II need to ensure the EU remains open to business with third countries. TheCityUK welcomes the Government’s efforts to reorient EU policy towards growth, modernisation and competitiveness exemplified in the Prime Minister’s recent letter (with eleven other EU Prime Ministers) to President Barroso calling for fresh initiatives in the interests of trade and growth.

7. The EU’s Institutional Architecture

7.1 Even a cursory review of some of the EU’s economic, commercial and regulatory policies suggests that the UK ought to be wary of any new institutional architecture in which the UK’s influence is reduced, whether this be through new formal or informal structures. Fiscal integration within the Eurozone is likely to lead to further changes in architecture and an EU policymaker presumption that the needs of the Eurozone and of the Single Market are the same. UK policy will need to be alive to these trends and assumptions, working with the grain of other Member States’ perceptions while countering or rebutting them as necessary. To be effective, UK policy will need to operate within an institutional framework that accords the UK a full voice in representing UK, and full equality of treatment in securing them.

8. Conclusion

8.1 TheCityUK’s evidence does not seek to cover the entire policy field. However, by taking two key policy areas bearing on its members’ business, and by bringing out how both relate to growth, TheCityUK seeks to illustrate two essential points: first, that the EU policies in question are themselves evolving and, secondly, that the UK needs to be a continuing force in contributing to their evolution in ways consistent with UK interests. The European Union has reached a sudden and unanticipated phase in its development. These changes are taking place against a global backdrop of great changes in traditional patterns of economic comparative and competitive advantage between trading blocs. For TheCityUK and its members it is vital that the UK retains and enhances its influence over the development of EU policy and practice at a moment of change.

22 May 2012