83.Business services are the UK’s largest services export, accounting for 44% of all the UK’s trade in non-financial services. After financial services, they also provide the UK with its biggest trade surplus: global trade generated a surplus of £30 billion in 2015. The EU also remains a key trading partner. It is the destination for 32% of UK business service exports, generating a £6 billion surplus in 2015.
84.The ONS collects data on trade in a broad category of ‘Other business services’ (see Figure 4). This category covers a wide range of specialisms and sub-sectors in the UK’s economy, including legal and accounting services, management consulting, engineering and architecture services, recruitment, advertising and market research, and research and development services.
85.In 2013, the Government published Growth is Our Business: A Strategy for Professional Business Services, which described these business services, broadly speaking, as ‘professional business services’ (PBS). This strategy found that the UK’s PBS sectors employed 3.8 million people and represented nearly 12% of UK employment. It also found that PBS were worth £153 billion, or 11% of the UK’s economy, and that the sector saw an average growth rate of nearly 4% every year from 2000–2010—despite the economic downturn. Of the different PBS sectors, legal and accounting services are the largest, “representing over a fifth of the sector’s [domestic] output”. The size of the various main PBS sectors, as a proportion of the whole, are illustrated in Figure 5.
86.The strength of PBS firms in the UK’s domestic economy has translated into significant strengths in international trade. The Government’s strategy found that “nearly one fifth (18%)” of PBS firms operated internationally, and that a quarter of all UK firms that traded internationally were from the PBS sector. It is therefore not surprising that the UK is host to many leading PBS businesses, “including six of the top 10 international networks of accountancy firms, the ‘magic circle’ of leading law firms and the world’s largest advertising company, WPP”. The Government’s 2013 strategy noted that the extent of trade in the UK’s PBS sector was “probably underestimated by trade statistics which don’t fully capture the extent to which PBS firms operate overseas, either by travelling to the customer destination or establishing an overseas commercial presence”.
87.The strategy also noted that the “European Single Market created a huge opportunity for the UK’s PBS sector by opening up access to a large market at a time when demand for its services was increasing”. It stated that, outside the Single Market, the PBS sector “often faces considerable barriers to trade in international markets”.
88.Giving evidence before the Prime Minister’s speech ruled out Single Market membership, most of our PBS sector witnesses supporting staying in the Single Market. The Professional and Business Services Council, for instance, said: “There is no precedent for an FTA giving full access to the single market in services … only the EEA agreement provides the full services package.” They were also concerned that FTAs typically took “many years to conclude”, noting that ratification of EU FTAs was “becoming increasingly difficult”, and that the “political rhetoric in some EU Member States is increasingly anti-trade”.
89.Sally Jones, Director of International Trade Policy and Global Brexit Insight Lead at Deloitte (and representing the Professional and Business Services Council), took a different approach, telling us that a “best-in-class free trade agreement would be pretty much the optimal non-EEA answer” for PBS. EY, in contrast, said that, while in principle a FTA could provide “effective rights of access for services, movement of people, mutual recognition and enforcement between [the] UK and [the] EU”, there were “doubts about the political will of both the UK and [the] EU to negotiate such a deal”.
90.The Minister, Dr Norman, described the UK’s PBS sectors as a “powerhouse”, and said that despite concerns about the imposition of new non-tariff barriers, he had been impressed “by the degree of positivity and confidence with which they are facing the prospect of change”.
91.Witnesses told us that the right to provide a service in another Member State, combined with the right to establish a commercial presence or subsidiaries, was essential in order to continue to provide PBS across the EU. Such concerns are relevant to all services sectors but were particularly acute for businesses providing legal services. These two broad categories of rights are provided for under the Services Directive and are expressed, in relation to legal services, in the Lawyers’ Services Directive and the Establishment of Lawyers Directive. These three Directives are outlined in Box 5.
The Services Directive 2006/123/EC
This Directive liberalises the services market by identifying and prohibiting certain restrictions on the freedom of establishment and on the freedom to temporarily provide and receive services. The Directive is estimated to cover services activities accounting for 46% of EU GDP, though some sectors are excluded, including healthcare, financial, electronic communications and transport services. Where the Directive conflicts with sector-specific EU legislation, that legislation takes precedence.
The Directive bans or blacklists some restrictions used by Member States, including nationality requirements for service providers, requirements for businesses to have a minimum number of staff for different roles, requirements not to have more than one establishment in more than one Member State, and requirements for authorisation subject to the existence of economic needs.
The Directive allows Member States to retain restrictions, as long as they are “non-discriminatory, necessary and proportionate”. Professor Barnard characterised this as a “grey list” of rules and restrictions, which the Commission “really do not like”. These included “rules on requiring a service provider to have infrastructure in the host state before they can provide the service, or requirements about the contractual arrangements regulating the staff providing those services”.
The Lawyers’ Services Directive 77/249/EC and the Establishment of Lawyers Directive 98/5/EC
The Lawyers’ Services Directive permits EU lawyers to provide temporary cross-border services within the EU, without prior notification or registration with the host Member State’s Bar.In contrast, the Establishment of Lawyers Directive 98/5/EC enables lawyers to practice on a permanent basis (either self-employed or salaried) in a Member State other than that in which their qualifications were obtained. This entitles a UK qualified lawyer to practice on a permanent basis in Brussels, with equal rights to their Belgian counterparts. These Directives also ensure that UK lawyers have the right to appear before EU Courts.
92.Facilitated by the Services Directive (and other pieces of EU legislation relevant to specific sectors such as accounting), PBS firms told us that they often conducted trade overseas by establishing subsidiaries in other territories (mode 3). Ms Sally Jones said firms like Deloitte typically grew “not by exporting”, but by “setting up a local subsidiary or a local member firm, staffing it and then using that local firm to build local relationships”. KPMG told us that their business created individual “legally distinct and separate entities” in different territories, which in turn “reduced the need to provide services across borders”.
93.The Law Society told us that under the two legal services Directives “UK lawyers and their law firms … benefit from a simple, predictable and uniform system”, whereby they can “provide services on a temporary basis and/or establish permanently in another Member State under their home title”. Clifford Chance added that the Directives had ensured that UK-based solicitors could represent clients in the EU27 and the EFTA states on a ‘fly-in-fly-out’ basis, and that they could enter partnerships with lawyers in other EU Member States. They further noted that, since the Establishment of Lawyers Directive was introduced, “English-headquartered law firms have become a major force in continental Europe”. This observation was supported by Mickaël Laurans, Head of Brussels Office at the Law Society, who commented: “We have 36 of the top 50 UK law firms with offices in 25 of the 27 EU Member States”.
94.Witnesses from the legal sector also emphasised the critical role of both Directives in attracting law firms from third countries to, in the words of the Law Society, “to set up an office in the UK as a means of gaining access to the EU market”. They estimated that there were over 200 foreign-owned law firms in London, including 100 US firms, which might consider seeking a new ‘European hub’ location if they did not have “access to practise and establishment across the EU”. The Bar Council wrote: “The international earnings of the Bar, and of the legal services sector more broadly, will significantly be determined by the extent to which the suite of existing cross-border rights and practising rights are maintained.”
95.As for FTA options, Mr Laurans told us that “any off-the-shelf free trade agreement would be a setback to current levels of market access and national treatment” for legal services. Legal services remained highly restricted globally, and the EU-South Korea FTA was “the one example of a free trade agreement that achieved a significant change in market access for the legal services sector”. He said the Government should be “very, very ambitious for the services sector to achieve the kind of market access we would like”.
96.We asked the Minister what work the Government was doing to understand how far a FTA could provide rights of establishment and market access for UK firms after Brexit. Dr Norman said it was “absolutely a live issue … officials are working on this at the moment”. While he could “echo the concern that you have described”, it was “a working assumption that it will be possible, at a minimum, to have, if not formal rights of establishment, mechanisms by which companies can continue to trade”.
97.Although many PBS businesses seek to set up a local presence abroad, we also heard that they benefited from moving staff between offices—thus highlighting the complementary nature of trade via modes 3 and 4. EY told us they “often use our UK people to deliver work in other EU Member States where local teams need supplementary or technical resources that do not exist domestically”.
98.Witnesses emphasised the importance of the frictionless temporary movement of staff across borders. Ms Jones said it was “vital” for Deloitte and others to be able “to put the right people in the right place at the right time”, and that the free movement of persons helped to achieve this for both short and long term projects. Ian Harris, Director of Z/Yen Group Limited, noted that in management consulting and project-based work, “you do not know what is going to happen on the project from one week to the next”; this meant that determining whether you could “just jump on a plane and go to such-and-such a place to sort a problem out if a problem arises” was an important consideration in bidding for a project.
99.Several witnesses said that the UK’s future trading relationship with the EU, and indeed the rest of the world, for PBS needed to ensure continued access to EU skilled service providers. Ms Jones said that London had “more high-skilled jobs than any other city in the world”, with 1.7 million such jobs, compared to New York with 1 million and Paris with 600,000. Many of these jobs were in “in business and professional services, high-tech or financial services. If we cannot get the people to fill those roles we will not grow; worse, we will diminish.” While not all those jobs were filled by EU nationals, “a decent chunk” of them were. This point is particularly pertinent as the Government has predicted “a net increase of over 600,000 PBS jobs” by 2020.
100.James Kenny, Head of Global Affairs at consulting engineers Arup, highlighted the significant skills shortage in the construction sector, and said that, for forthcoming projects such as HS2, for which they needed “planning and design engineers”, the “first place we would normally look to fill those gaps would be Europe”. Not being able to do so in future “could be a brake on the UK economy”.
101.In relation to SMEs, Mr Harris said “access to skills and talent” seemed to be the “biggest concern” for managing partners of professional firms and that this “clearly leads us down the line of thinking that free movement of people is important”. Although this issue would not affect all SMEs, for those it did affect it was “an existential issue … as to whether they will be able to continue to do the sort of work they are doing at the moment”.
102.KPMG highlighted the dependence of regulated PBS, such as law and accountancy, upon “the level of professional mobility—i.e. mutual recognition of qualifications, registration and licensing for regulated professions”. In contrast, “loss of mutual recognition would hamper the mobility of [firm’s] professionals”. KPMG recommended the Government seek to “retain or, ideally, enhance mutual recognition of professional qualifications” as part of the negotiations. While the Professional and Business Services Council accepted that the Professional Qualifications Directive could be better implemented, they said it was “most important that leaving the Single Market does not result in currently recognised qualifications becoming unrecognised”.
103.Danny Mortimer, Chief Executive of NHS Employers, explained that the NHS also benefited from the mutual recognition of professional qualifications for doctors and other medically trained staff. Some 6% of the NHS workforce nationally, and 10% in London, were EU nationals. The NHS Confederation also noted that the UK was a “net importer of healthcare professionals qualified in other parts of the EU”, and that mutual recognition had helped to “fast-track” EU health professionals “for registration with the General Medical Council, the Nursing Midwifery Council or other relevant regulatory body”.
104.The Mutual Recognition of Professional Qualifications Directive, which supports the ability for PBS service providers to practice in other EU Member States, is outlined in Box 6.
All Member States regulate access to professions such as medicine, engineering, law and accountancy. In order to support the free movement of these services, the Directive harmonises qualifications in some professions and extends the principle of ‘mutual recognition’ to others. In the words of the Directive:
“The recognition of professional qualifications by the host Member State allows the beneficiary to gain access in that Member State to the same profession as that for which he is qualified in the home Member State and to pursue it in the host Member State under the same conditions as its nationals.”
Under the Directive, qualifications for nurses, midwives, doctors, pharmacists, architects and veterinary surgeons receive automatic recognition across the EU. Qualifications for lawyers, auditors, insurance intermediaries, commercial agents and other professions have to go through a general process for mutual recognition. Individuals apply to the competent authority in the relevant Member State, which then considers whether there is a gap in the qualifications they have achieved compared with the requirements in that Member State. The relevant authority can request the applicant take ‘compensation measures’, such as sitting an aptitude test or completing a probation period.
The Directive also provides for mutual recognition of non-degree qualifications by outlining the minimum criteria for qualifying work experience.
The Directive was amended in 2013 to improve its implementation. In January 2016 the Commission introduced a European Professional Card (EPC) for five professions (nurses, physiotherapists, pharmacists, real estate agents and mountain guides). This is an electronic certificate issued via an online EU-wide system for recognising qualifications.
105.The Royal Institute of British Architects (RIBA) said: “Any professional licensing restrictions following the departure of the UK from the EU would represent a key non-tariff barrier for architecture professionals.” Without continued mutual recognition of professional qualifications, the ICAEW, the accountancy training body in the UK, said there was “a risk that UK auditors and chartered accountants will no longer be able to practise in other Member States, or at least not as easily as at present”. Conversely, there was a risk that “EU auditors and accountants qualified in other Member States may no longer find it possible to work in the UK or may encounter new hurdles”. EY suggested that without the mutual recognition, new arrangements “would need to be negotiated, potentially on a bilateral basis with each EU Member State”.
106.Ms Jones explained that mutual recognition of professional qualifications mattered more to ‘regulated’ as opposed to ‘unregulated’ professions (such as management consultants). Service providers in unregulated sectors were “free to trade without qualifications at all”, in the sense that there was no requirement for membership of a professional body. Ms Jones also noted the limitations of mutual recognition of professional qualifications in some sub-sectors. For example, even if there was “complete and free market access” to provide “tax advice in any other Member State”, she noted that she “could not go to Ireland and pick up its tax statute and sensibly advise on it”.
107.There are precedents for a degree of mutual recognition of professional qualifications between the EU and third countries: the EU has extended the application of the Directive to Switzerland, and has also agreed a framework for mutual recognition with Canada under CETA. We asked the Minister, Dr Jesse Norman MP, what weight the Government would give to mutual recognition in negotiating a FTA. He told us that it was “not absolutely clear at the moment” what sort of agreement the UK might reach in this area, but he felt it was “hard to imagine that we would not be able to put in place some set of working arrangements”, given the extent of harmonisation between UK and EU law. He acknowledged that there was “every possibility that other states might use” restrictions on qualifications “to try to escalate barriers against UK nationals”, given that PBS were generally highly regulated.
108.Dr Norman also suggested there was “likely to be an increasing move towards more mode 3 activity”, so there would be “an increasing incentive for them to use people, whether UK nationals or not, who are appropriately qualified locally as well as internationally qualified”.
109.For other regulated professions, such as accountancy, market access also depends on mutual recognition of regulatory frameworks, including regulators. Ms Jones explained that the Financial Reporting Council (FRC) was “the main regulator for the accountancy and auditing profession” in the UK, and was currently “recognised across Europe”. She continued: “If it were not to be so recognised it would be far harder for us to be able to do cross-border work.” The FRC could continue to be recognised, outside the Single Market, in two ways: either via ‘equivalence’, or via ‘mutual recognition’. Equivalence meant that “every single way that the regulator acts mirrors exactly the way that the European regulators act … you have zero divergence in how regulations are written and applied”. Equivalence was thus “very inflexible”. Ms Jones preferred mutual recognition, because it focused on “the outcome instead of the manner in which you get there”.
110.Ensuring the free flow of data between the UK and the EU will also be critical. The Professional and Business Services Council highlighted the importance of data flows to professional business services, as their entire aim was “to analyse data and provide advice based on professional knowledge”, and noted that “email is now the primary means of business communication”.
111.Changes to data protection rules would have a significant impact on PBS firms. EY said they maintained a single IT system across the EU, in compliance with the Data Protection Directive. If the UK were no longer party to this, “we would be required to undertake significant re-designing of our data systems in the UK and EU”. Concerns about data flows in digital and creative services are discussed further in Chapter 5.
112.The Professional and Business Services Council said trading under WTO rules would affect most PBS services, and that “in many cases they may face an absolute barrier to trading, (as opposed to merely facing additional costs)”. In relation to legal services, Mr Laurans said the EU’s GATS schedule would require the UK to negotiate with 27 individual markets, of which “some … will not have third country lawyer status, so you will not be able to practise in that Member State”. In others, UK lawyers “will not be able to set up a law firm with local lawyers”; this would be another “significant setback for the legal services sector”. As for accounting and auditing services, EY said trading under the GATS “would constrain the ability of our business and our people to operate across the EU”.
113.The UK Trade Policy Observatory referred us to the Services Trade Restrictiveness Index (STRI) compiled by the World Bank, noting that outside the Single Market, lawyers and accountants looking to provide services in the EU would be up against “major restrictions”.
114.The Professional and Business Services Council added that while actual applied trade restrictions were “generally better” than what was included in GATS schedules, such a “favourable market access environment could change at any time, giving rise to considerable uncertainty”.
115.For PBS such as management consulting, for whom mutual recognition of qualifications or regulatory frameworks is not necessary, trade under WTO rules could be subject to fewer restrictions. Even so, the Management Consultancies Association described international trade under WTO rules as “manageable” but “scarcely attractive”. They noted that there was a “risk that many of our global consulting companies, who have used UK consulting resources on projects within the EU, would simply equip their local EU offices to respond to local demands, reducing net UK consulting exports”.
116.Witnesses acknowledged that trade between the UK and the US in PBS currently occurred only on WTO rules. However, Ms Jones said this trade incurred additional “frictional costs and administrative costs”, and that it was “materially harder” than trade with EU Member States. She concluded: “We would far, far rather, if we could, have the same freedom with the US than move Europe to a US model.” Mr Laurans agreed that trade in legal services with countries such as the US or Canada was possible, “but it is more complicated, more complex and it costs more”.
117.The negative effects of trading under WTO rules could be mitigated by the conclusion of negotiations on the plurilateral Trade in Services Agreement (TiSA), a broad global services agreement that seeks to improve on the terms of trade provided by the GATS. Although negotiations between the 23 WTO member countries (including the EU) started in 2013, there is no formal deadline for final adoption. Ms Jones recommended TiSA as “the way forward”, because it recognised “technological developments”, generally improved market access for PBS, and improved rules on data localisation and data flows. She also noted that TiSA contained “far greater mutual recognition of qualifications and regulatory coherence”. Ms Jones concluded that it was a “far better, more robust agreement”, which borrowed its approach from “much more recent free trade agreements”, and was “in some ways, best in class”.
118.Nonetheless, TiSA will have some limitations. Mr Laurans said that while TiSA usefully “improved the transparency of … restrictions”, it did not amount to “a liberalisation of market access” for legal services. Comparing TiSA with FTAs, like CETA, Ms Jones said that the EU was “taking what is referred to as a CETA-minus approach to TiSA”. Thus the EU’s “TiSA offer is just a little bit less generous across the board than what it has agreed in CETA”. Nonetheless, she said even a CETA-minus position was “for most professional and business services—legal notwithstanding—significantly better than GATS”. The Professional and Business Services Council agreed, noting that TiSA “does not achieve everything the EEA achieves, and therefore would not be an alternative to an agreement with EEA style services provisions, but would be significantly better than nothing”. The Government’s White Paper said: “The UK continues to be committed to an ambitious TiSA and will play a positive role throughout the negotiations.”
119.Professional business services (PBS) comprise a wide variety of regulated and un-regulated professional services, encompassing some of the UK’s most successful exports globally and to the EU. The UK generates a large surplus in trade in PBS with the EU (£6.1 billion in 2015). It is now up to the Government to protect and maintain the UK’s strengths in business services in a deep and comprehensive UK-EU FTA.
120.The Government should ensure that any UK-EU FTA includes provisions on the mutual recognition of professional qualifications and also of regulatory structures. Failure to achieve such mutual recognition would, according to the Professional and Business Services Council, result in “absolute” barriers to trade for the most highly regulated professions.
121.In addition to securing market access for UK service providers to provide services temporarily in the EU, the Government should also seek to include provisions on the rights of UK businesses to establish themselves in the EU (and vice versa). While the extent to which such provisions have been provided under existing EU FTAs with third countries is unclear, it will be vital for the UK, given the significance of services trade via mode 3.
122.Issues relating to cross-border movement of persons delivering PBS will need to be addressed in UK-EU FTA negotiations. The free movement of persons has facilitated trade in PBS between the UK and the EU in two clear ways. Firstly, it has enabled firms to service clients and contracts at short notice and to assist partner firms in other Member States. Secondly, the free movement of persons has also enabled firms to recruit from a larger labour market and fill skills gaps. The Government should give full weight to these benefits, and the consequences of changing migration rules for PBS, both in negotiations and in the preparation of immigration legislation.
123.Under a ‘no deal’ scenario, regulated PBS firms (such as legal and accounting firms) would face increased (and in some cases absolute) barriers to trading with the EU. Unregulated PBS, like management consulting, would be able to continue trading with the EU, although even they could be indirectly affected.
124.In such a scenario, it is likely that PBS firms, in particular those in the legal sector, would either relocate to the EU, or move resources to partner firms within the EU, in order to continue to trade on preferential terms. Both outcomes could have a negative effect on the UK’s trade balance, tax revenues and employment.
125.The Trade in Services Agreement (TiSA) provides an opportunity to update the global terms of trade for many services. But we note that negotiations on TiSA have stalled, and that the EU’s position has been to pursue terms in TiSA negotiations that are less favourable than those in CETA.