Chapter 5: Opportunities
214.The financial services sector is, by necessity, strongly regulated and, as described in the preceding chapters, there is much work to be done to adapt the regulation of the financial services sector now that the UK is outside of the EU. However, there are a number of new and novel areas of the sector for which there is little, if any regulation yet in place. These areas include financial technology (commonly known as ‘FinTech’), green finance, and crypto and digital currencies.
215.For these areas, the Committee heard that there is the potential for the development of a supportive and agile regulatory and trading environment that could allow the UK to take the lead, both in terms of attracting these industries to establish themselves in the UK and in shaping and influencing global regulatory frameworks.274
216.Most witnesses appeared to support the notion that, in these areas, the UK should seek to obtain first-mover advantage in terms of developing and shaping the future regulation of these industries275. Former European Commissioner Lord Hill, for example, said the UK had the chance to “set global regulatory standards” in “areas that have not yet been regulated”.276 However, Michael Dobson, then of Schroders plc, took a more cautious approach: “The more important thing is to co-operate with regulators in the EU or elsewhere so that it is done in lockstep … I do not see it so much as taking a lead as working with partners to try to ensure that we have the best new regulatory rules.”277
FinTech
217.FinTech refers to a range of technologies, including software and mobile applications, that may either automate and improve traditional financial business, or seek to underpin the development of new business models to compete with or replace more traditional businesses.
218.FinTech is a major growth industry in the UK. According to evidence the Committee received from Innovate Finance, $11.6 billion was invested into UK FinTech companies in 2021—up from $929 million in 2014. This growth has been powered by “new technologies such as cloud computing, blockchain and artificial intelligence, together with a greater consumer use of digital platforms for engaging with financial services and shopping (ecommerce)”. Innovate Finance additionally highlighted that, in terms of capital investment into its FinTech sector, the UK was second only to the US in 2021 and well ahead of other European countries.278
219.The Government commissioned an independent review into the UK FinTech sector from Ron Kalifa OBE, which reported on 26 February 2021. The Kalifa Review made 17 recommendations in the areas of policy and regulation, skills and talent, investment, international attractiveness and competitiveness, and national connectivity with the aim of enhancing the UK’s FinTech industry.279 £5 million was allocated in the spending review for the establishment of a new Centre for Finance, Innovation and Technology to leverage expertise from across the regions to support this aim.280
220.In an effort to support the development of new financial technologies, the FCA has introduced a so-called “Regulatory Sandbox” to enable innovators to test their products in a controlled, professionally supported environment. This allows entrepreneurs to investigate the success or otherwise of their business models in the market and identify consumer protection mechanisms without having to overcome the very high costs of entry for those seeking full regulatory approval. This approach was endorsed in the Kalifa Review and also found favour among many of those giving evidence to this inquiry,281 with Innovate Finance stating that the “success of the regulatory ‘sandbox’ was such that it has now been replicated by nearly 50 other jurisdictions around the world.”282
221.Looking at the UK’s FinTech sector as a whole, Andrew Pilgrim of EY was clear that the UK was well-placed to take a leading role globally, stating that:
“the UK is incredibly well placed, given some of the technology companies here but also the associated financial, legal and other related service companies that sit around that ecosystem. Many of the international benchmarks put the UK in a fundamentally good place in that regard, and we have to champion that.”283
222.Speaking for the Government, the Economic Secretary appeared to support the recommendations of the Kalifa Review for the establishment of “a centre for FinTech innovation and technology … expressly designed to try to propagate the FinTech opportunities across the UK”.284 In terms of the development of the future regulatory framework, he appeared to endorse a less internationally focused approach:
“For some areas I will look at what is going on internationally, but [FinTech] is an area where we have to use sandboxes and to work with the FCA to develop a better iterative loop on regulatory approvals and authorisations. Again, international co-operation there is probably not such a big driver.”285
Green finance
223.Green finance refers to structuring financial activity in a way that allows growth without harming the environment. The UK’s Greening Finance Roadmap, published in October 2021, sets out how the UK financial system can go about aligning with the Government’s Net Zero commitments, including through the development of a UK Green Taxonomy (which would establish criteria to define sustainable investment to prevent so-called ‘greenwashing’—the presentation of investment as ‘green’ when it is not).The EU is already in the process of finalising its own taxonomy, as are several other jurisdictions.
224.Nathanaël Benjamin of the PRA told the inquiry how the Bank of England had “for some time now, has been aiming to play a key role on the climate regulatory front”:
“First, in 2019, we set out our supervisory expectations of how firms should be governing, managing and having accountability for their climate risk exposures. These expectations are now in force. Secondly, we are currently running a major concurrent climate exploratory scenario analysis of all major UK banks and insurers … Thirdly, we are participating in the broader thinking, in the longer term, about climate-related capital requirements as part of international fora such as the Basel Committee.”286
225.The UK’s focus on this area was also emphasised by Edwin Schooling Latter of the FCA:
“we have sought to move quickly and take a leading position in ESG [Environmental, Social and Governance] matters. I think we were the first jurisdiction, at least with a global financial centre, to ask listed companies to make disclosures in line with the global model set out by the Task Force on Climate-Related Financial Disclosures”.287
226.Many witnesses agreed that this was an area that needed an internationally coordinated approach. Edwin Schooling Latter saw a “very strong case for global standards here. After all, the climate is a global issue.”288 Stéphane Boujnah of Euronext saw green taxonomy as an area for cooperation, in which the UK and the EU could “definitely lead because the two societies and the two peoples have the same preferences on climate change”.289 Rachel Kent of Hogan Lovells argued that “Five [green] taxonomies across the globe is not helpful”, adding, “How does the UK participate in that to make sure that we do our part and help to maintain a leading financial centre but at the same time do not cause unnecessary fragmentation?”.290
227.Similarly, the UK Sustainable Investment and Finance Association (UKSIF), which represents the UK sustainable finance sector, considered that:
“very, very contrasting rules on taxonomies between the UK and EU could be damaging, and mean that firms in the UK will need to follow one set of taxonomy requirements for products marketed in EU markets and a separate set of requirements in the UK … [however] some of the significant issues we have seen with some of the EU’s rules, such as its ‘green taxonomy’ and … [the EU Sustainable Finance Disclosure Regulation] … will need to be remedied as a priority in the UK’s regime, meaning a degree of divergence will be necessary.”291
228.In contrast to FinTech, where the UK is already recognised as a world-leader and as having a head-start compared to the EU, there was also a widespread acknowledgment that the EU’s own endeavours in green finance were already well-advanced.292 Andrew Pilgrim noted that: “We have seen the EU take an early lead, particularly in terms of taxonomy … and it will be important for the UK to show that it is equally prioritising this very important issue but also thinking a little further ahead.”293 Lord Hill did consider, however, that although “on green finance the Europeans are getting a crack on”, they are “going down a heavy and convoluted route” in their regulation of the sector.294 Several other witnesses were also critical of the EU’s approach to the regulation of green finance.295
229.Witnesses broadly agreed that there was a need and an opportunity for the UK to move quickly in this area. Peter Bevan of Linklaters pointed to the “incredible importance of transforming our economy to a more sustainable one in future,” seeing “the use of the financial sector to drive that transformation [as] clearly critical”.296 Rachel Kent pointed to the UK’s reputation for innovation, with the financial services sector acting as an “accelerator” in this. She saw the sector as capable of being “an accelerator of ESG issues, because they are not just large firms that have ESG issues in their own right; they also lend money.”297
230.UKSIF acknowledged the leadership that the UK had shown so far with regard to sustainable finance and regulatory policy but saw there as being more that could be done to further advance the UK’s “pre-eminent leadership position on sustainable finance”. It supported “as much consistency as is possible between the UK and EU’s sustainable finance regulations … but this should not come at the expense of implementing robust, world-leading regulations here at home”. In this regard, it urged the UK to “learn from the EU’s experience with its ‘green taxonomy’” and “implement a robust ‘green taxonomy’ that sets the highest standard possible for green investment for the rest of the world to follow and is purely based in science”.298
231.For the Government, the Economic Secretary cited the UK’s championing of the international sustainability board at COP 26 and the UK’s “common heritage with the EU in this area,” adding that the UK had “worked very closely with the [EU] on the development of the EU taxonomy when we were part of the EU”. He committed to looking at the EU’s technical expert group as a “key influencer” in defining the UK’s own disclosure requirements and technical screening criteria.299
232.In addition, the Economic Secretary agreed that “interoperability with the EU and other jurisdictions is obviously very important” and that he did not want to “burden industry with a distinct, different and inappropriate additional set of regulations that differ for the sake of it.”
233.The Committee welcomes the Government’s comprehensive and forensic approach to developing the regulatory and trading structures for innovative and novel products and technologies, including through high-profile Government-sponsored reviews such as those for green finance and FinTech. In particular, we welcome the UK’s pioneering role in establishing ‘regulatory sandboxes’ for FinTech, which have since been imitated in other jurisdictions.
234.The Committee urges the Government to prioritise leadership and cooperation with its global partners in the establishment of global standards for novel and innovative products and technologies. In particular, we urge the Government to cooperate closely with the EU and other major jurisdictions on their respective approaches to Green Taxonomy, while ensuring that the UK’s own approach is environmentally sound and grounded in science.
Approaches to securing market access
235.As noted in Chapter 1, the TCA contains very few provisions concerning market access for the financial services sector. Indeed, witnesses largely agreed that Free Trade Agreements (FTAs) like the TCA rarely, if ever, made much provision for financial services. In the words of Richard Fox of the FCA, “FTAs … do not tend to focus on financial services other than possibly setting up … cooperation [fora].”300
236.However, the Government is currently exploring an alternative and innovative approach to improving the UK sector to foreign markets by negotiating a Mutual Recognition Agreement (MRA) with Switzerland. Many witnesses saw this approach as having significantly more potential than the FTA route. 301 Sam Woods explained: “[The] MRA process is a richer and better way of doing what is intended to be achieved by some bits of equivalence, because it is about the market access bits but, crucially … [is] outcome-based.”302 Richard Fox added:
“[A] Mutual Recognition Agreement is a much more detailed assessment predicated on much more deference to the other side’s system of laws and regulation. Therefore, it involves a more intense assessment on our part, as the regulators, on whether those frameworks deliver the same outcomes … FTAs are a good place to start, but if you really want deep cross-border trade you are more looking at an MRA”.303
237.Miles Celic of TheCityUK agreed, telling the inquiry:
“With the Swiss we are taking absolutely the right approach in trying to go for a mutual regulatory recognition arrangement. As a senior Swiss Government figure said to us, if you cannot have mutual regulatory recognition between the UK and Switzerland, it is very hard to think of two countries where it is possible at all. There is political will, and you have two highly sophisticated, well developed and in many ways very similar financial services and ecosystems that should be able to interlock pretty well, with two very high-class regulators that work well together.”304
238.Witnesses not only supported the current negotiations with Switzerland but saw the potential of an agreement as a precedent for future negotiations. Caroline Dawson of Clifford Chance hoped that if “we can achieve a very ambitious mutual recognition arrangement with Switzerland … it would be fantastic if we could use that as a template to roll out to other jurisdictions.”305
239.For the Government, the Economic Secretary spoke of the “mutual appetite for similar standards of openness and giving each other access in different domains” in terms of the negotiations with Switzerland and also hoped that a successful agreement would be a “useful template for financial services with other jurisdictions”, although he did not wish to be drawn into speculating which jurisdictions those might be.306
240.The Committee welcomes the Government’s innovative approach to securing market access for the UK’s financial service sector and, in particular, hopes for the successful conclusion of a Mutual Recognition Agreement with Switzerland.
241.We urge the Government to continue to innovate and learn from its successes as it pursues further Mutual Recognition Agreements. While we note the traditional limitations of Free Trade Agreements with respect to financial services, the Government should continue to seek to embed the interests of financial services in the Free Trade Agreements it pursues as much as possible.
The labour market
242.The UK’s financial services sector has a reputation for cosmopolitanism and openness to immigration. Miles Celic was clear that this needed to continue, ensuring that the sector is “continuing to attract people, which is the single biggest issue for most of our members—getting the right talent, both domestically and internationally, into the UK.”307 This sentiment was echoed by Andrew Pilgrim, who stressed that “openness is key … [including] on immigration.”308
243.The Economic Secretary spoke of the support the Government is providing in this regard:
“In May last year we improved the visa for global talent. In the spring of this year, we have brought in the visa for high-potential individuals and the global business mobility visa. We will be looking to build on that this summer with announcements on the global talent network and how to bring in talent from key jurisdictions important to the growth of FinTech and the financial services sector.”309
The importance of openness
244.More broadly, the evidence the Committee received showed widespread agreement with the need for the UK to retain its reputation for openness, “that key philosophy that has made the UK one of the major financial centres globally”.310 Caroline Dawson said it was important to ensure that “we do not have a fortress UK approach, but a global financial centre approach and an openness approach. We have the ability outside of the EU to maintain that better than we would have been able to within the EU.”311 Peter Bevan stressed:
“It would be a mistake for the UK to take the view that, because the EU is building a fortress that is very difficult to enter from outside, we should do the same to give ourselves a bargaining chip and say, “Well, we’ll take our wall down now if you take yours down”, because the building of that wall would inhibit the very kind of global financial centre that the UK has become so well known for and so successful at … it is the right approach for the UK to keep those barriers to entry low, appropriately protecting consumers in the way that the UK’s current regime does … Maintaining that balance, even if there is no reciprocity on the side of the EU, will in itself be good for the growth of the UK system.”312
245.For the Bank of England, Sir Jon Cunliffe agreed on the need for openness, arguing that “Being open enhances the efficiency and risk-sharing of the financial system”. He cautioned that “it also necessitates the effective management of cross-border risks … Where other jurisdictions are not as open, this approach might naturally create some asymmetries between the UK and the other jurisdictions.” However, he ultimately concluded that “the overall impact of such asymmetries are likely to be fairly limited, including from a competitiveness perspective.”313
246.Key to maintaining the UK sector’s openness was a rejection of reciprocity, where the UK would only take an open approach if other jurisdictions did the same. Caroline Dawson was unequivocal in her assessment that reciprocity was “not the way forward”.314 The City of London Corporation agreed: “the UK should not adopt a reciprocal approach. Unilateral recognition of overseas services and firms can provide significant benefits to UK customers with no threat to UK financial stability, market integrity or consumer protection.”315
247.For the Government, the Economic Secretary reiterated “the agenda that the Chancellor has set out of being open, embracing technology, being competitive and embracing the opportunities of green finance and the green economy”.316
248.The Government is right not to adopt a ‘Fortress UK’ approach, and to prioritise openness. The Committee also welcomes the Government’s non-reciprocal approach to maintaining the UK’s openness to external participation in its financial markets and wider financial services sector. The Committee urges the Government to adopt a principle of openness in all aspects of its regulation and support of the UK’s financial services industries. In this regard, the Committee urges the Government to continue to recognise the importance of immigration and access to talent to the openness of the sector.
274 See Q 74 (Lord Hill of Oareford), Q 38 (Caroline Dawson), Q 7 (Miles Celic) and written evidence from Innovate Finance (RFS0008).
279 HM Treasury, Kalifa Fintech Review Final Report (26 February 2021): https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/978396/KalifaReviewofUKFintech01.pdf [accessed 7 June 2022]
280 HM Treasury, ‘Centre for Finance, Innovation and Technology: Steering Committee’, (4 April 2022): https://www.gov.uk/government/publications/centre-for-finance-innovation-and-technology-steering-committee [accessed 7 June 2022]
287 Ibid.
288 Ibid.
295 Q 42 (Caroline Dawson) and written evidence from UK Sustainable Investment and Finance Association (RFS0007)
303 Ibid.