Summary of conclusions and recommendations
Introduction
1.The Committee asks the Government, in its response to this report, to provide a detailed breakdown of the figures for PAYE and corporate tax receipts for the previous five years, to support the Economic Secretary’s view in his evidence that tax receipts from the financial services sector have been resilient since Brexit. (Paragraph 13)
2.We welcome the fact that, overall, the UK financial services sector remains optimistic about its prospects for the future, and that significantly fewer jobs have so far left the sector than had been anticipated. This demonstrates both the continued strength and the resilience of the sector in the UK. (Paragraph 46)
3.We warn, however, against any complacency in this regard, as it is not clear whether the full impact has yet played out. We note that there are many factors, both ongoing and on the horizon, including EU regulatory and political decision-making, that may have a significant impact on the sector, with the risk that further jobs will move out of the UK. (Paragraph 47)
4.The fragmentation of job moves across EU financial centres highlights that no single EU financial centre has so far emerged as a serious rival to London. Nevertheless, the Committee is concerned that fragmentation could raise cost and reduce liquidity for businesses served by the UK and EU financial services sectors. We urge the Government to work with the EU, and its institutions, to ensure that London is able to maintain the depth and liquidity needed in order to continue to function as the prime source of capital for the European market. (Paragraph 48)
5.We note the movement of assets and infrastructure out of the UK. We ask the Government to set out what steps it is taking to monitor this and to ensure that it does not harm the competitiveness, profitability, or operational capabilities of the UK’s financial services sector. We also ask the Government to set out in its response to this report what assessment it has undertaken of the costs and risks to the sector and the wider UK economy by the movement of assets and infrastructure out of the UK following Brexit. (Paragraph 51)
6.We support the Government’s broad policy aims for the financial services sector, as far as they go, and hope that these will be enacted in a proportionate and evidence-based way. (Paragraph 59)
7.We ask the Government in its response to this report to set out the specific steps it has taken and is proposing to take to fulfil the ambition and promise of the aims set out in the Chancellor’s 2021 Mansion House Speech and in ‘A new chapter for financial services’. (Paragraph 60)
8.Despite our broad support for the Government’s policy aims, it is important that the Government ensures financial services policy is not focused too heavily on the City of London alone. We therefore ask the Government to provide a full explanation of how it intends to support those parts of the sector operating throughout the rest of the UK with respect to the UK’s evolving relationship with the EU. (Paragraph 61)
Equivalence
9.We welcome the UK’s open approach to granting its own equivalence decisions. We view this openness as one of the UK’s great strengths in navigating its global relationships in the post-Brexit era. (Paragraph 72)
10.We regret that the EU has opted not to grant equivalence to the UK in a number of areas where it would be beneficial to market actors in the UK and the EU. We note that the Government does not consider the lack of equivalence in these areas to pose a significant problem, despite the effort originally expended in submitting information to the EU as part of the latter’s consideration of the UK’s regime. (Paragraph 100)
11.However, we recognise that further equivalence decisions are ultimately a matter for the EU. We therefore agree that it would be misguided to base the UK’s future strategy for the sector on something that is not in the Government’s gift and that currently seems unlikely to be forthcoming. (Paragraph 101)
12.Contrary to the Committee’s expectations at the outset of this inquiry, we recognise now that the low number of equivalence decisions is not seen within the sector as a matter of fundamental concern. The sector has successfully adapted to operating without equivalence and sees limited benefit now in making further adaptions to accommodate it. We also recognise that the EU currently seems unlikely to grant further equivalence decisions without the UK constraining its regulatory flexibility and ability to diverge. (Paragraph 102)
13.Although the imbalance between the number of decisions the EU has granted to the UK compared to other jurisdictions is striking, the evidence we received suggested that the impact of this on UK competitiveness has been limited. We also recognise that not all equivalence decisions are equal and that most granted to other jurisdictions are unconnected to the crucial issue (as far as the UK is concerned) of market access. (Paragraph 103)
14.We ask the Government, in its response to this report, to set out the extent to which it believes there to be a competitive disadvantage as a result of the imbalance in equivalence decisions, and how it intends to address any such competitive disadvantage. (Paragraph 104)
15.We also note that there is continued medium-term uncertainty. While the lack of equivalence has been less detrimental than anticipated prior to the end of the transition period, this has partly been as a result of specific business-model adaptations. (Paragraph 105)
Regulatory cooperation
16.The Committee regrets the fact that the UK-EU Memorandum of Understanding on regulatory cooperation is still not in place, despite technical negotiations having concluded more than a year ago. The Committee notes the widespread view that the MoU has become a casualty of wider tensions between the Parties, particularly regarding the implementation of the Protocol on Ireland/Northern Ireland. (Paragraph 113)
17.We consider the lack of a structured mechanism for regulatory cooperation on financial services between the UK and the EU to be particularly striking given that both the UK and the EU have established structured dialogues with other partners, notably with the United States. (Paragraph 114)
18.We consider that the Government’s overall objective should remain the earliest possible entry into force of the Memorandum of Understanding and that, as and when it enters into force, the Government should make the fullest use of the dialogue established to work for effective cooperation with the EU in this important sector. (Paragraph 115)
19.The Committee acknowledges that the non-implementation of the Memorandum of Understanding does not appear to have posed major practical problems to date, particularly as it is a tool for political cooperation rather than something that, in itself, facilitates market access. However, the Memorandum of Understanding would provide a useful mechanism and structure for future strategic dialogue and cooperation between the UK and the EU, and the Committee considers that its implementation would benefit both sides. (Paragraph 124)
20.We caution the Government against complacency in this area. Despite the limited impact of the non-finalisation of the Memorandum of Understanding to date, its real value is likely to be found in the future as the UK and the EU diverge, particularly in the event of cross border financial services developments and potential future crises that may require transnational solutions. (Paragraph 125)
21.The Committee welcomes the series of bilateral Memoranda of Understanding that have been agreed between UK and European regulators and supervisors at both EU-wide level and Member State level. These appear to be working well and have meant that day-to-day regulatory and supervisory cooperation has continued despite the lack of a higher-level UK-EU Memorandum of Understanding. (Paragraph 130)
22.Alongside formal regulatory cooperation, the Committee urges the Government to increase its political and diplomatic engagement on financial services both with the European Commission and with key Member State capitals. (Paragraph 133)
23.While welcoming news of the Economic Secretary’s recent meeting with the European Commissioner for Financial Services, we are concerned that such meetings are not taking place with the structure or regularity needed for close UK-EU cooperation. Notwithstanding the importance of establishing a more comprehensive structure for regulatory cooperation with the EU, we therefore recommend that these meetings take place at least once a year and are used as a forum for discussing regulatory cooperation and raising any issues of concern. (Paragraph 134)
Regulatory reform and divergence
24.Although the retention in primary legislation of key aspects of EU financial services law at the point of the UK’s departure from the EU was the right decision for regulatory stability, it now means that the UK regulatory framework for financial services is complicated, unwieldy, and difficult to amend. Accordingly, the Committee welcomes the Government’s Future Regulatory Framework Review. (Paragraph 144)
25.The Committee notes that, as a result of the Future Regulatory Framework Review, the Government is considering introducing an additional, secondary ‘competitiveness’ objective for the Financial Conduct Authority and the Prudential Regulation Authority. However, it is equally important for the UK’s overall economic competitiveness for the Government and regulators to work together to develop a broader regulatory culture that is responsive, consistent, and proportionate. (Paragraph 151)
26.We ask the Government, in its response to this report, to explain in further detail how a secondary ‘competitiveness’ objective would be applied by the regulators in practice and how success will be measured. (Paragraph 152)
27.The Committee agrees with the Government that, in the interests of flexibility, agility and proportionality, many of the regulations currently contained within primary legislation would be more appropriately managed by the regulators themselves. However, it is essential that this transfer of powers is accompanied by appropriate mechanisms for Parliament to scrutinise the regulators and hold them to account, and that the regulators are given sufficient resources to allow them to accommodate the increase in their workloads resulting from such a change. (Paragraph 160)
28.The details of parliamentary scrutiny and accountability of the regulators are a matter for Parliament, but we ask the Government to commit to facilitating the establishment of appropriate mechanisms as necessary. (Paragraph 161)
29.The Committee recognises the need for continued scrutiny of ongoing and future developments that might affect the sector. In this regard, we welcome the Chancellor of the Exchequer’s commitment to make an annual ‘State of the City’ report to Parliament, as proposed by Lord Hill in the UK Listings Review. (Paragraph 167)
30.The Chancellor has committed to presenting the first of these ‘State of the City’ reports this year, but it is unclear when this will be; the Government should provide clarity on this. We recommend that this report includes for at least the next five years a section dealing expressly with the UK-EU relationship in financial services. (Paragraph 168)
31.The Committee welcomes the launch of a series of reviews into the regulatory framework governing financial services that the UK inherited from the EU. The Committee is concerned, however, that progress on some of these reviews appears to have stalled. (Paragraph 174)
32.The Committee asks for an update on the progress of the various reviews into the regulation of financial services in the Government’s response to this report. (Paragraph 175)
33.Diverging from EU law may present opportunities for the UK’s financial services sector, and the Committee notes the sector’s positivity about pursuing these opportunities. Much of the inherited acquis was designed to cater to 28 countries, and Brexit provides an opportunity for the UK to innovate and to tailor the regulation of its financial services sector to reflect the UK’s own interests. (Paragraph 187)
34.It is nonetheless vital that the Government balances the benefits of reform against the cost of implementing new rules, and that the sector is not now subject to a constant process of piecemeal change. Some pieces of EU regulation were unpopular with businesses when they were implemented but are now regarded by the sector as a sunk cost, further reform of which would impose an additional, unnecessary cost burden on the sector. (Paragraph 188)
35.UK-EU divergence will also be driven by future regulatory changes on the part of the EU. The Committee notes the contrast between the UK’s approach of an internationally open financial services sector and the EU’s prioritisation of control and market location as part of its drive for ‘open strategic autonomy’ and is concerned that the latter could lead to increased barriers to cross-border trade in financial services. (Paragraph 195)
36.After the UK’s exit from the EU, it was inevitable that the UK would lose the ability as a Member State to influence the EU’s legislative processes directly. Nevertheless, the Committee is concerned by the Government’s apparent unwillingness to use its wider influence and diplomatic resources in order to engage with the EU and its institutions to further the UK’s interests, as other third countries do. (Paragraph 196)
37.The Committee asks the Government to clarify its approach to engaging politically and diplomatically with the EU and its institutions to support and advance the interests of the UK’s financial services sector in the EU’s legislative decision-making processes. (Paragraph 197)
38.Notwithstanding the inevitability of UK-EU divergence on the details of financial services regulation, and the opportunities this is likely to afford the UK’s financial services sector, in the long-term, the Committee considers that there is a strong case for pursuing global convergence on the principles and outcomes of the regulation of financial services. (Paragraph 200)
39.In terms of data flows between the UK and the EU, the Committee recognises the possibility that the Government’s plans for reform of the UK’s data protection rules could lead to the withdrawal or non-renewal of the EU’s data adequacy decision for the UK. This could have consequences for a range of service providers engaged in cross-border personal data transfers, including for some financial services providers, primarily those handling retail business. (Paragraph 211)
40.The Economic Secretary told this inquiry that the decisions the Government will take on the UK’s future data protection regime will “reflect what is right for the UK interest”. In the Committee’s view, it is in the UK’s interest that it continues to benefit from the EU’s positive data adequacy assessment. (Paragraph 212)
41.While the future of these adequacy decisions is ultimately a matter for the EU, the Committee urges the Government to ensure that it carefully considers the implications of losing data adequacy, including for the financial services sector, into its future changes to the UK’s domestic data protection framework, particularly under the forthcoming Data Reform Bill. (Paragraph 213)
Opportunities
42.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. (Paragraph 233)
43.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. (Paragraph 234)
44.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. (Paragraph 240)
45.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. (Paragraph 241)
46.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. (Paragraph 248)