Financial Services Bill

Earl of Shrewsbury Excerpts

2nd reading & 2nd reading (Hansard) & 2nd reading (Hansard): House of Lords
Thursday 28th January 2021 Lords Chamber

[The Earl of Shrewsbury (Con)]

My Lords, I, too, congratulate my noble friend Lord Hammond of Runnymede on an excellent maiden speech. I refer noble Lords to my entry in the register.

The EU-UK Trade and Cooperation Agreement, which came into force on 1 January this year, is a free-trade agreement that does not facilitate the same access to the EU single market, for the UK’s financial services, as that which was available pre-Brexit. The EU passporting regime is founded on a 20-year history and there are nine different passports that cover financial services, from core banking services such as lending and deposit taking, through to asset management and more. Each passport is embedded in a particular EU directive or regulation, establishing the basic rules for that activity.

Your Lordships will be fully aware that, from 1 January, the passporting regime was no longer available to UK-based financial services firms. Consequently, the extent to which UK firms can continue to provide services to customers in the EEA or EU will depend on local law and local regulators’ expectations or a grant of equivalence from the European Commission. Conversely, EEA-based firms must now either have a UK-based operation, be able to rely on an exemption or exclusion or be acting in accordance with one of the UK’s temporary regimes in order to undertake regulated activity in the UK.

The removal of the passporting regime, together with the uncertainty duly generated, has resulted in financial firms operating in the UK relocating around 7,500 employees and more than £1.2 trillion-worth of assets from the UK to the EU. Over 40 financial firms have announced plans to make local hires for existing or newly created roles in Europe, equating to over 2,850 additional new jobs. There are alternatives to passporting, but they are complex and I do not have sufficient time available today to visit them in this debate. The European Commission can grant equivalence to a third country if it seems that the laws of that country have the same intention and produce more or less the same outcomes as the laws of the EU. However, the Commission can also unilaterally withdraw equivalence, should the situation change, within 30 days. It is my understanding that, in order to prevent the Commission from withdrawing equivalence at short notice on the grounds that the UK rules diverge materially from those of the EU, the UK is seeking a form of enhanced equivalence whereby both parties would regularly update each other on new regulations. Given that financial services were specifically excluded from the TCA, what efforts are the Government making to ensure that passporting rights—and, in the absence of those, equivalence rights—and access to the EU for the UK financial services industry are secured? Further, depending on the outcome of the discussions between the UK and the EU regarding equivalence, what additional measures are the Government proposing to take to support the UK financial services industry and reinforce its competitive advantage?

I am aware that the sector has a number of specific concerns, which include the temporary permissions regime and the capital markets union, with further concerns held by the UK funds industry and the UK insurance industry. My understanding is that, in November last, my right honourable friend the Chancellor announced that the UK proposed to recognise the equivalent status of EU financial services laws in a number of key areas, including those that I have just mentioned. By granting equivalence to EEA-member states in three of those areas, the UK acknowledged that insurers and reinsurers, established in the EEA, have the same capital and governance requirements as UK firms. This gesture of good will from the Government has, I believe, not yet been reciprocated by the European Commission, which has yet to take any action whatsoever towards granting similar rights. Are we surprised? Nothing changes.

This is a complex and substantial Bill, which aims to improve the UK regulatory framework for financial services following the end of the Brexit transition period and I support it. Doubtless it will receive much scrutiny during the stages to come, but we must remember that the other place gave it its support and we, too, should give it a fair wind.