Financial services are an important component of the UK economy, employing 2.3 million people and making up 10% of total UK tax receipts. The sector is also an significant contributor to the UK’s international trade, comprising 19.1% of all UK services exports. The EU is an important trading partner in this sector, making up 37% of total UK financial services exports in 2019.
The UK-EU Trade and Cooperation (TCA) was agreed on 24 December and entered into force on 1 January 2021. Among other matters, the TCA established the foundation for a trading relationship between the UK and EU reflecting the UK’s status as a third country following the UK’s exit from the European Union.
The TCA’s provisions in the area of financial services were limited. The UK and EU agreed alongside the TCA that they would conclude a Memorandum of Understanding on regulatory cooperation, but this has still not been signed 18 months on. The UK has also so far only received two equivalence decisions from the EU, both of which were time-limited and only one of which is still in force.
The Committee’s report is based on an inquiry undertaken between February and April 2022. The scope of the inquiry included the impact so far on the UK financial services sector of the UK’s exit from the Single Market; the impact of the absence of a functioning framework for UK-EU regulatory cooperation; the future of cross-border financial services in the absence of equivalence; and the impact of regulatory divergence and agreements with third countries on UK-EU financial services trade. The inquiry involved seven oral evidence sessions with a total of 16 witnesses, as well as 12 written submissions.
The Committee’s key findings and conclusions are as follows:
- The Committee concludes that the overall outlook for the UK financial services sector post-Brexit is positive. Far fewer financial services jobs have moved from the UK to the EU as a result of Brexit than some anticipated; current estimates suggest 7,000 jobs have moved, compared to estimates of 75,000 in 2016. London has retained its position as the world's second largest financial centre, and there was a strong sense that the sector has remained resilient.
- However, the Committee cautions the Government against complacency. It is not yet clear whether the impact of Brexit on the sector has fully played out. The Committee also calls on the Government to ensure that its approach to financial services delivers for the whole of the country and its economy, not only for the City of London.
- In terms of the Government’s plans to give more powers to the financial services regulators, the Committee notes the greater flexibility and agility this may bring. However, it stresses that new powers for the regulators must be accompanied by appropriate mechanisms for scrutiny and accountability, including by Parliament.
- Post-Brexit regulatory divergence is inevitable as the result of developments in both the UK and the EU. The Committee sees opportunities in divergence, which will allow the UK to innovate and tailor its regulation to its own interests. However, it also urges the Government to weigh the benefits of divergence against the costs of implementing new rules. In addition, it is concerned that the EU’s increasing emphasis on ‘strategic autonomy’ could lead to barriers to cross-border trade in financial services.
- The UK has inevitably lost influence over the development of future EU financial services rules post-Brexit, but the Committee is concerned that the Government appears unwilling to utilise the influence it still has. This is part of a detectable theme that has emerged in other work carried out by the Committee: the Government seems reluctant to recognise the importance of the UK-EU relationship, seeming unwilling to fully engage with the EU institutions, or to acknowledge that developments in the EU still have significance for the UK.
- The Committee found that the absence of EU equivalence decisions for the UK reflects a political, rather than technical, approach on the part of the EU, and it appears that the UK is being held to a higher standard than other countries in this regard. The Committee concludes, however, that the absence of EU equivalence decisions has had less adverse impact than initially feared and that it would, therefore, be unwise for the Government to base its strategy for financial services on a process that it cannot control, and which currently seems unlikely to bear fruit.
- The Committee found that the Memorandum of Understanding (MoU) on regulatory cooperation is being held up because of wider difficulties in the UK-EU relationship. The Committee believes that this MoU would provide a valuable mechanism for strategic dialogue and considers that its earliest possible entry into force should be a priority for the Government. It also calls on the Government to step up its political and diplomatic engagement with the EU regarding financial services.
Lord Kinnoull, Chair of the Committee, said:
“Despite the challenges Brexit presented to the sector, our Committee has been encouraged by the generally positive outlook for UK financial services. The strength and resilience of the sector is clear, with significantly fewer job moves than originally feared, and London retaining its status as Europe’s leading financial centre.
“However, this must not lead to complacency. The full impact of the UK’s departure from the EU has yet to play out and there are many ongoing factors, including EU regulatory and political decision-making, that may have a significant impact on the sector, with the risk that further jobs could leave the UK. The Government must remain alert to these challenges if the UK is to retain its position as a global player for financial services.
“I note the array of major reviews and consultations in train on financial services regulation. Such careful analysis is welcome, but the delivery of change is very largely yet to come and striking the balance between the maintenance of high international standards and ensuring that regulation is proportionate is key.
“Another highly important matter for the future is the engagement on financial services between the UK and the EU. Some aspects of this are currently impacted by the impasse over the Northern Ireland Protocol. When this is resolved it will be essential that the Government uses all of the influence and diplomatic resources at its disposal to engage with the EU and its institutions and, indeed, vice versa.
“Finally, I note that more than half of financial services jobs are outside London. The Government must also ensure that its policies for financial services deliver for the economy across the whole of the country.”