Government reluctant to engage with the EU on financial services says Lords Committee report

• The Committee found:
  Far fewer financial services jobs have moved from the UK to the EU as a result of Brexit than some expected; current estimates suggest 7,000 jobs have moved, compared to estimates of 75,000 in 2016. However, the Committee cautions against complacency, as it is not yet clear whether the impact of Brexit on jobs has fully played out.
  
  
• While divergence between the UK and the EU is inevitable, it would present the UK with opportunities to innovate and tailor the UK’s regulation of financial services to its own interests. The Committee stressed, however, that the Government needs to weigh up the benefits of divergence against other factors, including the cost of implementing any new rules. The Committee found that there was a reluctance on the part of both the UK Government and the EU to fully engage with each other, and called for a stepping up of financial services engagement, particularly at the political level.
• London has retained its position as the world's second largest financial centre and the sector has remained resilient. However, the Government must ensure that its approach to financial services delivers for the whole of the country and its economy, not only for the City of London.

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.”

The Committee’s findings also include:

• The Memorandum of Understanding (MoU) on regulatory cooperation, which the UK and EU committed to concluding alongside the TCA but which has still not been signed, 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.
• 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.
• 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.
• Regulatory divergence is likely 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 cautions the Government to weigh up the benefits of divergence against the costs of implementing new rules. It is also concerned that the EU’s increasing emphasis on ‘strategic autonomy’ could lead to barriers to cross-border trade in financial services.

Report is strictly embargoed until 00:01 on Thursday 23 June 2022.

To request an embargoed copy of the report, or bid for an interview with Lord Kinnoull, Chair of the European Affairs Committee, please contact Louise Shewey, House of Lords Press Office lordspressoffice@Parliament.uk +44 (0)20 7219 8550