Their Brexit: financial services report, released today, concluded that financial services provided in the UK may not be easily replicated in the EU, and that it would be in both parties’ interests to preserve access to the EU market for UK-based firms.
It also highlights the importance of agreeing a transitional period for financial services, so that a ‘cliff edge’ is avoided, both at the moment of triggering Article 50 and as the country forges a new relationship with the EU.
Chair of the committee, Baroness Falkner of Margravine, said: “The government has a lot of work to do.
“It must, early in the negotiation process, agree a transitional period so as to prevent UK-based financial services firms from restructuring or relocating on the basis of a 'worst-case' scenario.
“The EU should also carefully consider the findings of this report. EU firms rely on the services provided in the UK, and pain caused to the UK's financial sector will not be the EU’s gain, but New York’s.
“We are in danger of a lose-lose scenario if pragmatism does not prevail.”
London is the world’s leading financial services centre, with its concentration of activity allowing for economies of scale and a depth of capital market activity which other European cities would find hard to achieve, according to the report.
It employs 1.1 million people, 60,000 who are EU nationals and 100,000 non-EU nationals, however the report states that many firms do not appear to be aware of their reliance on current passporting arrangements.
The Bank of France governor, Francois Villeroy de Galhau, has previously said that the UK will not be able to use what is called the ‘banking passport system’ unless it signs up to all of the rules of the single market.
This could limit the UK’s ability to access highly qualified staff from the EU, a key issue for the financial sector, with the report stating that possible equivalence provisions would not be sufficient in covering the full range of financial services activities.
“The government should go into negotiations with the strongest possible evidence base,” Falkner continued.
“It needs to determine as precisely as possible which firms currently rely on passporting and the degree to which equivalence provisions might provide a substitute.
“We found those provisions to be patchy, unreliable and vulnerable to political influence. The government should seek to bolster them wherever possible.”
In particular, the FinTech industry could be under threat if this ‘passporting’ issue is not resolved, as it will not be able to recruit adequately qualified staff and the entrepreneurial talent needed for innovative start-ups.
The report argues that the UK should seek to find equivalence on withdrawing from the EU, keeping law already in place to avoid disruption to the financial industry, but warns that this may not include retaining market access.
It states: “If the Great Repeal Bill successfully ensures that the UK continues to apply EU legislation post Brexit the UK will, on a technical level, have a regulatory regime that is initially identical to that in the EU.
“However, it will remain for the European Commission to decide whether the UK is equivalent for the purposes of retaining market access.
“This process could be lengthy and could be politicised. The government should seek agreement that the UK will be determined to be equivalent at the point of withdrawal, to avoid damaging disruption to financial services providers.”
It goes on to say that the UK’s influence on international standard-setting bodies, such as the Basel Committee and the Financial Stability Boards, will be crucial to ensuring changes to regulation are consistent internationally.