Bim Afolami: I beg to move,
That this House
has considered the UK as a financial services hub.
It is a pleasure to serve under your chairmanship, Mr Stringer. I started my professional career in financial services, as did the Exchequer Secretary, as a corporate lawyer in the City of London. I worked at Freshfields Bruckhaus Deringer for three years, before working at an American firm called Simpson Thacher & Bartlett for three years. After that, I underwent a bit of a switch, and moved from being a lawyer advising on transactions to working in banking in strategy and restructuring at HSBC. I moved from being an adviser to a principal, or manager.
When I was at HSBC, I started to learn about financial services in their broader sense. As a senior executive, I was deeply involved with several high-profile aspects of the bank’s restructuring, notably on splitting the retail bank from the investment bank, which was necessitated by ring-fencing legislation. I also spent time working across the global bank on the implementation of MiFID II—the markets in financial instruments directive—which required huge changes to how the markets desk operated. I also worked on custody systems, payment systems and business design. That took me up to June 2017, when I was elected to this House as Member of Parliament for Hitchin and Harpenden.
Obviously, financial services matter a huge amount to me, but they also matter a lot to my constituents. An analysis of the latest census data leads me to estimate that my constituency is in the top 50 in the country for those who work in financial or professional services. One cannot move in Hitchin or Harpenden without bumping into a lawyer, a banker or an investor.
Robert Jenrick: You are really selling it!
Bim Afolami: I am really selling it. In fact, when I was canvassing at the last election, a voter told me that after they had looked me up, they said, “Oh, well this is probably the only seat in which being a lawyer and a banker is an advantage rather than a disadvantage.”
Craig Tracey: My hon. Friend makes some important points about banking. Does he agree that the insurance sector has a massive role to play? It brings in £29.5 billion to the UK economy, including, as I am sure the Minister will appreciate, £12 billion in taxes. The critical point about the insurance industry is that it employs 300,000 people, two-thirds of whom live outside London, so the industry has an impact on all our constituencies.
Bim Afolami: My hon. Friend is completely right. Later in my remarks, I will talk about the regional aspects of our financial services sector. Suffice it to say, I called this debate because I believe that our world-leading position in financial services is at risk. That will have an impact not only on London, but on regions outside London, and on industries such as the insurance industry in my hon. Friend’s constituency and across the country.
We must remember that despite the appalling financial crisis of 10 years ago, in which many institutions and firms were culpable of incompetence and wrongdoing—if not outright illegality—the British financial services sector is a national asset and a public good. It is our most successful sector and export. I will try my hardest not to get trapped in a Brexit rabbit hole during the debate, but I will make this point: in post-Brexit Britain, we will have to adapt our financial services sector to ensure that in the next 20 years, the UK remains the world’s global financial services hub, facilitating business and creating growth from Bangor to Bangalore and from Hitchin to Helsinki.
John Howell: I am a former partner in Ernst & Young, so mine is a completely different perspective on the sector. Yesterday, I chaired a breakfast meeting to look at the future of digital currencies. Among those present, there was an overwhelming desire to see better regulations in place globally. We have an opportunity to take the lead on that. Does my hon. Friend see that as an opportunity for the UK?
Bim Afolami: I defer to my hon. Friend’s experience as a very senior partner at a major accounting practice. The regulation of financial services has moved from a national to a regional level and now to a global level, for instance through Basel and Solvency II. Let us consider the reasons that Solvency II was brought in for the insurance industry. Britain—not just the Treasury but also the Bank of England—needs to make sure that as we leave the European Union, we do not lose our voice at the global level. If we do, we will have to implement regulations that we will not have taken part in shaping. I will address that further on in my remarks.
John Howell: The Bank of England was not only present at yesterday’s breakfast meeting, but spoke. It took a strong role in looking at whether the digital currency sector needs future regulation.
Bim Afolami:I thank my hon. Friend; I will address that aspect directly in my remarks.
Before I come to that, I think it is worth defining, for people who might read or watch the debate, what financial services actually do. To many, it looks like it is just about shuffling paper around or playing with spreadsheets. Put simply, financial services are partners of business. In 2017, UK banks lent £14 billion per quarter. Almost 1,500 equity finance deals, with an investment value of almost £6 billion, helped smaller businesses grow in 2017.
Another thing to assess and to remember is that financial services create business demand for other goods and services. The financial services industry is the largest buyer of tech services in the UK, for example. A business contributing to what we might call “the real economy” needs financial services to be available, cheap and effective. In Britain, companies from around the world have access to those services through our financial services sector.
What impact do financial services have on the Treasury’s balance sheet? The Minister will be keenly aware of this—I know that the Chancellor is. The financial services sector contributed over £72 billion in taxes last year. To give people a sense of scale, that is half of the NHS budget and about 11% of total UK Government revenue. In addition, the sector provides 1.1 million jobs to the UK-wide workforce. If one includes related professional services in an advisory capacity, such as accounting or legal services, that number rises to 2 million.
We are global leaders. The UK is the leading destination country for foreign direct investment projects in financial services from the United States, Sweden and China. The UK attracts 15% of the US’s global projects of that nature, 47% of Sweden’s and 15% of China’s. I come back to the point made by my hon. Friend Craig Tracey; those who believe that financial services affect the City of London only should think again. Two-thirds of financial services jobs in the UK are based outside London. In fact, with regards to the foreign direct investment that I just described, between 2013 and 2017, regions outside London accounted for 49% of the jobs created, 48% of the gross value added in financial services, 36% of the estimated capital investment in the UK and 37% of the total number of jobs. All that went to regions outside London.
Highly paid bankers and insurance brokers or traders who earn millions of pounds do not reflect the reality of 99% of financial services. A major reason that they matter is the cluster effect of the jobs that major financial institutions create around them. Let us take self-employed freelance workers, who often work as consultants for major firms in the industry. The number of self-employed workers in the UK has gone up by roughly 50% since 2001. According to statistics from IPSE, the Association of Independent Professionals and the Self-Employed—I refer the House to my entry in the Register of Members’ Financial Interests—22% of the self-employed work in financial services, and 40% of those freelancers had at least one project based in the EU in the past 12 months. A good Brexit deal really matters to them, and those statistics show the ancillary losses that a poor deal for financial services will bring.
Numerous challenges and changes are on the horizon, which will require our Government to change and develop their approach to the sector. I will focus on three principal areas: first, the digitisation of the economy and the rise of FinTech; secondly, the challenges and tough choices we face as we leave the European Union; and thirdly, the need to increase the penetration of financial services into our most deprived areas. That will deepen and improve the relationship between the financial services sector and our most deprived people, to ensure that everyone benefits from the sector, not just the affluent.
On digitisation, we are in a new economy: the internet and social media, as all Members of Parliament know, have completely changed not only how politics operates but how goods and services are produced and sold throughout the world. Anyone who has read Stian Westlake and Jonathan Haskel’s book, “Capitalism without Capital: The Rise of the Intangible Economy”, will be in no doubt about the profound economic change that we are seeing. These days, anyone can produce almost anything anywhere using 3D printing; anyone can advertise a product worldwide at the click of a mouse; and, as I saw last week, a film producer based in Hitchin in my constituency can work with clients in China in minutes.
Such changes are exciting from a technological perspective, but present a real challenge to the way in which we do things. For the past 15 years or so, companies have invested more in intangibles, such as branding, design and technology, than they have in machinery, hardware or property. Businesses such as Uber do not own cars; they own software and data. Coffee bars and gyms rely on branding to help them stand out from the crowd, and they often lease their premises and physical goods, rather than owning them. That is capitalism without capital.
What does that mean for financial services and, in particular, for banking? The normal model for bank lending is this: when lending to a business, the assessment of the company’s balance sheet—the assets and liabilities—is a critical aspect of assessing credit-worthiness. In the new economy, banks struggle to understand how to value and monitor intangible property. In the old days, if a company went bust, a bank could recover its money by selling physical assets—it would have a mortgage over the buildings and could sell capital assets such as machinery. If a company with intangible assets folds, those assets cannot be sold off easily—in effect, their value will have sunk with the company.
A lot of smaller businesses in the new economy therefore do not have the same access to bank loans. They are much more reliant on venture capital and angel investors, and that is a very different model of financing from traditional bank lending. My first question to the Minister is this: how will our regulatory system have to change in order to catch up with the new economy, which is changing at both a domestic and a global level? Without changing the rules on bank lending, we will be unable to finance small entrepreneurial businesses properly over the longer term.
FinTech is another success story for Britain in financial services. Indeed, we are the world’s FinTech hub. Of the European Union’s $26 billion of FinTech investment, the UK attracted $16 billion, which is a huge chunk of that European market. In the first half of 2018, that helped the UK to overtake US FinTech investment for the first time. If we consider the size of the United Kingdom, for us to overtake the US in terms of total investment is really something.
Those numbers look impressive, and they are, but there are clouds ahead. I suggest that the money is still being raised easily because the successful companies that attract a lot of the equity investment are based in Britain—they were set up here. However, there is much evidence across the FinTech sector that new start-ups increasingly are created in competitor countries, in cities such as Berlin and Paris. Much of the money raised by companies—the money I was just describing—still comes to Britain, but it is spent abroad. The companies are expanding their footprints elsewhere due to worries about the short and medium-term outlook for FinTech in Britain. We need to face up to that.
The fundamental point that we need to be honest about is that Brexit has put huge uncertainty at the centre of Britain’s short and medium-term economic outlook, which affects financial services and FinTech in particular. There are many reasons for the success of FinTech over the past few years, but the key factor is that London has become the principal magnet for the best software engineers, the best inventors, and the best and most successful investors from all over the world. How will we maintain that while dealing with the challenge of Brexit?
I suggest a twofold approach. First, we need to ensure that we remain one of the best places to raise equity finance, and enable the employees of FinTech start-ups to take equity in the businesses in which they work. Will the Minister undertake to ensure that the Treasury will not seek to change the enterprise investment scheme or entrepreneurs’ relief? Will he also consider eliminating stamp duty on shares? That idea was floated recently by Xavier Rolet, the former head of the London stock exchange. Oxera Consulting calculates that the abolition of stamp duty on shares would cut the cost of raising capital for small and medium-sized enterprises by between 7% and 8.5%. KMPG estimates that that could rise to 13% for some technology companies. Cutting the cost of capital for SMEs would lead to increased growth, profitability and employment, and higher salaries for workers, all of which make revenue for Her Majesty’s Treasury while creating a more dynamic business environment.
The second approach is simple: it is about people. In recent conversations—some took place earlier this week—with major FinTech investors, they were extremely clear that the ability to hire high-quality people, and to keep them in this country away from the clutches of Paris or Berlin, is very important. The £30,000 earnings threshold proposed in the immigration White Paper should not be a huge problem for the sector, because the vast majority of the people brought in by our FinTech companies earn more than that. One consideration, however, might not have been fully appreciated: 42% of our founders in FinTech are from abroad, and when they start their business, they often do not earn much, because they are ploughing what they earn back into their businesses, so they might fall beneath the £30,000 cap.
What are the Government’s plans to ensure that founders—the talented people who are the brains behind FinTech businesses—can move easily to the UK to start their firms? If they cannot, they will go somewhere else, and that innovation and wealth, and those jobs, will go to other countries.
Bob Neill: My hon. Friend is making a most powerful speech, and I agree with everything that he is saying. Does he agree that it is important to look at the means of retaining those bright graduates who come here and train? They are precisely the people who might wish to start their businesses in the UK. We need a scheme that makes it possible for them to remain in the UK, without having to leave and come back, so that they can move from graduate employment into the sector, using their skills. We would then get the brightest and best from day one.
Bim Afolami:I completely agree that we need to make it easier for graduates to stay. My understanding is that the Home Secretary has extended the time in which graduates may search for a job in Britain—I think up to 12 months. I would like to see that go up further, and I think the Home Secretary is quite amenable to that. We have to be honest: if we are thinking about immigration caps and the like, we should not turn away graduates, who will often be the brains of new businesses. We should help as many of them as possible to stay here; I agree with my hon. Friend on that point.
Brexit obviously dominates Parliament and Whitehall at the moment. We are in fast-moving times, so I will offer no predictions, largely because by the time anyone sees this debate, they would be completely out of date. As things stand, the political declaration that sits alongside the withdrawal agreement explains that the UK will have access to the EU market, and vice versa, under an equivalence regime. That means that the usual equivalence assessment will need to be undertaken for UK firms in the EU market, and the UK will have a similar equivalence process for the EU. Let me explain the notion of equivalence for those who are not familiar with it, with reference to the European Union. Essentially, the EU may look at a set of regulations that govern a certain area of financial services, such as bank lending, and deem another country’s regulations equivalent to its own, thereby allowing firms based in that other country to sell products to customers—individuals and firms—in the European Union.
Our reliance on an equivalence regime leaves me with three questions. First, to what extent do the Government wish to align themselves with EU regulations at a time when the European Union is pushing ahead in a much more restrictive and onerous direction, in regulatory terms? In recent years we have seen the alternative investment fund managers directive, the cap on bankers’ bonuses, MiFID II and other regulations, which were often well intentioned but have tended to increase costs, reduce Europe’s competitiveness and increase complexity. That has made accessing financial services more expensive, more complicated and not necessarily any safer for the consumer. I believe that onslaught of complicated regulation has led in part to the poor productivity of financial services since 2008. Productivity has slowed by just over 2% in the past 10 years.
Craig Tracey: My hon. Friend is making a powerful case. His point about regulation is critical to ensuring our future success, which will be underpinned by proportional regulation. Does he agree that we need to give the regulator a function as a promoter of the industry? If it had to promote the industry across the world, it would have to understand better what it regulates. The rules that apply to insurance do not necessarily apply to banking; those industries are regulated very differently across the world. The promotion aspect is critical.
Bim Afolami:That is a very interesting and important point. My hon. Friend will correct me if I am wrong, but my understanding is that when the Financial Services Act 2012 came in, there was significant debate about whether it should have included a duty on the regulator to promote financial services, both in the UK and abroad. The decision was taken not to put that in statute at that time. The Government should revisit that decision. Giving the regulator such a duty would not be inimical to ensuring that we regulate the industry properly; it would just ensure a balance, and that the regulator considered the impact on consumers—firms and individuals—as much as other impacts.
Recently, the EU has made many changes to the way it treats all non-EU firms that seek to offer financial services to European customers. Changes to MiFID II and large clearing houses are being considered, and I believe the proposals being discussed include setting the bar higher for granting equivalence for firms classed as systemic. It is proposed that the European Securities and Markets Authority—let us just call it ESMA to avoid getting tied up—be given greater powers to oversee the activity of those firms, including powers to open investigations, conduct on-site inspections and the like. It is also proposed that ESMA be able temporarily to restrict or prohibit those firms’ activities in the EU.
In recent months, the EU has shown that it wants to be able to give its supervisory agencies, such as ESMA, greater extraterritorial reach, so they behave a bit more like American financial services regulators often do. The EU wants to ensure that ESMA plays a greater role in overseeing when national regulators can allow EU-based asset managers to outsource or delegate portfolio and risk-management activities to entities outside the EU. At the moment, as the Minister will appreciate, many asset management funds based in Luxembourg and Ireland delegate those activities to London. Some fear that the initial review that is under way is the precursor to the EU seeking to ban those outsourcing and delegation models altogether, although I gather that in recent days an agreement has been reached between British and European regulators—that is what it said in the Financial Times, at least. Perhaps the Minister can enlighten us about that.
Those rather technical points matter, because they show that the equivalence regime—the regime that we are going to rely on under the Brexit deal—is being considerably narrowed. In my judgment, that may make it harder for UK-based firms to sell services directly into the EU in future than it is for, say, Japanese and American firms to do so today. If the Minister’s answer is that the UK will seek in large part to copy the EU’s regulation, does that not make us highly vulnerable to aggressive regulatory behaviour from the EU27, who have already shown that they are very capable of designing regulations that are deliberately inimical to UK interests? Just as importantly, as we look further afield to the huge growth in opportunities for financial services in places such as Asia, how will we be competitive with the centres of Hong Kong, Singapore and New York and ensure that the UK is best placed to attract that business?
On the other hand, if the Minister’s answer is that the UK will seek to diverge from EU regulations where we can—obviously, that is a perfectly legitimate outcome—do the Government have a strategy setting out the areas in which we will seek to diverge, how we might do that and what the benefit will be, bearing in mind that the consequence will be reduced access to the European market in the areas in which we seek to diverge? In my view, we can take that path only if we shift to a regulatory model that significantly increases our relationships with and footprint in emerging markets in Asia and elsewhere. In those circumstances, we would shift more decisively to being a global financial centre, accepting that a certain chunk of European business will move away to the European Union. How do the Government envisage managing that shift and balancing those two approaches?
The Asian powerhouse countries have increasing financing needs, which include servicing $26 trillion of infrastructure spend, providing the backing for the Chinese-led belt and road initiative, and the internationalisation of the renminbi. Over the past 25 years, emerging economies’ share of global activity has risen from 40% to 60%, and their share of global trade has grown from a fifth to a third, yet their financial assets make up only 10% of the global financial system. Things will not stay that way for long, especially as savings rates keep increasing and the Asian economies concurrently get richer and richer. Growth in those countries far outstrips growth in Europe and the United States, and London is not necessarily the automatic choice for Asian financing. Singapore and Hong Kong are redoubling their efforts to ensure that they are the financial services centres that finance that Asian growth. How will we ensure that the UK is the global hub for that work?
I have spoken mostly about regulation—hon. Members are all still awake; I thank them for bearing with me—but tax policy is also a major part of this. The sad truth is that we are no longer internationally competitive on taxes for financial services. A report by UK Finance and PwC published in December 2018 states:
“On an overall basis, over half the profits (50.4%) from participant banks are paid in taxes” in the UK. Some 43% of the taxes borne are not dependent on profit. In effect, they represent a fixed cost; the profitability of the bank is irrelevant. If we compare London with our major competitors—Frankfurt, New York, Singapore and Dubai—the overall tax burden for a model bank is highest in the UK, at just over 50% of commercial profit. In Frankfurt, that figure is 43%, in New York it is 34%, and in Singapore and Dubai it is 23%.
Putting all that together, given the regulatory challenges I outlined and the tax challenges I have just set out, are we still sure that the UK is in a position to dominate international financial services for the next 30 years, as it has for the past 30 years? Our financial services sector helps productivity and growth in our real economy across the country. Financial services is one of the most productive sectors in British cities, and while the average output per worker in a British city was £59,000 a year in 2016, that figure was almost twice as much in financial services. It would be foolish, however, to suggest that our financial services sector fully penetrates into some of our poorest regions, or that it is used by some of the poorest people in our country. I refer hon. Members to my entry in the Register of Members’ Financial Interests, because I am a commissioner for the Financial Inclusion Commission, and we have been working on this issue since our landmark report on financial inclusion in 2015. Since then, the Treasury and the Government have taken on board most of the commission’s recommendations, and I commend them for that.
What does financial inclusion actually mean? In simple terms, it means belonging to a modern, mainstream financial system that is fit for purpose for everybody, regardless of their income. It is essential for anyone wanting to participate fairly and fully in everyday life. Without access to appropriate mainstream financial services, people end up paying more for goods and services, and have less choice. The payday lending market grew from £330 million in 2006 to £3.7 billion in 2012, and it is probably now worth more than £4 billion. We are a country of about 65 million people, and 13 million people in the UK do not have enough savings to support themselves for one month were they to experience a 25% cut in income—one month! We save less as a percentage of our income than any other country in the European Union.
I have talked about banking, insurance, Asia, and the belt and road initiative, but for the UK to be an effective financial services hub internationally, we must ensure that we are No. 1 in the world for financial inclusion. All our people need the chance to create and develop wealth and savings. There is no excuse for us not to use the talent of the world’s finest firms and individuals involved in financial and professional services in the UK, and for us not making true financial inclusion a reality for all our people.
Craig Tracey: I am really interested in this area, and I chair the all-party parliamentary group for insurance and financial services, which is considering that very point. Does my hon. Friend agree that although the internet and digital technology bring a lot of positives, they disproportionately disadvantage vulnerable people, who do not always have access to the face-to-face advice that they used to get on the high street, and who, as people are being driven online, do not always get the best deals?
Bim Afolami:Without wanting to out-APPG my hon. Friend, I am chair of the all-party group on credit unions, and one of the main purposes of credit unions is to provide that face-to-face advice. Credit unions are often active in places that banks left long ago. Providing that personal information that helps people to build up their savings is important.
Credit unions in the 10 most deprived communities in Britain are lending heavily, and they consider loans that few other lenders would consider because of the applicants’ credit scores, while also charging considerably less than any other type of financial service. Credit unions in the UK currently have £860 million out on loan, and that lending is predominantly focused on those at the bottom end of the income scale. Evidence shows that once people in deprived communities are given a chance to access credit on affordable terms, they start to see patterns of improvement in their credit profiles. Over time, those people will no longer necessarily need specialist financial advice from credit unions, because they will be able to bank with and access the mainstream financial services sector. Will the Minister agree to work with me on two aspects of credit unions? First, will he consider amending secondary legislation to broaden credit union lending powers, so that they are able to service more people from that vulnerable group? Secondly, will he work with the Bank of England to review capital requirements for credit unions, so that the sector can serve more people more effectively?
In conclusion, I would like the Minister to respond to the following points. First, what is the Government’s approach to adapting bank lending rules to enable more investment in the new economy with more intangible assets? Secondly, what is the Government’s blueprint for improving Britain’s attractiveness to people and firms in FinTech? Thirdly, what is the Government’s current thinking about their regulatory approach as we embark on our negotiations on a future trade agreement with the European Union, bearing in mind our need to be the No. 1 financial services hub for financing Asian investments and investments from the emerging world? Fourthly, how will the Government seek to bring down the tax burden on our financial services sector, given that we need to be more competitive on tax policy in coming years to counteract the uncertainty and destabilisation in the market? Finally, and perhaps most importantly, how will the Government seek to improve the penetration of financial services into our most disadvantaged communities, especially by helping credit unions to professionalise and expand?
Bim Afolami:I thank the Minister for his response. I would like him to write to me about credit unions, in particular, which he mentioned.
In the remaining 20 seconds, I will take on some points raised by Anneliese Dodds. The issue with regulation is not whether we should have a bonfire of regulations. Nobody on the Government Benches, myself included, wants to see a bonfire of regulations. It is about having the most effective regulations that we can, rather than just accepting everything that has happened before.