Shorting the City: The Tories’ Brexit deal fails the financial services industry

31st December 2020

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By Pat McFadden

There was a revealing moment in the House of Commons debate on the Government’s Brexit deal.  Labour MP Peter Kyle asked the Prime Minister about the absence of coverage for financial services in the deal.  The Prime Minister ducked the question but said he was glad Labour was “backing the bankers”.

The Prime Minister’s response summed up how the financial services sector has been viewed by much of the political world since the financial crisis.  The default response is to delegitimise anyone who raises concerns about the sector as nothing more than a spokesperson for the bankers.  It’s an easy way to dismiss concerns but also a reckless and immature way to discuss a sector of such importance to the UK economy.

Of course there are fat cats in the city.  There is egregious behaviour.  And there are the risks to the overall economy exposed by the financial crisis.  That’s why we need robust regulation, both strong and nimble enough to meet new challenges.

But the bottom line is this is a sector which employs a huge number of people, is a successful exporter and generates significant tax revenue for the exchequer.  Not only that but as the challenges of meeting our net zero targets or shaping the great acceleration generated by Covid emerge, it is a sector which, properly regulated, can help the UK succeed in the future.

Services have been the dog that hasn’t barked in the Brexit negotiation.  Harder to understand than car production or agriculture, and governed by rules rather than tariffs, the debate has been conducted often as though 80% of our economy didn’t exist.  This has allowed the Government’s ambitions for financial services in the Brexit negotiations to decrease steadily over time with little or no comment.  They began by aiming for the exact same benefits.  Then, in the Chequers proposals, they wanted a separate treaty because equivalence was too one sided and not good enough.  Now the aim is equivalence recognition and they have not even secured that.

That the sector has become resigned to this does not diminish the significance of what has happened.  Companies may not want a political row, but that does not mean they will not act accordingly.

Financial services are largely absent from the deal the Prime Minister negotiated beyond the usual FTA statements about working together.  The Prime Minister himself admitted that he had fallen short on what he wanted to achieve in this area.  But the truth is he didn’t really try.

Much now hinges on the separate MOU to be agreed by the end of March.  Labour hopes that MOU agrees an equivalence regime, though even that will be a significant downgrade from where we were as a member state.

The story of how financial services have been handled and in the end disdained by the Government speaks volumes about what the Brexit process has done to the Conservative Party. It can no longer claim to be a pro-business party.

The approach to this issue demands more maturity than “backing the bankers”.  It ought to revolve around support for wealth creation and fair wealth distribution so that the country can secure both prosperity and the good society.  That’s the approach Labour will take.

Pat McFadden is Shadow Economic Secretary to the Treasury