Jonathan Reynolds MP: A no deal exit would mean a cliff edge disaster for the UK finance sector
Financial services are one of our biggest export sectors – but the Government is woefully unprepared for the impact a no deal Brexit would have on them, writes Jonathan Reynolds
As MPs returned to Westminster this September, the Government had already tried to halt parliamentary efforts to stop no deal before anyone even entered the Chamber.
No deal would be exceptionally painful for many parts of our economy. In my role as Shadow City Minister, my direct concern is for financial services – one of our biggest export sectors in the UK, upon which British people rely every day.
Financial services made up 6.9% of total output in 2018 and contributed £29bn in tax in 2017/18, according to House of Commons Library figures. The financial sector in the UK has thrived on access to the single market, benefitting from a passporting system which allows services to be sold across the EU27. But with possible alternatives such as mutual market recognition and enhanced equivalence already off the table, many financial institutions have already implemented basic contingency measures. According to EY’s Brexit tracker, as of 31 May 2019, the direct financial impact of Brexit on major financial services had reached nearly £4bn, including the £1.3bn cost of relocating staff and operations, legal advice, contingency provisions.
The risk for the UK was always that any Brexit deal would not spell instant disaster, but rather operate like a slow puncture as the UK gradually lost out to other financial hubs with better market access and wider talent pools. A no deal Brexit, however, would be on another scale altogether. It is hard to predict what the impact would be of abruptly cutting the ties of decades of interwoven regulation. In addition, we would have to work on the assumption that none of the goodwill necessary to mitigate this disruption would exist. On the contrary, the relationship would likely be an acrimonious one with rival countries seeking to attract economic activity from the UK, rather than support measures to sustain our leading position.
Labour has repeatedly warned that the legislative preparations taking place for such an outcome have been inadequate. The first pillar was a huge volume of Statutory Instruments (SIs) porting EU financial regulations into UK law. Dozens of these instruments were passed in a three-month period leading up to the original 29 March deadline. In part, this established a Temporary Permissions Regime (TPR), which would allow EEA firms to operate in the UK for a limited transitional period. However, that does not extend the other way for UK firms in the EEA, as we cannot make that decision unilaterally. This risks severe disruption for customers of UK banks in the EEA as they will instantly lose their passporting rights in the event of no deal. Contract continuity is another grey area, particularly when it comes to the validity of long-term insurance contracts.
Despite repeated calls from the Opposition to use primary legislation, or at least debate the most significant SIs on the floor of the Chamber, these SIs continued to be pushed through in committee. The scale and speed of this process meant that subsequent errors were and continue to be found. For example, no provisions appear to have been made in the TPR applying to payment services provided by an EEA bank in the UK.
The second pillar was the Financial Services (Implementation of Legislation) Bill. This was primary legislation which would allow us to implement EU legislation currently being discussed but not yet legislated for over the transitional period. But the Government pulled the Bill before its passage in order to prevent it being defeated on amendments relating to transparency in the Crown Dependencies. The Bill could well fall given our new prime minister’s decision to prorogue parliament, leaving the sector facing yet further uncertainty.
Ultimately, crashing out without a deal is a systemic change so unprecedented it is hard to fully assess how severe the consequences will be. The third country regime, where a country is granted access rights on the basis they comply with EU27 regulations, was simply not designed to be used by a Member State moving in the opposite direction.
Reliable and robust financial market infrastructure is central to our economic stability. It is absurd that this infrastructure is now being jeopardised by a disastrous no deal exit from the EU. Moreover, the UK has benefited considerably from being seen as a stable, reliable and well-governed jurisdiction – a status we have now unfortunately lost. The Opposition will continue to do everything in its power to prevent this outcome and the disruption it would bring to the financial services sector throughout the UK.
Jonathan Reynolds is Labour Co-operative MP for Stalybridge and Hyde and Shadow Economic Secretary to the Treasury