11
Examination of witnesses
Nicola Watkinson, Carol Hall and Nick Collier.
Q8 The Chair: Welcome to this evidence session of the International Agreements Committee. Thank you very much indeed for being here. Members will declare their interests when they speak for the first time. We are looking at the UK-Switzerland financial services mutual recognition agreement. The meeting is being broadcast through the parliamentary website. A transcript will be taken and a draft will be sent to you; you will have an opportunity of making any necessary corrections before it is published, so long as you respond pretty quickly. I declare my interest as a practising lawyer in an international law firm with interests in Switzerland as well as the UK.
Can you provide an overview of the benefits and the limitations of the agreement? A slightly separate question is: were you sufficiently consulted by the team during the negotiating process? If I may suggest, when you speak, please introduce yourself, so we and the public all know who you are.
Nicola Watkinson: I am the managing director of the international work at TheCityUK, which, as many of you will know, is an industry body that represents the whole financial and professional services ecosystem and looks after the interests of the UK as an international financial centre. I am delighted to be here today.
On behalf of TheCityUK, we welcome the new MRA. We think it is an excellent agreement which demonstrates how major international financial centres like the UK and Switzerland can come together and collaborate. We see it as a benchmark that can be used for future agreements.
We also commend the efforts of the Government, particularly the Treasury officials but also those at our embassy in Berne, on the consultative process that they have adopted during this process. It really has been excellent, and we feel the industry has had a good opportunity of inputting their views and ideas during the negotiation. I would particularly call out, if I may, the chair of our Swiss market advisory group, Joe Cassidy, who has helped lead the industry consultation on behalf of TheCityUK and industry members.
The Chair: That is reassuring to know. I am interested in what you said about this being a potential forerunner for other agreements. Some of you may have heard the previous session and know it is a question in which we are quite interested. Do any other witnesses want to say anything at this stage?
Carol Hall: I head the EU and international affairs team at the ABI. Our membership includes insurance and long-term savings providers, and we service customers from retail and small-to-large commercial clients as well, but we do not have insurance brokers in membership.
The Chair: So the public know, the ABI is the Association of British Insurers.
Carol Hall: Similarly, we have welcomed the outcome of the negotiations. When we spoke to members several years ago about markets of interest to prioritise, we went through a combination of considerations, including potential growth opportunities and the removal of frictions for operators. We looked at a similar prudential regulatory regime, and, as was referred to quite a bit in the previous session, the appetite of both countries to roll their sleeves up and get involved. We feel the outcome of those negotiations has pushed the front on many of those things, so we are very pleased to see that.
On the consultative process, we were part of TheCityUK’s Swiss market advisory group. We had very good and open sessions with them, but subgroups were also pulled out as and when required, so those with a particular insurance interest then had a separate session.
The Chair: So you endorse Ms Watkinson’s view that the consultation was very good.
Carol Hall: Indeed, yes.
Nick Collier: I am managing director of the City of London Corporation’s Brussels office. I am an adviser to the corporation on Europe, and I include Switzerland in that. Indeed, I sit on the Swiss MAG, so I endorse what Nicki has said about the work of the industry group.
If I may mention a couple of other points, partly having heard the previous discussion.
The Chair: Please.
Nick Collier: This is important for a couple of reasons. One, it is a treaty. We always want financial services to be in trade deals, but we never get it. It is not in the TCA, for example. I remember years ago—wearing an American industry hat—trying to get financial services into the EU-US trade deal, something which neither side wanted. But this is a treaty, which is great.
The Chair: Before you go on, what is the benefit particularly of it being a treaty?
Nick Collier: It is Government to Government. Otherwise, you would be very much in the hands of the independent regulators. It is very transparent and binding, and it has all the concomitant benefits of a treaty like the review process, some of the things you talked about in the discussion just now with the Treasury, the review clauses, standing committees, et cetera.
If you do not have a financial services treaty, then, as you discussed before, you essentially end up relying on unilateral equivalence measures, which is the EU wording for unilaterally recognising somebody else’s regime. This is mutual recognition, which has never been done before, apart from when you were inside the single market, of course. This new word, deference, which we all now have to learn to use, is one that the industry pushed very hard for and is indeed in the G20 commitments. There is a Financial Stability Board document going back a few years that says we should all try to defer to each other’s regimes.
The reason that matters is that, since the financial crisis in particular, we have introduced broadly the same rules, certainly in every major jurisdiction, on banking, insurance, credit rate agencies or whatever, but then we do not recognise each other’s regimes. Having some kind of process to do this is really helpful.
The EU process of equivalence is a very heavy-handed, line-by-line assessment of someone else’s regime. You say to the EU, “But, they’ve already done that at G20 level or at the Basel Committee on Banking Supervision, or IOSCO”, which is the global security regulator. “You’ve already done that. Why do you have to do it again, and why do you do it on a unilateral basis? This is an important precedent, as Mr Knox said.
The Chair: That is very helpful. Thank you very much indeed. Lord Marland.
Lord Marland: I thought that was a good point, and the three of them have answered the question I was going to put to them, Chairman, so I will not take up more of your time.
The Chair: Let me go straight then to Lord Udny-Lister.
Q9 Lord Udny-Lister: You probably heard, because you were all in the room earlier, that I have an interest to declare, as I am an adviser to HSBC Bank, which has branches and subsidiaries in Switzerland; and to a small emerging markets fund, Gemcorp, which has a subsidiary in Switzerland. Do you have any concerns about implementation? What happens if the UK or Switzerland starts to change regulatory approach?
Nicola Watkinson: I might start with that. It is important to say that the agreement is still in very early days, but it is a living document. It has provisions for it to be regularly reviewed and for its scope to be increased if needed and if there is an opportunity to do that. Also, if there are concerns, as Mr Knox said, there are provisions that allow the regulators to consult and look at potential solutions.
From the process that we have seen so far, we do not have major concerns about this leading to any unintended consequences. We think the mechanisms that exist within the agreement should provide the means to resolve any short-term or urgent issues as well as regular review moments to see what needs to be refined within the agreement or added or taken from it over time.
Carol Hall: For those of us who were not around the negotiating table but were interested spectators, we were quite aware that there was a very thorough, rigorous assessment, with the regulators going through line by line, as Mr Knox said. At some point, I suppose that makes you nervous, because you can look too closely—there were a lot of lines to look through, so the thought was, “Will it ever happen?” As it went further forward, we realised there was a genuine commitment to make this work and a genuine interest on both sides to ensure that it is implemented as intended.
As things stand, certainly from the insurance perspective, both regimes are pretty much built on the same foundations. Whether it is a Swiss solvency test, or now we have Solvency UK, the foundations are the same. Things have changed but there are not huge divergences. If there were significant changes, we would see those happening over time, and there would be plenty of opportunities for people to talk things them and bust any myths that were going around. I certainly feel quite confident that it is quite a rigorous process.
The Chair: Before I go to other members of the committee, you will have heard in the last session our asking for some quantification of the part of the UK financial services market or business that this would cover. Do you have any ideas as to what numbers we can put on this?
Carol Hall: No, unfortunately not. I wish we could.
Nicola Watkinson: The ONS data that we have is around £3.9 billion of traded services from the UK into Switzerland in financial services and insurance. But as we know, further breakdown by individual industries like asset management or investor services is just not available, so we rely on more aggregated high-level data that we can draw upon. As mentioned earlier, there has been strong growth with the UK being able to sell more services into Switzerland, which is why this agreement was seen as a real priority for our members: it enables us to increase market access in areas such as insurance but also to secure access in other parts of the wholesale markets.
Nick Collier: Mr Chairman, it is probably worth adding that Switzerland and the UK are open markets. If major players want to set up in each other’s jurisdictions, they do that now. It is not really a question of opening a brand-new market. These are marginal gains on the back of existing business, and often the benefits from this agreement are smoothing out inefficiencies and duplications rather than opening up new forms of market access.
The Chair: I understand what you are saying and why, therefore, that does not enable one to give a number for the benefits of entering into the agreement. Let us carry on now.
Q10 Lord Anderson of Swansea: Perhaps I should say on record that I have no angle or tangle or interest to declare. When the negotiations began, you must have had some concerns about what might emerge during them. Clearly, you were satisfied. Does that imply that there was very close consultation with government during that process? What mechanism would you hope to have to ensure that, on the rollout of this process, you have a similarly close relationship with government to voice any concerns you may have?
Nicola Watkinson: Back in 2017, TheCityUK set up the market advisory group to look at the Swiss market and provide some thought leadership on what engagement in this market would look like for our members. Also, we were very actively engaged with Economiesuisse, which is our business counterpart over in Switzerland, because we wanted this to be something of mutual benefit to both markets. We published two position papers, one in 2018 and one in 2020, that ended up being the forerunner, or the foundation work, if you like, on which the MRA could then be built. They were jointly published by TheCityUK and Economiesuisse, representing shared interests across the markets.
Since the announcement in June 2020 of the start of the MRA negotiations, we have had regular consultations with Treasury officials through our market advisory group. They have come along to brief our members on progress with the negotiations and to seek input and guidance on particular issues that members and the industry were most interested in.
Lord Anderson of Swansea: Were your concerns met?
Nicola Watkinson: As far as possible, yes. The point is, in any negotiation, you never get 100% of everything that you would like to see, but I have to say, what we have seen coming through from the MRA is very positive. People feel it is a really good deal that will open up opportunities that both sides will benefit from.
To your point about where we go from here, we are already working collectively across this table, as well as with government officials, to make industry aware of what the benefits of this agreement are going to be. Sometimes we sign agreements and forget that we need to educate business about how to leverage the opportunities that have been delivered. We also look to work very closely with the Treasury to see how we can keep evolving the agreement. It is supposed to be a living agreement, so we see potential to extend its scope over time, whether it is in green finance or other areas that members might like to pursue into the future.
Lord Anderson of Swansea: Do you see the need for the establishment of any formal structures for consultation?
Nicola Watkinson: Through our market advisory group we already have a structure in place which brings together representatives of the industry from across the ecosystem, including asset managers, insurers, banks, lawyers, advisory firms and so on. We think that is one good mechanism, and we have also been talking to Treasury about how we can continue to ensure that we have a chance to input into the ongoing meetings and discussions that it is having with its counterparts.
Lord German: I am a little concerned, as I am getting a slightly different emphasis from Mr Collier and Ms Watkinson. On one side, we are hearing that this was a smoothing exercise which will not deliver new market possibilities; on the other side, there are opportunities for creating new markets. So, I have two questions. First, Article 11 provides for an expansion of scope. In your view, is this a matter of urgency, because therefore we are using it to try to create new markets? You have given the example of green finance. Where else might we go?
Perhaps, Mr Collier, on your side, clearly the mechanism for new market changes is in Article 11, which is quite a bureaucratic approach because it requires both countries to agree, and then they send away to a committee, which then sets the regulators that are working for each other. If it is not providing new markets, I wonder whether that is a too long and tortured process to get expanded scope.
Nicola Watkinson: I will start. Within the agreement, if we look at the different industry elements, we see, for example, increased access for our insurance industry into Switzerland. That is a new area of opportunity that has been opened up, as well as making sure that UK companies will be exempt from some changes that the Swiss brought in at the start of this year. We are the only partner country at the moment that has that exemption. New areas are coming through, but as we have discussed before, there are already very open markets between the two economies, and this agreement helps to shore those up and make sure that we provide a good backstop in that area.
Then in terms of future areas of opportunity, to be honest, we probably still have quite a while to go before the Swiss are able to fully ratify all this, given the long processes that they have, and we have some processes that need to happen on the UK side. We still have a while to put this agreement into place, but we are always scoping with industry areas that they would like to see covered in future agreements. Green finance is certainly one of those.
Lord German: How far away do you think it is before ratification by the Swiss? Are we talking months? Years?
Nicola Watkinson: The anticipation is it may take until towards the end of this year for all their procedures to be fully implemented, given the processes they have[1].
Nick Collier: I would just add that my point about access is really establishment. You can set up using the right of establishment in all the western jurisdictions—okay, you have to pay for it, and it is a hassle, but you can do it. This deal is about services, cross-border services, which is more difficult to do. If you can lock in mutual recognition of your home country authorisation, then you can do cross-border services. It opens up new areas in wealth management—this is particularly important to the Swiss coming in, but it also helps us going out—and particularly in insurance broking, which Carol might say something about.
On the new areas—and this is also partly an answer to the previous question—a lot of the proof of the pudding will be in how both sides handle new rules. That is one of the major industry asks: as we mentioned earlier, there are waves of new regulation coming, typically globally. Sustainable finance happens to be very, very topical. Both sets of jurisdictions have interesting rules on, for example, disclosure requirements by listed companies. If you want to invest as a fund manager, put money into an ESG fund of some kind, you want to know that you trust the disclosure regime in that country. Again, the EU approach to that, which has been put into the disclosure regime rules of the EU, is equivalence. You assess them line by line, jurisdiction by jurisdiction. This is a much more efficient way of doing it. We trust each other, partly because—in the case of Switzerland and the UK—we have both signed up in some detail to these global rules.
It will similarly be the case in other areas of ESG regulation going forward. Digital might be the next wave—digital assets perhaps; both sides can talk to each other about that and share best practice. As Mr Knox said, the UK Treasury already does that with a number of jurisdictions; it talks about what each side is doing in a regulatory dialogue or an economic and financial dialogue. But then to deliver something that specifically gives you access, mutual recognition, is a step that you are realistically not going to do with any other jurisdiction. Particularly not—as I think, Lord Hannay, you were asking about earlier—in the EU context. The MoU discussions will not lead to some kind of market access issues, I am afraid, at least for some time to come.
Lord German: Are you happy with the Article 11 process for expansion of scope, which is about coming together and having the regulatory bodies then going through it to find equivalence?
Nick Collier: Yes. As Nicola Watkinson said earlier, there is a tremendous opportunity for industry to feed in views to that—plus, of course, both sides are also very open regulatory regimes; both sides consult. There are very few secrets in our regulatory world. Indeed, the big firms are on both sides, so one would know what is coming down the pipe and there would be consultation on both sides.
Carol Hall: As I consciously mentioned, we do not represent brokers, so if you want detailed input then I can recommend some people to speak to. Certainly, at a high level, there were domestic changes in Switzerland requiring localisation for third-country insurance intermediaries that the UK will not have to adhere to as a result of this MRA. That is very much a unique situation.
On broader insurance, this is the first time we have had almost genuine cross-border access. We have obviously been able to access via branches and freedom of establishment et cetera, but in terms of cyber insurance and things like that, these are where the new opportunities lie. A good point made by Nicola was that a joint effort is needed to make sure that those are realised, and we obviously are aware of our part in that.
Q11 Lord Hannay of Chiswick: Could you perhaps give us some thoughts about whether you think this sort of agreement, this mutual recognition agreement, is likely to be applicable to jurisdictions other than the UK and Switzerland? If so, from the British interest point of view, what would your order of priority be in other jurisdictions? Do you think that the Government ought to be thinking about it now? We were told by the Treasury that it was not thinking about it, it was all too soon, but you presumably think a little further than the Treasury does. Could you tell us what order you would put these priorities in, and whether you think the countries we would like to conclude a mutual recognition agreement with would be likely to like to do one with us?
Nicola Watkinson: I might start on that one, recognising the points that Mr Knox made about the fact that this is still early days. To even attempt something like a mutual recognition agreement—if we think that this started in June 2020 and we concluded it only in December 2023, and that was with a very close partner in Switzerland—we need some core prerequisites. We talked heard about that in the last session. We need a strong and trusting relationship between our regulators already in place; that is obviously fundamental. We need to know that the other jurisdiction has the right regulatory environment that is suitable for a mutual recognition agreement. We also need to know that, if we are going to ask our Treasury officials to spend time doing this rather than something else, the return on investment for our officials’ time is going to be worth it.
We have been thinking about the jurisdictions in which there might be the greatest positive impact for our industry from further work on mutual recognition. We are just starting to think about a scoping study to be able to do that. We would have liked to have started it prior to all this, but the reality is that this is quite a groundbreaking agreement, and in early discussions that we had with our counterparts in other markets, they were finding it quite hard to compute what this mutual recognition agreement would look like. Now we actually have it, and it is able to be shared, we are looking to complete a scoping study within the next year to look at where other markets might be most suitable for an MRA.
I do not have the full answers for you yet. I can say anecdotally that companies that we have spoken to have suggested that markets such as Japan, Singapore and Australia could be candidates for something like this, but we do not have any further detail to add to that right now.
The Chair: No shopping list?
Nicola Watkinson: Not yet.
The Chair: No preferred list of suitors?
Nicola Watkinson: We have to understand whether there is appetite on the part of the other market and to see what the mechanism might be. Then from an industry point of view, there is an onus on us to be able to say, “What would the economic benefit be if this was achieved?” I think that is an important part of making sure these agreements are a good use of everyone’s time, because it took a lot of effort on behalf of industry, as well as on behalf of government, to achieve this particular outcome.
Lord Hannay of Chiswick: You have not mentioned the two biggest markets that the UK tends to deal with—the United States and the EU—as among those who might be considered, from our point of view, as being desirable to have a degree of certainty with that unilateral action will not be taken, which you cannot have with a pure equivalence decision. You have not mentioned those two; where do they rank?
Nicola Watkinson: The EU and the US are our two largest sources of exports for the UK industry, so I am by no means saying these are not important markets; they are very important markets and will continue to remain so. There are probably going to be other mechanisms in the short term that will allow us to find ways of achieving greater regulatory co-operation than an MRA might.
Lord Hannay of Chiswick: You mean ones that would leave the two sides completely free to take unilateral action if they wanted to?
Nicola Watkinson: Each market is quite different in its own right. If we were to look at how those markets are structured, whether the MRA is going to be the quickest path to delivering the outcomes that we would want would be the question we would have to ask ourselves.
Nick Collier: In a way, of course we would want mutual recognition with Europe and the US. As Nicki said, it is just not very practical at the moment. Secondly, on the Asian jurisdiction: some of this is time zone stuff. The reason Switzerland and the UK work so well is partly that we are very similar regimes, but also that we have firms that can do cross-border business in that time zone. It is a little different if you are in Japan or Singapore, because you are probably not going to be doing the cross-border activity in the day. It will probably be a bit more partial; it might be bits of the regulatory jigsaw that you could have mutual recognition applying to.
Lord Boateng: I would just like to tease that out a bit. Is the view expressed by Ms Watkinson and TheCityUK the view of you all? You have given your take on it, Mr Collier. Ms Hall, would you like to give yours?
Carol Hall: These are very much the considerations that we are going through as well, and we are very much aligned with that. We were starting to talk about the variations within markets. The insurance sector is very much state-driven in the US, so obviously that adds a new dynamic to trying to negotiate something collectively. That will be different. Switzerland obviously has its cantons, so that influenced the negotiations as well. But each of those will be different because of their national domestic structures. When it comes to the EU, similarly, it is very attractive from our perspective, but obviously it very much depends, as we have seen, on what the EU’s appetite for that is. To what extent do you pursue that?
Lord Boateng: So it is more a question of the EU than domestic political considerations. I hear you say, Mr Collier, that it is not practical, yet the cross-party UK Trade and Business Commission co-convener, Paul Blomfield, who you will know is in the other place, says, “The EU remains the largest overseas market for most British businesses and protecting them demands similar arrangements of beneficial regulatory alignment, which will break down barriers, reduce costs and unlock the huge potential of the UK economy”. Does any one of you disagree with him?
Nick Collier: No, but I have met the European regulatory officials, Lord Boateng, and it is not on their agenda at the moment.
Lord Boateng: It is not on their agenda, but would you like it on ours?
Nick Collier: It takes two to do mutual recognition.
Lord Hannay of Chiswick: That is surely an astonishingly downbeat assessment to make. If before you start thinking about the EU you regard it as not being possible, because, let us say, the beastly French will prevent it happening, that is an odd basis on which to try to advance our own interests, is it not?
Nick Collier: Perhaps this is a conversation for another day. One of the reasons why we have all been so positive about this mutual recognition is that it shows it can be done. It has never been done. Actually, it is not quite true to say it has never been done before, because I am old enough to remember pushing the Americans to do a deal with the Australians in 2008, which all collapsed because of the financial crisis, but the American securities regulator and the Australian securities regulator did sign a deal and you can imagine it now being back on the table.
To be clear, it might be difficult to see a holistic agreement, but it could be bit by bit. To use sustainable finance as an example, this is something new; everybody is currently regulating for, let us say, disclosure rules. Why not try to say, “Okay, so now we’re going to embed this process”? I think we would also be happy to see that done multilaterally.
One of the frustrations about financial services is you come up with these global rules in Basel, usually in the G20, and then they do not deliver harmonised implementation because everybody does them slightly their own way, perhaps, or they certainly do not embed recognition of other people’s. It would be nice to have global standards that were applied globally.
Lord Anderson of Swansea: When Lord Hannay and Lord Howell asked about the two elephants in the room, the US market and the EU, I thought I heard the answer to be that in the short term we will find other means of drawing closer to those markets. Is it, in your view, a medium- or longer-term aspiration to have MRAs in respect of those two markets?
Nicola Watkinson: At this stage, we can have aspiration—yes, it is always good to have aspiration. Whether mutual recognition is going to be the right path for each market is the question. Industry tends to be quite pragmatic: we want to get to the right outcome, we want to get better market access, we want to reduce regulatory friction and we want to have the best levels of regulatory co-operation and coherence in international standards. We probably remain relatively agnostic on the pathway that is taken to get there. If mutual recognition is the best way to do it, then we would definitely support that, but in the meantime, we have other financial dialogues and market dialogues, we have free trade agreements, we have other forms of co-operation that can be used to help to identify ways to bring this together, both at a bilateral and at a multilateral or plurilateral—
The Chair: We were waiting for the Division Bell and there it is. The committee will go to vote. I think we have completed our session, with many thanks to you for that. If the committee members could return for some short private business after voting, that would be very much appreciated.
