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Examination of witnesses
Dr Nicolette Butler and Chris Bates.
Q39 The Chair: Welcome, everyone, to the International Agreements Committee witness session today. I am extremely pleased to be joined by Dr Nicolette Butler, senior lecturer in law at the University of Manchester, and Chris Bates, special counsel for Clifford Chance LLP.
I hope you have had an opportunity to see some of the work that we have been doing on this inquiry until now. We felt—I do not think this is a unique sentiment—that the world of trade has changed significantly. Not only has technology made significant differences but our economy has become a predominantly services economy. A lot of the mechanisms that we use to promote our trade arrangements probably need to be thought about in light of the changes to our economy. Clearly the world has also changed, in how some of our allies and other nations view free trade, with volatility in tariffs and, to some extent, erosion of the multilateral system that we have counted on for the last 30 or so years. So we as a country have to adapt, and we are taking evidence from a whole range of stakeholders on how we can adapt to promote growth in Britain. Thank you very much indeed, both of you, for joining us. We have an almost complete complement of our committee today, which is excellent news.
The first question is from Lord Anderson. Before we start, I should say that there are two of you; it is not necessary that both of you answer every question but, if you want to come in, do so. We are also joined by Lord McDonald online so, if he wants to interject, he will raise the hand; we can see him clearly enough, so he can come in as well.
Q40 Lord Anderson of Swansea: My question is probably best addressed to Mr Bates, but I am sure that our two witnesses are delighted to have attracted such a fine audience. The evidence that we have received is that free trade agreements are more relevant and suited to trade in goods than in services. What provisions in trade agreements have delivered meaningful liberalisation for financial and professional services rather than for goods, which are the focus of most of them?
Chris Bates: Thank you for inviting me to attend here today and thank you to our large audience. In beginning to answer your question, it might be helpful to try to unpack a bit of what we mean by liberalisation and its various dimensions in relation to trade and services. The first point to make is that a trade instrument achieves meaningful liberalisation for UK business only if UK firms can do business with a trade partner country to a greater extent or subject to significantly fewer burdens than before the trade instrument was signed. That is to say that liberalisation occurs only where the trade partner country is, in some way, willing to change its rules to assist your businesses.
Secondly, liberalisation can cover two types of business. It is conventional for trade agreements to think about commercial presence: liberalisation can make it easier to establish a branch or operate a subsidiary in the trade partner country; or it can make it easier for UK firms to do cross-border business from the UK with clients or counterparties in that country. From the point of view of the UK as an international financial centre, it is the latter—cross-border business—that is the most important, in my view, because if you can liberalise cross-border business, it enables jobs to be created in the UK to do business from the UK to the rest of the world. Liberalising commercial presences, to some extent, enables UK firms to export jobs to trade partner countries. They may benefit indirectly from dividends or other profits but the work, in essence, is being done somewhere else.
In any event, when thinking about liberalisation, many countries and particularly most developed markets already allow UK firms to establish local presences pretty much on a national-treatment basis. Very few developed countries—we were talking earlier about the position in developing countries—discriminate against local presences in an obviously material way, at least if you want to do a subsidiary.
In contrast, many countries, especially developing countries, severely restrict cross-border business in financial services, even when UK firms are trying to do business with wholesale clients. This is not just about retail business but about wholesale business, which is the business of the UK financial centre. In many cases, there is no way around those restrictions. It is not like goods, which can be changed to adapt to local requirements; in many cases, this is a question of whether you have a licence or can get a licence on a cross-border basis. The answer is frequently no; therefore, liberalisation is critical if you want to do cross-border business.
Moreover, it is fair to say that barriers to cross-border business are increasing rather than decreasing. All new regulation essentially creates barriers to cross-border business. New regulation is occurring all the time, as a result of previously unregulated areas becoming regulated. Think of crypto or ESG rating businesses; these were unregulated areas. When we create regulation, we create a barrier to cross-border business, and this is happening not just here but in other countries. Perhaps more perniciously, the barriers can result from countries specifically trying to limit cross-border business to reduce dependency or to secure autonomy in some way. We have seen that most notably with the EU’s introduction of new restrictions on wholesale cross-border lending, under the so-called capital requirements directive number 6—CRD VI. That is the second dimension.
Thirdly, liberalisation—and I shall come on to actual examples in a minute to answer your question—can take two forms. It can be erga omnes; one of your previous speakers lapsed into Latin to explain this. That is, people liberalise their rules as against the world for all foreign firms. Or it can be preferential, in a way that benefits UK firms. Obviously, the UK likes the latter, because that gives the UK a competitive advantage, where that happens. Fourthly, liberalisation can result from legally binding instruments or non-legally binding instruments, a subject that I know you have been thinking about in this committee.
However, to go back to your point, few agreements actually require liberalisation in the sense that I have described, in relation to financial services. Most trade agreements, and many bilateral agreements such as digital services agreements, just bind the partner countries to do what they already do, or not to do what they already don’t do. Few actually require them to change their rules in a way that is beneficial to a partner. Even when they do, it benefits only those firms where it is about commercial presences—it is not about cross-border. So you see countries, particularly developing countries, removing foreign ownership caps or allowing a greater number of branches to foreign firms, but those are relatively limited examples. States often find it hard to do things on a preferential basis, because they have most-favoured nation obligations, or whatever.
Q41 Lord Anderson of Swansea: Can we come to an example? The agreement with Switzerland is cited as the best example of such a liberalisation. What are the characteristics of the Swiss agreement that makes it different? Is it the nature of the two economies, or what?
Chris Bates: First, it is true that the Swiss agreement is unique and was ground-breaking—it was a very unusual agreement. It did actually liberalise, initially in small areas, although the idea is that it gets broader, the ability of insurance companies to do cross-border business in Switzerland and the ability of insurance intermediaries and investment firms to do some business. So those were actual changes in Swiss rules on a preferential basis.
Lord Anderson of Swansea: What was special about that agreement? Why Switzerland, not India?
Chris Bates: The Swiss agreement arose because of a specific set of circumstances. First, the UK and Switzerland both have developed economies with pretty developed regulatory systems. The agreement is based on deference and on trust, which depends on you having an idea that the partner economy’s regulators, regulatory system and supervisory techniques are broadly the same. They may not do exactly the same things, but they deliver broadly the same outcomes. That is obviously much harder to imagine with developing economies.
Secondly, both countries had a need to do something. Another unique feature about both countries is that they were relatively open already, so it was not that hard for them to be a little bit more open, because they already were being open. So those were two foundational things.
One other thing was that both countries had a need to do something, and both because of the EU, in a way. The UK at the time when this was being negotiated was in the process of leaving the EU and wanted to establish that it could do things elsewhere. Switzerland, as you may recall, was having difficulties in its EU relationship and wanted to demonstrate that it could do things elsewhere. Those things came together with the other factors to lead to a fairly unique agreement.
The Chair: Thank you. We have further questions, which I can feel will be woven into the rest of your answer.
Q42 Lord German: I am going to move on to the “how”. I shall ask Dr Butler first of all how you ease regulatory barriers at the border with our priority countries. Is this a fight worth having? I think that we have just heard that it is, but in your written evidence you said that there was a combination of overlapping sectoral agreements that could confuse, fragment and be complex for business. You might want to say whether this is a good thing that we should chase—and, if it is, how should we do it?
Dr Nicolette Butler: Thank you, and thank you so much for the invitation to join you today as well. It is a complicated question. As Chris alluded to, greater liberalisation and openness is obviously desirable. We can increase trade in services, specifically, in the key areas where the UK is particularly good. We have a very resilient economy in terms of services, so it is obviously in our interests to try to do that. However, there is a risk that the more agreements we sign—binding FTAs and non-binding agreements, which I know we will talk about later—that could increase the risk of fragmentation. It is incredibly difficult for businesses to follow all these different agreements, and what rules are applicable in one agreement or MoU or vice versa. So it could lead to fragmentation and increased cost to businesses, which is obviously not desirable.
The issue is to try to get the balance correct, using all the instruments and prioritising countries, as you mentioned. We may not want to achieve the same level of liberalisation with some countries that we might with others. As Chris alluded to, it depends on having a similar level of development in terms of the regulatory environment and legal system and so on. It is a really complicated question that I think the Government should deliberate on more strategically perhaps than they seem to now, as far as I can see.
Lord German: So if it sometimes a good thing, what are the tools in the toolbox for making it happen?
The Chair: We have some supplementary questions to ask as well.
Q43 Lord Boateng: I declare an interest as a senior independent director at a UK-regulated pan-African bank specialising in trade finance, but also as a former high commissioner to South Africa. Dr Butler, you have pointed out the negative impact of growing geopolitical rivalry and increasing protectionism, as well as tariff volatility. That is understood. At the same time, we have witnessed the development and increasing implementation of the African continental free trade area. We have seen similar developments in the Indo-Pacific. The UK has been prominent in supporting those changes. What impact has that made on the situation in which the UK finds itself, and on international trade in the area of services that Lord Anderson pointed out earlier? I would like your take on that—and maybe, Mr Bates, you have some insights into the position of the UK’s legal services industry. We had a reception here last night with the Law Society and Bar Council, celebrating the legal industry’s contribution to the UK’s GDP. How are we doing in that regard, given the developments occurring in Africa and the Pacific?
Dr Nicolette Butler: Again, it is a complicated question, because there are all these different agreements with slightly different provisions. We do not negotiate the same provisions in different agreements, so it is hard to take a view overall. I know that the African continental free trade agreement is still not fully operationalised, particularly in respect of investment, which is also particularly important for services, as Chris alluded to, as the mode 3 level of supply. I have not undertaken a sectoral or area-specific comparison of these agreements, so perhaps that is something I could do and then follow up in written evidence.
Chris Bates: As you say, there may be some developments on mode 3. I would be surprised if your research showed up significant liberalisation on cross-border activity. That is just not what is done under trade agreements. This is why the EU single market was so unique; it actually addressed free movement of services in a way that, contrary to many people’s perceptions, was incredibly powerful in financial services. It enabled the UK to centralise the provision of wholesale financial services for the whole EU in London, in a way that would not have been possible. Most trade agreements do not do that.
Lord Boateng: What about legal services?
Chris Bates: The traditional thing with legal services has been whether you can get permission to open. For example, there is a well-known ambition of the UK to get UK lawyers the freedom to open business in India, which has never gone anywhere.
Lord Boateng: And in South Africa.
Chris Bates: No doubt the UK will continue to press that. I do not think it has been regarded as essential to the UK’s success as a centre for international legal services. If anything, I would say that the tendency has been more for firms to hub their business in key financial centres, rather than establishing offices around the world, although that obviously depends on a firm’s strategy. I am not sure that the failure to achieve that in India or other places is significantly affecting the UK’s presence.
The Chair: Could I follow up on that, if Lord Boateng does not mind? A consistent theme we have had around the India free trade deal is that one of its weaknesses is that it does not allow our legal profession access to the Indian market. If you think that the future of this country is the services industry, your industry is absolutely essential to our economy. Why do you not see our inability to access this market after having negotiated this very cumbersome free trade deal as an issue? Should we not be told that we should be recommending this?
Chris Bates: I have no doubt that it would be a good thing. Whether it is fundamental to the UK’s ability to do business is another question; in other words, if you asked, “Is London doing well on the provision of international legal services without these measures?” the answer would be yes. If India opened, yes, it would provide other opportunities and I am sure that some firms would take advantage of it, but I am not sure that it is fundamental in the way that some think.
Governments do a lot of things. The ability of a Government is to do lots of different things at once, as somebody once said, and one might be promoting the ability of lawyers to establish businesses in India.
Q44 Baroness Verma: I just want to pull digital services and AI into the mix. How do you see those changing the landscape, at the pace that they are both moving? They do not seem to have been taken into account in the wider FTAs that have been signed. They can change lots of different sectors as we see them now, and I suspect even more so going forward. Do you see a common regulatory framework being developed that will become much more globalised, so that we can easily move across, or is it still very much nascent, as we try to grapple with how to deal with it?
Chris Bates: AI is an interesting example. One of the things that the international rules-based order does is international standard setting. That is a good thing for cross-border business and for free business establishment because, if the rules are at least similar, if not the same, it is easier for people to do business.
I will perhaps anticipate another question about the weakening of the rules-based order. One of the issues with that is that international standard setting is probably weakening as an idea, because people have very different ideas about what to do. AI is probably the best example of that. We have seen the AI Act in the EU take one approach; the UK and the US are taking a very different approach. So there is no common international standard, and I do not see there being one any time soon, because people see their own system as providing them with a form of competitive advantage that they are unlikely to be willing to give up in the name of international standard setting. I do not expect those frictions to go away; if anything, I would expect them to increase.
Baroness Lawlor: I have a supplementary, if I may, and I will add my question. This is just to pick up on something that Mr Bates said earlier; you rather extol the EU system for financial services. Why did TheCityUK, which was a stay-in organisation—it represents financial businesses right across the country, as well as in the City—come out very clearly in March in saying that it was very happy as we are and that it did not want the reset to bring us any closer? Its request was to be excepted from any potential reset.
Chris Bates: The question should really be directed to TheCityUK rather than to me. I do not speak for it.
Baroness Lawlor: I just wanted your assessment.
Chris Bates: Obviously there are divergent views about what should be done on financial services. There is a feeling that any progress on financial services is likely to be very limited. We know that EU policy on, for example, giving relatively trivial equivalence decisions in respect of the UK is to deny giving those decisions. That does not appear likely to change any time soon, reset or no reset. In those circumstances, there appears to be little to gain from participating but something to lose, in the sense that the UK is in the process of trying to improve its financial regulatory system, which might be hindered by a form of dynamic alignment with the EU.
Q45 Baroness Lawlor: I am sorry to digress, but it was very interesting and it is my own question. We talk a lot about services here and the international trade context, and we have been talking about different sorts of trade instruments. Which trade instruments could benefit the UK’s financial and professional services in the future, and in which areas of policy or which sectors? The second part is on current UK trade agreements: which ones are best for the UK’s financial and professional services? I know we have discussed the Swiss one.
Chris Bates: We will put that to one side. One—this is not my specialist area, so I should not speak to it at any great length, but it tends to get neglected—is mobility. It is an area where things can be done by trade agreements. We obviously have the Swiss example—not the Berne agreement but another agreement with Switzerland—on short-term mobility. This again is an area that tends to be neglected—the idea that people can go on short-term visits, as part of their work, without needing work permits, and do more than they can do on a conventional business visa, which is very limited. There is some scope for that.
In the context of trade agreements, provisions on intra-company transfers and business establishment mobility are important for those purposes. Actual productive changes can be made in those areas, so it is worth spending time on that area and there is quite a lot of literature available on the subject.
In other areas, one has to think more of a problem-solving approach. An example of an agreement that did do something, which again was an EU agreement that was rolled over by the UK when it left the EU, was the agreement with the US on reinsurance. The US lowered very significant barriers to cross-border reinsurance business in exchange for the EU, and then the UK, agreeing, in effect, not to do certain things that they might otherwise have done.
Baroness Lawlor: Was that at federal level rather than state level?
Chris Bates: It was interesting, because obviously those barriers were at state level, and there were issues about the federal Government binding the state government, but they did create a mechanism that encouraged the states and threatened them with federal pre-emptions. Anyway, it did the trick and benefited an industry that was important for the UK. That is a problem-solving example.
An interesting point is that you could say that the catalyst to that was the EU threatening to do something that the US did not like. However, one of the issues that the UK has on cross-border business is that, because wholesale cross-border activity is a largely open economy, it generally has relatively limited chips to bargain with in that area and has to bargain with other things. Problem-solving is one example.
There are other examples around the recognition of CCPs in other countries and the recognition of trading venues in other countries for derivatives. These are all areas that, not through formal international trade agreements but through co-ordinated unilateral action—supported by supervisory co-operation rather than regulatory co-operation in its true sense, with regulators agreeing to exchange information and co-operate in relation to the supervision of entities—have made a difference. There are things that can be done when you identify particular problems.
Although I have said that we are really interested in liberalisation, locking things in is a good thing. Even though digital trade agreements might not change anything, they prevent backsliding in a way that is useful. We should not rule trade agreements out as an instrument just because they do not require people to change. Certainty is helpful, as are remedies; we can talk about investor state remedies in a minute.
These things are useful. The fact that there is some sort of commitment to keeping things open—or as open as they are today—and to not creating new barriers is useful.
Baroness Lawlor: Dr Butler, which of the current treaties that we have signed since leaving the EU are good for both of those areas?
Dr Nicolette Butler: That is a very difficult question to answer because there is no uniform approach in any of them. It is sometimes like comparing apples and oranges: one agreement might be particularly strong in one area and one agreement might be particularly strong in another area.
Baroness Lawlor: Which ones are strong in either area?
Dr Nicolette Butler: Digital services are particularly interesting. Although this is not necessarily one of the UK’s agreements, a country to which we can look as a good example of this is Singapore, which is going on a very big negotiating mission with various countries regarding digital services in FTAs.
We know that FTAs are cumbersome to negotiate. They take a number of years and, by the time they are finished, the digital sector may have moved on significantly. That is why a lot of countries are moving more towards a sector-specific model of having digital trade agreements specifically. The UK could certainly consider that. Even if binding agreements just bind the status quo for now, the remedies are quite an important issue as well.
We could also consider other instruments in these areas, whether MoUs or other non-binding agreements, particularly in sectors that move quickly. That approach is still exploratory because we can use them as sandboxes for regulation as well. Obviously, digital is hugely important for the growth sector in the UK. We should look towards Singapore and other countries that have already moved more in this direction. It could be a good model.
Baroness Lawlor: What about the Dubai International Financial Centre? What do you think of that financial services model?
Dr Nicolette Butler: I have to confess that financial services are not my realm of expertise. Chris may be better placed to answer that question.
Chris Bates: UK firms are very active in the various centres in the Gulf. I do not think that those are driven by trade agreements. They are driven by those countries creating these centres for their own purposes, with a view to attracting investment. Obviously, they are adversely affected by—
Baroness Lawlor: Do they use the common law as the default?
Chris Bates: Yes. All of that is helpful to UK business because a lot of the regulatory schemes in these countries are modelled on UK precedents, often by UK law firms and individual lawyers. That then makes it easier for UK-based businesses to do business in those countries.
This brings us back to the importance of standard setting, whether or not it is global standard setting, which remains important—even if it is weakening, which is clearly troubling. The fact is that geopolitical fragmentation is weakening some major countries’ commitment to global standard setting, but it remains important for the reason I mentioned earlier: having common standards helps people do business. If those standards are modelled on UK standards or standards with which we are familiar, that is even better. Standards are good.
As I say, another example of bilateral problem-solving is non-binding co-operation on T+1. I do not know whether you are aware of this. It is the move, in the settlement of securities transactions, from doing things on a T+2 basis, where the trade settles two days after you actually agree to sell or buy the security, to doing things on a T+1 basis. That sounds like a simple move but it is amazingly complicated and difficult in the UK. Switzerland and the EU are co-operating on a single deadline for that, and it is a very productive piece of work.
The whole point about trading services is that they are multi-layered. There are lots of things going on at various times. One of the UK’s strengths is in its supervisory and regulatory relationships with supervisors, regulators and officials in a wide variety of countries. They are an incredibly important asset of ours, and they make these sorts of initiative possible. Without them, those initiatives would not be possible.
We have to bear in mind that lots of things that are good for business could be going on simultaneously. Trade instruments may be only one part of that—a small part, perhaps—although the fact of negotiating them is sometimes regarded as beneficial in itself because of the relationships that it creates or cements.
The Chair: Thank you very much; that is extremely helpful.
Q46 Baroness Anelay of St Johns: Mr Bates, you just referred to the supervisory action in business. We have a supervisory function with regard to holding the Government to account under the CRaG Act and having a structure, which means that we can scrutinise some trade agreements. On the other hand, regardless of our political background, we would all be supporters of the fact that those people who are in business need to have some form of certainty for both them and the UK to be able to succeed.
May I direct my question to Dr Butler first? Can you give us an idea, against the background of some uncertainty for business and some complexity in scrutiny, of which of the various models of trade agreements you think will work best? Is it appropriate to use an MoU, for example, rather than a legally binding instrument, whether it is an FTA or another kind of animal?
Dr Nicolette Butler: That is a great question in the current geopolitical climate. The key thing is not whether a non-binding instrument, an MoU or whatever we want to call it is labelled as an MoU or a treaty. The key question should be: in essence, what does the agreement—I use that word loosely—or instrument do?
There are lots of examples of where MoUs can be really appropriate, such as in regulatory dialogue, information sharing, technical co-operation, sandboxing, pilot projects—I alluded to these a little earlier—and building relationships in emerging sectors. MoUs are entirely appropriate. Co-operation on AI, which we have mentioned, could be a really good candidate for a non-binding agreement in this regard.
I am slightly concerned, from an academic perspective, not that the Government—or Governments generally—are using MoUs but that they are increasingly using them to have substantive economic, regulatory and policy consequences. In lots of areas, we are now seeing a shift away from traditional treaty-based governance and international agreements, which can be scrutinised, towards more politically managed arrangements. That is potentially problematic because, unfortunately, politics can change on a daily basis. MoUs on non-binding agreements could be really important; they have an important place here.
It is also key to remember that legal bindingness is not the only measure of significance. Agreements can be significant even if they are not legally binding because they can have significant practical effects. For example, Governments change their behaviour if these types of agreement matter. Regulators may adjust their behaviour. Businesses can change their investment decisions and strategies. Markets can react to these kinds of agreement as well. As we have mentioned, the practical effects are what businesses really care about; they are the most important thing.
From a business perspective, the question is not whether something is legally binding or not but whether it affects market access, regulation or commercial behaviour. It is really important that Parliament is able to scrutinise the whole range of agreements, not just treaties. I have written extensively on the deficiencies of the current scrutiny arrangements in CRaG. The members in this committee do a wonderful job, but this is just part of a wider framework.
Parliament needs to be able to scrutinise these non-binding matters, 100%. There is already precedent for doing that, with White Papers, policy announcements, spending decisions and so on, so there is precedent for being able to look at these types of agreements. However, I am not recommending scrutiny of every MoU, because the Government produce hundreds of them on a yearly basis, and that would clearly be impossible to achieve. We should have criteria-based scrutiny even for non-binding agreements, which is what is currently lacking. We could have criteria, for example, if the MoU or the non-binding agreement has significant economic effects; if it affects citizens’ rights; if it affects public services, particularly the NHS; if it creates substantive regulatory commitments; and if it has major policy implications. We can use those criteria to prioritise significant MoUs on non-binding agreements. The place of Parliament is not to negotiate agreements, but it is clearly to have democratic oversight over significant arrangements, and I would say that MoUs can certainly be significant.
Q47 Lord Hannay of Chiswick: Could I follow up your point? You juxtaposed legally binding agreements, which you said or rather implied—I hope that I do not misrepresent you—are not as valuable as they are made out to be. In contrast to that, you said that often the memorandum of understanding approach, which does not have a legally binding character, was valuable. Could you give an example of each of those two cases?
Dr Nicolette Butler: Forgive me if that is what I alluded to. I am not saying that treaties are not valuable—they are clearly legally binding and valuable—but sometimes in particular areas such as digital services and AI things move on before you can even finish the agreement, so they cannot be so helpful in that regard. It is important to use the whole toolbox, whether that be multilateral-level negotiations or bilateral-level negotiations, binding or non-binding. Each agreement, or potential type of agreement, has a place. That is what I was trying to suggest. Does that make sense?
Lord Hannay of Chiswick: I think you have left us a little adrift, since you have ducked which of any bilateral agreement that Britain has falls into one or the other category and can be characterised therefore as an MoU that has brought benefit or a legally binding agreement that has not done very much. Are you really not able to give any example?
Baroness Lawlor: I do not think Dr Butler said that. Her written submission was very clear, and what she said now backed that up.
Lord Hannay of Chiswick: I am sorry, but I am merely asking a simple question—whether there is an example of one of the two cases she gave that she could offer us. If the answer is that there is not, that is the answer.
The Chair: I am a bit confused about the question. It is not unreasonable to suggest—everyone is speaking on your behalf here, Dr Butler—that some treaties that may appear to be very significant actually are not that significant and that some MoUs that appear not to be significant are very significant. This is the quandary that we are in.
Baroness Bonham-Carter of Yarnbury: There is an MoU that is very significant at the moment, of course.
The Chair: Which one in particular, since there are so many?
Baroness Bonham-Carter of Yarnbury: Well, the American one.
The Chair: That is a good point. I did not want to jump in because my colleagues have supplementary questions, but I noticed when listening to the President talking about the arrangement that he specifically did not use the word “treaty”. My assumption is that it has to go through an extremely complicated or significant scrutiny process, so the MoU is now becoming very thinly stretched. I had a question to ask on that front. Do you think that the UK-US pharma MoU should be classified as that?
Dr Nicolette Butler: I have not scrutinised the exact terms of the treaty, to be honest, because I have been focusing on other areas of research. As I understand it, it is an MoU in name, but it is very significant because of the situation, how it will affect the NHS and so on. The substance should follow the form, rather than the other way around. Just because you call something an MoU does not mean that it actually is one. Is this a political tool to try to avoid scrutiny processes? I do not know if that is the case or not, but it would certainly seem to me that it is a possibility, which is problematic.
The Chair: In your study of the CRaG process, is it possible to have a specific definition of what is binding and what is not? Theoretically, any agreement has a binding element to it.
Dr Nicolette Butler: This is the problem—that there is no definition of a treaty and no definition of what is binding and what is not. Historically, we have tended to rely on what the parties have called it, but that is now becoming a little bit more problematic. If you call something a treaty, there is the assumption that it is binding; if you call it an MoU, there is an assumption that it is not binding—but it is very difficult to draw the line between the two. Obviously, for our purposes, the bindingness will trigger the CRaG process, which is excellent. However, lots of things, including the MoU with the US, the tech deal and the pharma deal and so on, seem a little more significant than the MoU suggests that it is, which I think is very problematic.
The Chair: And then there is the question of who decides what is binding and what is not.
Baroness Anelay of St Johns: My question was to build on that. You mentioned flexibility, but it can be dangerous in the democratic sense in that it can be misused. Do you think that in the different types of instruments being used, flexibility can be a way of assisting business to go forward? That is especially in a world that is becoming more fragmented—but particularly in development terms, with AI, where we are not sure of the future.
Dr Nicolette Butler: Flexibility is a great benefit in the current geopolitical climate, definitely. The problem is if it is being used as a cover to avoid democratic scrutinisation processes; that is problematic. One reason is that the scrutinisation processes contribute to a better overall agreement and regulatory environment, arguably. There needs to be flexibility, particularly because that can lead to more speed, but I am not sure that flexibility and speed need to be suggested as diametrically opposing certainty and scrutiny processes. There is a sliding scale, and perhaps there is room for both. That would be ideal.
Q48 Lord Hannay of Chiswick: Could both of you address the question of the weakening of the multilateral trading system, and in the case of services the inadequacy of that system—because there is actually not a great deal there in the World Trade Organization agreement on services? How much is the weakening of that system affecting UK-based financial institutions and investors’ ability to operate internationally? Is it a handicap?
I will add something on a completely separate question, based on the first question that you answered, Mr Bates. You said that the Swiss agreement was “unique”. My understanding of that word is that it cannot be replicated. Is that what you meant?
Chris Bates: Perhaps I should answer that one first. I meant that it was unique in the sense that it has not happened before, not that it cannot be replicated. It could be replicated; the difficulty in replicating it is in finding the circumstances that exist, although there might be different circumstances to motivate another similar agreement.
Lord Hannay of Chiswick: So there could be other countries with whom you could fall into a similar category that would be similarly mutually beneficial.
Chris Bates: Yes. You could imagine G7 countries having those sorts of arrangements. On the other hand, you can also see that countries such as the US are unlikely—
Lord Hannay of Chiswick: Or you could see the CPTPP moving in that direction.
Chris Bates: I think the CPTPP would be unlikely to replicate it on a multilateral—or, technically, plurilateral—basis because of the diversity of the membership.
Lord Hannay of Chiswick: Can we go back now to the main question? How much is the weakening of the multilateral trading system, perhaps more brutally described as the chaos in it, adversely affecting UK-based financial institutions and investors?
Chris Bates: I think the answer is not yet. Things could get worse. We could see the weaponisation—that is the thing that people worry about—of financial sector tools by one country against another in the developed club of nations. We already weaponise our financial system against rogue countries through sanctions and whatever.
The recent US action to ban the use of a particular AI system by foreigners is obviously troubling to partner countries. It is a form of discrimination, which they are obviously not happy about, although it has led to the product being withdrawn for all users, not just foreign users.
Up to now, I do not think we have seen a major spillover of the sorts of things that we have seen in goods into financial services. That may be because people are well aware that financial stability is an important public good and that it is quite difficult to chop it up on a national basis. “Financial stability for us but not for you” is not the sort of thing that works that well.
The answer is not yet, but, obviously, if there were further fragmentation of the goods world or the geopolitical world more generally, then the idea that financial services can remain immune from that would become fanciful. Financial services are part of a wider economic system and you cannot separate them.
Lord Hannay of Chiswick: To what extent do you think the existence of dispute procedure arrangements between parties who have discussed these matters together would be helpful?
Chris Bates: It could be helpful. We have seen the semi-collapse of the WTO dispute settlement system, though the plurilateral interim arbitration arrangement created in its place is helpful. I suspect that the sorts of grounds that people would use to disrupt the system would rely on exceptions such as national security exceptions, which are difficult to challenge.
Lord Hannay of Chiswick: It is hard to find something that does not fall within that category for the largest trading country in the world.
Chris Bates: That is an issue. Its position has always been that the national security exemption is self-defined in the WTO. The EU and UK position is more middling, in that it has to be some sort of rational connection between the action and national security. They loosely put it that way.
Dr Nicolette Butler: That was also confirmed in the Russia traffic and transit case. I think the US is the outlier with this view.
Q49 Lord Boateng: The development of cryptocurrency, bitcoin, and the increasing understanding of the significance of blockchain, is potentially a challenge to financial stability and also a massive opportunity for growth for the UK. Can you help us as a committee in your assessment of the current capacity of international trade agreements, and the institutions that promote and police them, to both confront the challenge and embrace the opportunity? Nothing is going to stop it. It is happening. How should we be responding? What should we be asking of our Government to ensure that we confront the challenge but embrace the opportunity? Perhaps you can give me your different perspectives?
Chris Bates: This is an area a bit like AI, where countries are doing it themselves. On the other hand, there is some commonality in what they are doing.
Lord Boateng: If I can stop you there, them doing it themselves is not sustainable. It is not possible. The whole benefit of the system, as well as the nature of the challenge, means that doing it yourself is not really an option. Downstairs, as we speak, we have got a whole gathering of senior executives in that area meeting and talking over lunch. Their message is very clear: yes, they can make a bit of money for the time being, arbitraging between the different systems of rules and regulations, but it will not hold. That is not the future. What we need to understand, from your extensive technical expertise and knowledge, is how Governments can respond to that in a policy way.
Chris Bates: When I say that they are doing what they are doing themselves, that is not to say that they are ignoring what other people are doing. The EU did MiCA, we are doing our crypto-regulatory reforms and the US is doing the GENIUS Act. There is commonality within these systems; they are not entirely different. This is not an uncommon way for financial regulation to develop.
We often have examples of a new regulatory problem. We could go back and think about investment research after the dotcom crisis. Every country started to do something and did it slightly differently. There were some international standards and whatever, and everybody ended up roughly in the same place in the end.
That is what happens. It may not be a tidy and neat way of doing things, but it is what happens. It is partly because countries are not willing to wait around for common international agreement on how to do things before they feel they should act, and so they act. To some extent, you live with that, but the end result very often has a high degree of commonality to it.
The troubling issue—you can see this with the regulation in this area of stablecoins, for example—is where the national regulatory systems do not deal adequately with cross-border issues. And they do not.
Lord Boateng: What do they do about it?
Chris Bates: They change their rules. When they find out that it does not work, they change their rules, because they have a competitive wish to deal with the problem. You could go back through a string of developments over the last 20 or 30 years where we have had exactly this: leapfrogging, slightly conflicting, different approaches. It is messy. It is deeply annoying to business and those people advising business on how to deal with it, but that is what happens.
What can produce some order is some sort of global standard setting. The Financial Stability Board has done stuff in this area and IOSCO, the international body, can do things. People can do things that help because they encourage people to have a common view. Regulators spend a lot of time talking to each other about what they are doing and discovering the problems that other people have run into. I am not hopeless about it. Business will tell you, rightly, that it is all too slow and difficult. That is sort of what happens. It is like sailors complaining about the sea; there is an element of inevitability to some of it, which you have to live with. To bring it back to the subject of this inquiry, probably international agreements are not the way of dealing with it because of the speed required to act.
The Chair: That is very interesting. We have noted that very helpful point for our inquiry. It is an untidy world out there. We want it all to be neat and with a box checked, but it is real life. We have a micro follow-up and then we have our last question.
Baroness Verma: It is a micro follow-up, because what we keep hearing is that it is done individually, which means that rogue nations can hide behind other nations individually. Therefore, sometimes it is important that, however tedious it is, business requires certainty and it is better to have a global pact on this, where all nations are abiding by the same regulatory frameworks. The difficulty I have with your argument is that we keep thinking that everybody applies the same rules, but unfortunately, they do not. That is just a read-back to Mr Bates’s argument.
Chris Bates: We have money laundering as an example of where international standards have been set. Action is taken against rogue nations under that; sometimes they perceive it as done unfairly because they are not that rogue, it turns out. But these things happen. It is possible to insulate yourself to some extent. What is tricky is when you have very different approaches in major countries. That is a much bigger problem. But I do not think that is where we are going on crypto. We see the US pressing forward with ideas for regulation; it is not planning for it to be a regulation-free zone, and neither is the UK or all the other major G7 economies. So I think we will see that those countries have that in common, and all those systems have boundaries that keep other people out.
The Chair: That is the problem, is it not? It is our own domestic protection.
Chris Bates: Whether it is effective or not is another question.
The Chair: Thank you for everyone’s patience. We are going to be a few minutes over time, I am afraid, but this is the last question from Baroness Blower—and my favourite question, if I may say so.
Q50 Baroness Blower: Thank you very much, Chair. My question is about ISDS. Is the Government’s approach to investor state dispute settlement consistently applied in their trade agreements, and to what extent does it strike the right balance between investor stability and public policy space? I should just say that I am much more familiar with the deployment of ISDS in areas other than financial and professional services: things such as issues of workers’ rights, climate and environmental issues, and so on. I am interested in your view of how this fits in with what we are talking about today. The question is specifically to you, Dr Butler, but I just noticed that Mr Bates used the expression “export of jobs” in passing and did not elaborate at all. So, when we have heard from Dr Butler, I would like to know what that means, what it looks like and what impact it has on our economy and other economies.
Dr Nicolette Butler: This is also my favourite question, if I may say so.
The Chair: I like all the questions equally, but—
Dr Nicolette Butler: It is my favourite. It is a very interesting question. As far I can tell, I do not think that the Government have a consistent approach to ISDS; they seem to flip-flop. They have not suggested in any publicly available document that they have a consistent approach, and we have definitely seen that. However, I am not sure—perhaps this is where my view may differ from other academics—whether consistency should be the sole objective. We have different investment relationships with different partners and they involve different legal systems, different political risks, and so on. The UK’s relationship with Australia is different from Singapore, which is different from the Gulf states, and they all have different regulatory environments as well. Arguably, it depends on what the rule of law is in a particular country and how you should approach that.
In addition, as the UK we have historically been a capital exporter, but now we are the other way round, which is why I think this debate is becoming a bit more prominent: we are now being sued, essentially, so there is a very real risk.
I just wonder whether a degree of flexibility can be justified in terms of the Government’s approach, but I think there needs to be some kind of underlying philosophy—that is my suggestion. I think the Government should be clear about what they are trying to achieve, why they include the protection in some agreements and perhaps not others, and why they exclude it, for example, in others. We need an underlying philosophy and some kind of justificatory regime for what we are going to do with the provisions of any agreement—investment, ISDS, and so on.
I perhaps think that the debate is sometimes framed a little bit too narrowly: ISDS versus no ISDS. There are a range of other models—I think I alluded to this in my evidence as well. We could have investor-state mediation, exhaustion of local remedies, state-to-state dispute settlement, or we could introduce appellate review. There is a range of options that we could go for, essentially.
The key issue is that a lot of these concerns which are attributed to ISDS are actually broader concerns with the underlying provisions; if you like, the dispute settlement has become the star of the show and it has attracted all the headlines. However, if we get the underlying provisions phrased correctly, it will not be as contentious, because it will not be raised on as many occasions.
For example, if we reduce the broadness of the fair and equitable treatment standard, reduce the broadness of indirect expropriation provisions, increase the broadness of exceptions provisions, prudential carve-outs and so on, and national security exceptions, the underlying treaty itself will be less problematic and then dispute settlement will also be less controversial. So I am an advocate of getting the treaty design and the treaty provisions right, so to speak, because then the dispute settlement will be less problematic. Clearly, with any agreement there needs to be some kind of dispute settlement provision. Then we can think about what may be suitable for dispute settlement and what may not be. I am perhaps a bit more of an advocate for a flexible approach, but it needs to be principled.
Baroness Blower: On the question of export of jobs, Mr Bates, you mentioned that in passing.
Chris Bates: The point I was making was that the great thing about liberalising cross-border services is that it enables people to do business from the UK with other countries and therefore to grow their business in the UK, whereas, if you liberalise the commercial presence, what you are doing is saying, “The way you can do business in other countries is by growing your business there”. That is, to my mind, less good from a UK perspective than growing your business in the UK, just because that is where the jobs are. It is not saying that we do not want UK businesses to be able to establish in other countries; we do not want them to have barriers to establishing insurance subsidiaries or whatever in partner countries. But my point is that, for the international financial centre, the important thing is to be able to do business from the UK with other countries. That is what it is about.
Q51 The Chair: The whole principle is non-discrimination in terms of access in a different sort of hierarchy of local exposure and then international exposure. ISDS is the same, in that we are trying to make sure that our investments around the world, as was the case in India, are not discriminated against. There were no ISDS provisions in the way that we wanted them to be in the treaty, which I thought was an issue.
My last question is: why have the Government here gone cold on ISDS? Not to pre-empt your answer, I was a great believer in us being clear about our alignment with these principles because we wanted them internationally. There was always this concern that it would prevent us from operating on some clear principles—they could be environmental, on national security or whatever—and I never really felt that was the case, so long as you follow the rules and are not expropriating foreign assets. If you have to pay up, pay up for it. We are a nation of the rule of law so, if we abrogate that, we really are in serious trouble. I do not know if you have a comment on that.
Dr Nicolette Butler: Obviously, this is speculative, but there has been a huge backlash since the EU-US agreement, TTIP. The negotiations failed in 2014 or 2015—somewhere around that time—and ISDS was headline grabbing all around the EU. In the UK, we were concerned about access to the NHS, what that might do and so on under that agreement. It created a lot of headlines and then that was held on to by non-governmental organisations, civil society groups and so on, and it became contentious in the UK as well as in other countries. So, we have a huge backlash against ISDS in the UK but also in other nations. That has culminated in 20 years of discussions about how to improve ISDS—when I started my PhD in 2009, we were still discussing these issues, and they have not really moved on much further. There is a huge backlash generally in the academic world, and it has been quite headline grabbing, so I think that is where the negative attention came from.
But dispute resolution is important in any agreement. If you are going to have a legal agreement, you have to have a dispute resolution process. There are things that we could do to tweak ISDS to make it better, or we could combine it with an escalation clause—so, mediation and then ISDS. There are various different ways in which we could approach the problem.
The Chair: I think it is puzzling. Governments, bizarrely enough, do not really want to be bound by the rule of law, which is a bit alarming.
We have come to the end. We had a great audience to start with and are now left with the hardcore, focused group. Would anyone like to say anything? Lord McDonald, are there any comments from you, or from anyone who has not asked a question? I think we have all asked a question, so we are all happy with that—very good.
We are grateful to you for your participation today. It was extremely helpful to have a slightly different view on some of the aspects that we have been studying. Your input has been enormously valuable. Nicolette, your report was well received in advance. If there is anything you wish to add—I think you were going to think of some other points—
Dr Nicolette Butler: On the African agreement.
The Chair: I personally would be interested to see more analysis on what is binding and what is not. If you have done some more work on that, it would be good to come back to that in the report with a table of what we felt would be a checklist for what is and what is not binding, maybe using some examples.
Baroness Lawlor: On the binding nature of the provisions, you said in your submission about it being legally testable and subject to law—
The Chair: Yes, as close as you can get.
Baroness Lawlor: I think you said that was the bottom line for you.
Dr Nicolette Butler: This is an ongoing project. As that unfolds, I am happy to share it.
The Chair: Well, it is very much in line with what we are doing, and I think the issue is going to be a cornerstone to the work of this committee. Thank you very much indeed, both of you, for your kind attendance today. It has been much appreciated.
