Examination of witnesses
Huw Evans, Stefan Hoffmann and Miles Celic.
Q48 The Chairman: I welcome our second set of witnesses, Huw Evans, Stefan Hoffmann, and Miles Celic. You are very welcome to our inquiry into the implications of Brexit on financial services. I have to go through some administrative points. You have a list of interests that have been declared by Committee members. This is a formal evidence‑taking session of the Committee and a full transcript will be taken. It will be put on the public record in printed form and on the parliamentary website. You will be sent a copy of the transcript and you will be able to revise minor errors. The session is on the record. It is being webcast and broadcast live and will be subsequently accessible via the parliamentary website.
Some of you were in the room while we were speaking to Sir Jon Cunliffe and will have heard his responses. We touched on bespoke agreements, because the indications from the Prime Minister last week are that immigration is a serious consideration and therefore a single market with full freedom of movement of people will probably not be a runner. In light of that, there seems to be a tendency to say that the UK will not fit any of the existing arrangements and that we should go for something bespoke to the UK. Briefly, in that kind of arrangement what would it be important to preserve in the UK’s financial sector from where you sit, and would there be any protectionist measures that could harm cross‑border access—the stuff you do not want to see as well as the stuff you want to see? Could we kick off with you, Mr Evans?
Huw Evans: Certainly. We would accept the assumption that the announcements made by the Prime Minister and other Ministers last week point to the need for a bespoke trade agreement, and therefore the need for quite considerable transitional arrangements, which Sir Jon referred to. There is no easy model to look at, not least because no country has left the European Union before, but, in brief, we consider that important aspects to look at would be: to preserve some form of access to the single market, but with it an understanding of how you would arbitrate disputes, given that that is the current role of the ECJ; something which preserved a high level of agreement around how regulatory frameworks would work, including from the insurance and long‑term savings industry, it being absolutely critical that the UK has a say in ensuring that those regulatory frameworks are appropriate for the UK market, which is the largest in Europe; measures relating to access to labour, in particular the skilled labour market for the insurance industry; and a means of having equivalence of agreement on the use of data. Data is absolutely critical to the insurance and long‑term savings industry. It is not the most glamorous industry, but given how the current data framework is entirely driven by the EU, and indeed has been in the process of being revised over recent years, it is a critical area for any future bespoke deal for the UK insurance and long‑term savings sector.
The Chairman: Mr Hoffmann, what would you say from the Swiss Bankers’ Association?
Stefan Hoffmann: In our assessment, once the UK has exited, is out, the EU equivalence rules will probably be applicable[1], but probably that will not be enough for a bespoke arrangement. You could try to arrange a sort of EU equivalence and, on top of that, at least part of EU passporting[2]. It is probably not realistic to say there would be the full passport rights that you enjoy at the moment, but I think it would be feasible to negotiate at least partially the passport rights that are in place at the moment, because there are certain passport rights that are applicable to third countries in the EU.
The Chairman: As in MiFID.
Stefan Hoffmann: As in MiFID yes[3]. That could be a way to reach a position between EU equivalence for general third-country applicability and EU passporting, which is in most cases restricted to member states, but there is a wide range in between. That is something you could try to negotiate in a bespoke arrangement.
The Chairman: Mr Celic.
Miles Celic: I agree that I do not think any of the existing models or networks of agreements would fit the UK, but equally there is no template, as has been said, for leaving the EU. The Norwegian model is different from the Swiss model and is different from the relations that exist with Turkey and so on. By necessity, there would have to be some form of bespoke British model that reflected the close and integrated nature of our relationship economically—beyond economically—with the European Union. That is particularly the case in financial services.
I very much agree with what my colleagues have already said. I will briefly set out a number of principles that TheCityUK has identified for the final shape of any relationship: the process needs to deliver clarity and stability during that time; it needs to be done in an orderly and cordial manner; the relationship and the talks need to begin in a manner that very much has in mind the end state of where we want the relationship to be; we need to defend the pre-eminent position of UK financial and related professional services as an asset not just for the UK but for the European Union—we represent 40% of the capital markets in the European Union, so this is a European asset and has been for a time that predates the European Union; and when we map out the exit, it needs to retain access that is as close as possible to the current situation and safeguards the future relationships that we have talked about, such as similar trading conditions and preserving the ecosystem.
There are two items that are more UK‑specific. One is that we move quickly to design and implement an independent UK trade and investment policy, which bolsters pre‑existing links but builds on the new ones that we will build in the years ahead, and a deeper relationship between government, the regulators and the industry. If you look at the major public policy challenges that the UK faces, and indeed that many other developed and developing economies face, over the next 20 years, financial services have a role to play in helping to address those and in enabling economic growth in other parts of the economy.
The Chairman: We will move to transitional arrangements and Lord Haskins.
Q49 Lord Haskins: Martin Wolf in today’s Financial Times says that a bespoke arrangement is not feasible to negotiate if the timetable the Government have set out is to be met; in other words, that the deed is going to be done in two and a half years’ time, and therefore one might have to face something more drastic at the moment. He would argue that it goes towards a WTO arrangement. Whatever happens, your industries have to face enormous degrees of uncertainty—uncertainty while the negotiations are taking place and, if a bespoke deal comes through, which I think we all hope will happen, the uncertainty that will arise between the time a deal is done and the time it is completed, which could take several years, perhaps less so in the insurance area than in other areas. What reactions or proposals would you like to put to government, to the banks, to the Bank of England, et cetera, to mitigate the damage that that uncertainty may cause to your businesses?
Miles Celic: As regards transitionals, it is difficult to say exactly where we are going to be, because it will depend on the nature of the final relationship and how it is negotiated. Sir Jon’s evidence, and that of some of your previous witnesses, used the analogy, which I think is quite apt, of a bridge that takes us from the end of the Article 50 process through to the final state of the relationship between the UK and the European Union. It is difficult to start building any bridge—to have a sense of how long it will take to build or how it is designed and developed—without knowing, if I can labour the parallel a little, what the bank on the other side is like: is it firm ground, soft ground, how far is it and how fast is the river moving? Those are all engineering factors and there is a similarity in what we are looking for. Clearly, the value of having a worked‑through, agreed and orderly transitional process is that you avoid what has been termed the cliff‑edge effect and a discontinuity of service that is not in the interest of clients, customers, corporates and indeed the countries themselves. There is a variety of factors that I would put in, and I do not think there is an immediate answer that we could give at this stage. A lot will depend on how the shape of the negotiations works out over the coming months.
Huw Evans: The key challenge around transitionals is not to wait until the end of the two years to start talking about them. It has to be part of the conversation now, for the reasons that you outlined, if we are to avoid a position where we default to WTO and then have what could be a very long time to negotiate a decent, effective and mutually beneficial bespoke treaty, which would of course then have to be ratified and agreed by the 27 EU member states plus several Belgian Parliaments. Such a process is inevitably very time-consuming. It is important that the Government focus on transitionals from the beginning of their Article 50 negotiations, but, as Miles said, it is difficult to know where the end point is so early in the process.
There are a few general points for us. It is important that the timeframes are as generous as possible, for the reasons I outlined. As much clarity as we can muster on existing customer relationships would clearly help as well, as would clarity over the regulatory structure of the relationships and how jurisdiction matters would work during the period that the transitionals covered. All those are important components of a transitional package, but it is very difficult to be more precise at this stage about the order they should go in and how they should be calibrated.
You asked about mitigation, Lord Haskins. There are several areas that are worth considering for mitigating any impacts. The first is the ongoing regulatory environment. Notwithstanding the Bank’s correct focus on the fact that its first priority is financial stability, the signals it sends about how open it is and how much it wants businesses to come and set themselves up in the UK are important, as are the wider tools at the Government’s disposal for their tax framework; their welcome for talent from around the world; their general positioning around how much they want the UK—London, Edinburgh and the other significant parts of the UK in financial services—to have new business coming in, including from Europe; and the value they place publicly on their relationship with the states of the European Union. All those things have an impact in the signals they send to boardrooms considering what options they might take and whether they would still want to view the UK as an interesting and useful place to invest in people, businesses and products.
The Chairman: Mr Hoffmann, did you want to add to that?
Stefan Hoffmann: No, I do not think it is up to a Swiss to advise on transitional arrangements.
The Chairman: We will move directly to something that does concern you. Lord Callanan.
Q50 Lord Callanan: Mr Hoffmann, would you like to comment on the specific reaction of the major Swiss financial players to the outcome of the referendum? Then I have a question for Mr Evans: would you like to comment on the specific risks that you think the process offers to insurers?
Stefan Hoffmann: First, we do not have an overview of what each of our members is doing, but as far as we are informed there have been no decisions taken concerning the UK after the Brexit decision. The reason is simple. For the moment, there is just not enough secure information around. The transition has not started. Nothing is yet decided, so there is no ground for taking decisions, certainly not about relocation or anything like that. What is certain is that at the moment the process is being observed carefully and assessed constantly, but so far, to my knowledge and to our knowledge, no decisions have yet been taken. It will probably take quite some time before useful decisions can be taken, given that the process will be rather lengthy and complicated, as we all know. For the moment, there is not much to say on that. Of course, the range of comments is varied and broad. Some are concerned, and others are more enthusiastic about the future. You can hear all kinds of voices at the moment, but as far as decisions are concerned, none is known to me.
Huw Evans: I welcome the question about specific risks to the insurance sector, because it is sometimes easy for debates about financial services to be entirely refracted through the prism of our colleagues in the banking sector. There are a couple of points I would flag. Obviously, London is the insurance capital of the world and the UK is the largest market in the European Union, and indeed the fourth largest in the world, so we have a very wide and deep insurance and long‑term savings sector. Therefore, to a certain extent, we have more to lose. It is none the less important to have some perspective, and, as was noted in the previous session, large sections of the UK insurance and long‑term savings industry are entirely domestic and retail and are therefore relatively unaffected by Brexit. It is important to have that perspective. If I look across the ABI, which, as I say, covers a very widespread area, I see some members who are barely affected at all and others who are profoundly affected. Probably a better way to think about how it affects the insurance sector is that the parts that are affected are affected pretty significantly.
There are some very specific risks for the insurance sector that I would draw attention to. Probably the most relevant, particularly given the focus of the previous session, is that there is a much less well-developed international architecture for insurance than there is for banking. With banking, obviously, you have the Basel standards. With insurance, that framework does not really exist. A putative insurance capital standard is being developed by the IAIS, but it is at very early stages. It is not very UK friendly in the way it has been developed so far, and there are very significant challenges in how such a standard could ever be adopted, given the very different positions of the US and the European authorities, who have very different views about how insurance should be regulated and supervised. That is probably the single most significant issue. There is not the same international framework that you can fall back on in the way that Sir Jon eloquently described for the banking sector. By extension, that has relevance to passporting, because if passporting is lost, either in whole or in part, there is not the same option to fall back on MiFID II, as has been described for some parts of the banking sector. The same framework is not there for insurance.
Another area I would flag, again, is data. Because data is so central to the insurance industry, it is absolutely critical that, however the future relationship with the EU is evolved, it is done on the basis of full equivalence with the European data regime. The new European data regulation will come into force in the UK in May 2018, and will then become part of British law; obviously we welcome the Great Repeal Bill announcement that it will therefore remain part of British law going forward. It is very important that data does not become a political football, with people saying that we should have a UK system just for the sake of it. That would cause very significant challenges for a wide range of insurance and long‑term savings providers, including those who otherwise would not really be much affected by Brexit.
The Chairman: Lord Butler, do you want to come in on the passporting issue?
Q51 Lord Butler of Brockwell: May we pursue the issue of passports for a moment? Mr Evans has just mentioned that the loss of passporting would be serious for UK insurance companies. We know that a very large number of firms depend on passporting. How serious would the loss of passporting be for the companies that you know—Mr Evans referred to it in the case of the insurance industry—and to what extent is there a mutual interest such that EU companies will similarly want to retain passporting into the UK, and therefore the basis for a deal, perhaps after a transitional period maintaining the present passport arrangements? Can I ask for your comments on those aspects of passporting?
Miles Celic: Three things immediately strike me in response to that. The first is that the sort of ecosystem that we have depends on passporting, but it is more than just passporting. There is an important financial and related professional services ecosystem, and I agree with Huw’s point that sometimes insurance—I say this as a former insurer—gets a little forgotten. Sometimes we forget that there are about 1 million or so jobs in financial services, but there are about another 1 million in related professional services that rely on the financial services industry in the UK, so there are 2.2 million in total. Two‑thirds of those are outside the M25.
Passporting is an important part of the way the industry and the ecosystem around the industry has evolved over recent years, but, as Sir Jon made clear, passporting is a complex set of relationships, directives and so on. There is more than just a single passport. One of the things that has characterised the debate since the referendum is the unpacking of some of these terms. I was very conscious that passporting was thrown around as a generic term, and I welcome the fact that it is now being looked at in slightly more detail. It is a case of going through those things and making sure that, where possible, we continue with them, and certainly that would be the consistent view among the members of TheCityUK, while recognising that many of the elements in passporting are untried and untested and will need to be tracked and worked on very carefully both in the run‑up to the UK’s departure and subsequently.
On your point about the importance of passporting in the EU, again it goes broader. The London and UK financial and related professional services sector is more than just a UK asset. We would argue very strongly that it is a strategic asset for the whole of Europe. It has an international centre—one of arguably only two genuinely international financial centres—off the channel, which has been a driver for European growth, for innovation. To give an example of what that means, a company in Düsseldorf may go to the local branch of their Sparkassen, or whatever, or they may go to Deutsche Bank or whoever, and ask for a loan or funding, however they choose to cut it, to extend their offices or to build a new production line, and as far as they are concerned that money comes from the bank at the end of the road. The likelihood, or a good possibility, is that a lot of that, if not all of it, is done in London and then goes back to the branch of the bank in Germany and then to the manufacturer. We would argue that, as the negotiations move forward, there needs to be recognition on both sides that the UK financial services sector is mutually beneficial to elements of both the UK and the EU27.
The Chairman: Mr Evans, do you want to add to that?
Huw Evans: Briefly. I agree with Miles. The honest answer is that we are still working it out because, as Sir Jon alluded to in the previous session, it is not something we have ever had to know before, or overanalyse. Even then I think there is a danger that, when figures are produced to try to give some estimate of the value of passporting, they are either rubbished as too low or viewed as not specific enough in what they can actually relate to. The wider ecosystem point is important, but it is worth noting that in Lloyd’s of London’s recent results its chief executive said that Lloyd’s viewed about 11% of its revenues as being at risk from the loss of passporting and a so‑called hard Brexit. It may not sound that much, but Lloyd’s annual revenues are £27 billion, so it is 11% of a very big number. However, it is still worth emphasising that this is a very big deal for the firms it affects and does not have that big an impact on others. It is important not to generalise but to recognise how vital it is for the firms that are affected.
Finally, it is true that there is mutual benefit, but, as has been reflected on already, it comes back to the tension of whether economics or politics wins out at the end of the day. To go back to my earlier point, it reinforces the importance of our Government and our Parliament signalling to our continental partners that they value the reciprocity of the current relationships and the mutual economic benefit that goes forward. If negotiations begin in that spirit, it is more likely that we can preserve something of that kind, rather than perhaps implying, maybe inadvertently, that we view these things as of limited or no value to the UK or to our European partners. That is demonstrably not the case.
The Chairman: Mr Hoffmann, your clients are directly affected by this.
Stefan Hoffmann: Many global financial institutions have more than one passport under one roof, depending on the range of products they sell and the countries they work in[4]In general, one can say that passporting is a crucial cornerstone for the set‑up of international global firms because it allows efficient and effective labour sharing; you specialise in one area and you are allowed to distribute that all over the EU. Without that, we could all—not only the UK but EU member states as well—lose potential benefits from the effective specialisation and labour sharing that is possible under the EU passporting regime. Efficiencies in capital allocation, netting, margining and risk management will get lost. We are all aware of that, but it comes back to policy versus economics, and that is the really tricky thing, I guess, but I am repeating what my colleagues have said. I would not add much more.
The Chairman: Lord Desai, do you want to come in on that point?
Q52 Lord Desai: From the numbers I have, UK firms have 60 passports per firm and the EU side comes in at three passports per firm, so there is a huge asymmetry in our interests in passporting. Do you think the Government recognise that and will in negotiations give proper importance to how much our interest is involved in this matter? It is not simple reciprocity. It is asymmetrical reciprocity.
Miles Celic: I cannot comment on the Government’s negotiating strategy at this stage. As I said, I certainly hope that they would look at the UK and London’s financial and related professional services sector as something that we can present as a point of constructive continued engagement with the European Union. Certainly from the conversations that I have had in Brussels—I have been there twice in the last three weeks—there is a real desire among the people I have spoken to in the Commission, the Council, the Parliament, the permanent representations and elsewhere to understand what all this means. There is a real sense in Brussels of information gathering. The word that kept coming up in the discussions that I had was pedagogical. They see this as a pedagogical exercise, the word they consistently used, so there is a real desire for them to grasp what the potential consequences are. What the Government then choose to do with that in negotiating terms is clearly a matter for them, but as I have said, and as I think my colleagues have said, there is an understanding that the politics of this is very important. It may or may not trump the economics, and I cannot comment on that, or indeed the processology, but if there is a sense of being able to grasp the economic prize that is on offer, if we get a mutually beneficial outcome, yes, passporting may play a part.
The Chairman: Can I take you back to what you said about the pedagogical exercise for your interlocutors in Brussels? Are they looking to you to provide them with information and evidence?
Miles Celic: They are looking for information and evidence from wherever they can get it that is credible, evidentially based and where a dialogue is possible. For instance, Sir Jon commented on the Oliver Wyman research that was released last week, and which we commissioned in order to provide exactly that kind of fact base. It is not a “lobbying” document; it is a fact‑based analysis of the various high to low access end points. There is a real desire and appetite, certainly that we have come across, to understand that.
Q53 Lord De Mauley: This is quite a broad question. What do you think UK financial businesses that currently benefit from full market access might be planning to do in its absence?
Miles Celic: A variety of work is under way, as Huw pointed out. People are trying to get a sense of what the outcomes are. As you would expect with any well‑run business, scenarios are being run, and planning is under way to look at what might be done so that those companies can access and continue to access the European markets and have the European players continue to access the UK markets. It is difficult at this stage to point to a uniform approach that is being taken, but from the conversations I have had, there is certainly a great deal of thinking and planning under way about how that might be done. Some of it is through passporting, and other options will be looked at, including, as Sir Jon alluded to earlier, almost going back to the future—what was done previously. Has the regulatory and legislative environment changed in such a way that that is no longer possible? That is for the European element.
Clearly, as I have spoken about, there is an element of looking to other markets. A great deal of work has been done down the years on the way that UK financial and related professional services work with the well‑known large markets in places such as the US, Japan, China, India and so on. We have started work at TheCityUK on how you build an independent trade and investment policy that drives activity in those markets and in other markets. I think it remains the case that six of the 10 fastest‑growing economies of the world are in Africa. As Africa and other markets move up the development curve, there tends to be more of an expectation, more of a demand and more of an appetite for services and service‑based trade. That is something we would certainly be looking at. That is not to say that companies are not already doing it. Some of the companies that have given evidence to you are examples of very successful British firms that sell globally already. We would be keen to see whether that is something we can do more of through the financial services sector.
Lord De Mauley: Sir Jon commented on the risks of people relocating and so on. Do you have anything to add to his views on that?
Miles Celic: No. He made the points on that very eloquently. As I said, companies are going through scenario planning; they are making their plans at the moment. I have no sense that companies are saying that they will relocate. It is important to get a sense of what relocation is because, again, it is one of those terms that is used in a reasonably generic way. It may be that you do not see companies lifting lock, stock and barrel and moving elsewhere. It may be, as Sir Jon talked about, that individual operations move elsewhere, or that if those operations no longer economically make sense they are no longer conducted. There is a planning process going on, but, as Mr Evans has alluded to, there is a timescale within which certainty would be beneficial as regards whether or not any of those plans are triggered.
Huw Evans: That is where, although the quite speedy timescale on Article 50 that was announced last week in some respects points towards a harder Brexit, the greater certainty about where we end up may help businesses. Even if they do not like the outcome, they will at least be clearer on what that outcome is going to be—it is certainly clearer for us. Any board that is publicly listed has a considerable responsibility to examine all the options and to make considerable contingency plans. As Miles said, most businesses are doing so. Of course, these are not just businesses that are directly affected by passporting. They could just as easily be businesses that have significant EU subsidiaries that do not rely on passports to do businesses in those EU countries, but have to consider how the future development of EU regulations and directives will be affected without the UK in the room. That is an area we need to begin to think about more, particularly in financial services where, contrary to some of the wilder rhetoric of the Eurosceptics, the UK has always traditionally had the last word on financial services legislation in the EU. It is very important for firms that have significant EU operations to consider what that may look like five or 10 years down the line.
There are two other areas that I think are important for firms in that position, other than transitionals, which we have already talked about. The first relates to the early signals that are sent on talent and on access to labour. This is not an immaterial consideration across all parts of the economy, but certainly for the insurance and long‑term savings sector it is something that comes up repeatedly from our CEOs. The other is of course what the authorisation procedures, processes and timings are in other countries in which firms may be exploring or putting in place contingency plans. Lots of names get bandied about, but it is easy not to look into the detail, and the fact is that those countries all have regulatory approval processes of their own. The Central Bank of Ireland was on record last week reminding people that there is no such thing as transferring a licence from the UK to Dublin; it is a new application that has to be done according to their rules and standards. Clearly, if they or any other regulatory body is inundated with too many applications, even if they are just on a contingency basis, it will significantly slow their ability to process them and do them properly. There are lots of considerations, once you go beneath the surface, that affect the ultimate question of what firms may do and on what timescale, but you are absolutely right to think that firms are actively considering this at the moment, and indeed it is their duty to do so.
Stefan Hoffmann: There is not much to add from me. We have quite a few Swiss companies active in London and they are all considering the situation, in the sense that they are part of a worldwide network. Of course they have their subsidiaries in the UK and they can profit from passporting, but they are setting up subsidiaries in other EU countries as well, to make sure that they can cover the EU as a whole. So far London has been a base for wholesale banking—asset management in particular, less for private banking and wealth management, as those areas are probably more likely to be served from Luxembourg or Frankfurt. London remains for asset management, and for investment banking in general, the place to be. It is not European business; it is worldwide business, and London has the business for the Far East and for the Middle East as well. It is not centralised. It is not just a hub for Europe, and therefore we need to be careful not to be too alarmed. Not all of that business will vanish from London even with a bad Brexit, because London is a worldwide centre for a lot of businesses, and most of them will remain here to some degree, together with their experience and networks, such as auditing and law firms and so on. It is a whole network that plays together and it cannot be replicated easily somewhere else.
Q54 Lord Desai: We have been around this point. Do we know what would be the consequence of fragmentation? Have people done stress-testing on how much fragmentation could happen, given the uncertainty, and what would be the effect on the financial system?
Miles Celic: Work has been done and work is under way on that. There are two or three things that I would point to immediately. As has been talked about, one advantage of London is that you have everything in one place. It is a quite enviable hub compared with many other potential sites in Europe. It is very difficult to identify another individual smaller financial centre in Europe that has anything like the sort of advantages that London has. Indeed, in some sectors of the financial and related professional services industry, London has an even stronger advantage than somewhere like, say, New York. One example that I would pick is fintech. With fintech you have the creative centre in London, the regulatory centre in London, and the legislative centre, the funding centre and the tech centre in London. They are all in one place, whereas even in the United States they are spread in about two or three—arguably more—different locations. The netting effect that the ecosystem brings, the contextual effect, has been a dynamic and virtuous circle that has kept feeding itself. It has led to greater competition, greater innovation and reduced costs. The risk of fragmentation is that you reduce that.
I happen to think that London, for some of the reasons I have already talked about, has a number of natural advantages that mean that there is, if you like, a floor below which it would be very difficult for London to go, but it will if it is handled badly. If we end up in a position that we would not seek to end up in, it will obviously have an effect on London and how that ecosystem continues to operate. It is not just London. London is one of the only two genuine international financial centres, but there is really valuable work going on in other parts of the UK that drives dynamism and economic investment and high‑value jobs in places such as Edinburgh, Manchester, Leeds and Bristol, et cetera. Manchester is, I think, the second largest legal centre in the country and has significant fintech advantages, as does Bristol. Edinburgh is a huge centre for asset management. I would not simply think about it as London but rather as the advantage that London brings generally. There are fragmentation risks, but, equally, London has a number of natural advantages. That said, one thing we need to guard against is complacency. That goes back to the argument I have been making that we need to be able to sell this sector, this industry and what it does, as an advantage for Europe as well as just an advantage for the UK.
Huw Evans: It is right to take a balanced approach on fragmentation, as Miles has just done. From an insurance perspective, it is worth bearing in mind that for Lloyd’s of London in particular London is a marketplace. Clearly, you need buyers and sellers in any marketplace for it to succeed, and you need the mechanics of buying and selling to be straightforward. That is a particular challenge, which is why I think Lloyd’s and the market participants there have been so vocal. Otherwise, it is right to take a more balanced view, particularly from an insurance and long‑term savings point of view. Most of our 330,000 employees across the whole of the industry and its supply chains, including its brokers, work outside London. Edinburgh is a very significant European centre for asset management and the life industry in its own right. Indeed, if you stick a pin in a map of most of the regional centres of the UK, you will find an insurer or long‑term savings provider as a significant employer, not just the places Miles rattled off. I could rattle off another 10, but I will not. It is important to have that balanced perspective on the way in which the economic and social benefits of our insurance and long‑term savings industry, the largest in Europe, are spread quite evenly across the UK as the market has developed over many years. It is right to have a more balanced view.
Also, there are—we may come to this—opportunities for the UK in leaving the European Union in international trade and the focus that the Government will now place, as they have already started to do, on concentrating much harder on opening up routes to India and China in particular. Those offer opportunities over the medium to long term for many leading UK insurance and long‑term savings providers.
Lord Haskins: Is it fair to say that the insurance activities outside London for the most part are domestic and for the most part not too much affected by Brexit?
Huw Evans: Very broadly, yes, but it is not the case—I do not think you are implying it—that the only people working outside London in the insurance sector are doing processing work. You will find executives and significant bodies of high‑skilled and important management activity taking place outside London, as reflects the history of the insurance industry. The biggest part of Aviva was the old Norwich Union, so, unsurprisingly, it is still largely based in and run from Norwich, and obviously many of the big financial institutions are headquartered in Edinburgh.
The Chairman: Mr Hoffmann, did you want to come in on that point? I assumed you would not.
Stefan Hoffmann: No, thank you.
The Chairman: Catch my eye whenever you want to come in with a particular perspective.
Q55 Earl of Lindsay: Can I ask the panel about their views on the EU’s equivalence regime? Sir Jon and some other witnesses pointed to the relatively greater significance that they see in global equivalence, which perhaps transcends the role of the EU equivalence regime. None the less, in the UK negotiations with the EU, a decision will have to be made as to whether or not participating in the EU equivalence regime is a good thing or a bad thing. What are your views?
Miles Celic: The caveat always put on equivalence is that, certainly in the way it is looked at and judged, it can often be a political as much as a technical decision. It tends to be a static point in a dynamic environment; from recollection, this may be what Sir Jon said as well. You can be equivalent on a point and on a certain day but there is no guarantee, unless there is very close matching of regulatory environments, that you will be equivalent at a later point. There is also the risk of withdrawal of equivalence, which again is something that companies would be very conscious of. It might be interesting to follow the idea of mutual recognition. This is grounded in the idea of international standards and speaks to a really important thing for the future of this industry outside the European Union, which is that we do not follow some sort of regulatory fall in standards in an attempt either to arbitrage the system or to attract business from elsewhere and so on. Reflected in the conversations I have been having is a desire and an expectation for the highest standards, and that London and the UK are seen as centres of regulatory excellence, expertise and the highest standards, and that in itself will attract and retain business.
The other factor—I think we have skirted around it—is the idea of how influential the UK will be outside the European Union as regards the shape of regulation and directives and so on. Two points relate to what you are talking about. The first is that we have helped shape this environment. It is very much a British‑shaped environment. I do not want to tread on Huw’s toes, but Solvency II, for instance, was originally a British idea. Because we are Europe’s financial centre, the expertise in a lot of these situations has come from British officials, the British Government and British regulators. There are a disproportionate number of British officials in the European supervisory authorities. When we talk to the negotiations, I would be very interested to see what we choose to do on that. This is by no means denigrating other parts of Europe, but we tend to be the intellectual powerhouse that produces a lot of the more forward thinking on regulation. I hope that we can get to a point, working with the other 27, where we design an equivalence regime that is better suited to the requirements of the UK and the opportunities that the UK industry can provide to Europe as its financial centre.
Earl of Lindsay: You are arguing, therefore, for a bespoke equivalence regime.
Miles Celic: Yes. I would argue that it would be in the interests of both the UK and the 27 that you have, effectively, a bespoke equivalence regime as part of a broader bespoke agreement.
The Chairman: That could be described as mutual recognition.
Miles Celic: It could be described in a number of ways. It could be called equivalence or anything else, but if you are going back to the basis of international standards, and if the UK adopts and encourages the highest standards, it is very difficult to see how you would not end up with a more positive and constructive starting point.
Huw Evans: Yes. This has to end up in a bespoke treaty. It cannot possibly be done based on the way in which the current equivalence regimes work. They do not guarantee market access; they are political decisions; they are temporary and, of course, the regulatory environment is ever-changing, which is particularly relevant to the insurance and long‑term savings industry, because Solvency II is subject to a significant review in 2018, so you have a moving target. The challenge I had with Sir Jon’s analysis previously was his reference to the international architecture. That simply does not exist in the insurance sector in the way it does in the banking sector, and it is hard to see how it can develop in the near term when the US and the Europeans have such fundamentally different views about how insurance should be regulated, principally around the question of the use of risk‑based models for determining capital levels.
This is not some sort of minor disagreement. It is a fundamental ideological disagreement between the US and the Europeans, which makes it hard to see how the insurance capital standard can become a reality any time soon. In the absence of that, the focus on having a bespoke treaty that cannot be unwound at the whim of the Commission, or that becomes irrelevant because the regulation that it was equivalent with has moved on, has to be the aim of the exercise—not least because the most important issue for the UK insurance industry is that we are in the room when regulatory issues are decided and discussed, not outside the room. It cannot be a functional way forward for the largest market in Europe not to have a say in its own regulatory environment.
Lord Haskins: Are you saying that the EU insurance regulatory regime is a pretty good one?
Huw Evans: Yes. As Miles said, it was broadly designed and inspired by the UK model that was developed after the dotcom bubble crisis in the early 2000s. It has been implemented in quite a process‑heavy way that has added significant implementation costs that, in our view, did not need to be there, but it is fit for purpose and it has the broader agreement, painstakingly reached, of all 28 EU member states. It works, although it could be improved, and therefore it would not be in our interests to look for a blank piece of paper and move fundamentally away from it.
Stefan Hoffmann: In our experience, EU equivalence is a useful and valuable concept in general for third countries.[5] However, it has its limits, and I would stress three limits that we experience in particular from Switzerland. The first is of course the scope. There are no equivalence rules available for a whole range of banking businesses; for instance, the retail business is not covered by EU equivalence, so that limits the usefulness of the concept as such, because it is down to wholesale business and to investment banking in certain areas, but it does not cover the whole of banking as the passport regimes would allow to you do.
The second shortcoming in our experience is that you really depend on the EU Commission to take the initiative. You have no right to EU equivalence. You have to wait until you are assessed. You do not get the right to be equivalent even if you fulfil all the criteria. The third thing is that the process itself is not very transparent and not very reliable. It is a two‑tier process. One is the technical tier, which is done by the ESAs, which are pretty reliable in that they are technical, but on top of that you have a political decision by the EU Commission, which is difficult to assess. In the end, it is a political assessment and it is susceptible to the overall mood and climate between two countries. Therefore, what we are arguing, or have been trying to put across to Brussels for quite a long time—probably we have an ally in the UK in that respect—is that we think it would be useful to establish an EU equivalence regime or process that is streamlined and more structured, in the sense that in the end you would get a right to be granted EU equivalence when you met certain conditions. As it is now, at the moment, you do not have that right. You really depend on the mercy, so to speak, of the Commission, and that, of course, is a considerable shortcoming of the regime.
Q56 Lord Woolmer of Leeds: Following on from all that, how do you think regulatory co‑operation and agreement will change between the EU and the UK following exit from the EU? Secondly, do you think the EU or the UK or both parties will become less influential international bodies, given the importance of the UK as you have all described it within the global environment, but also its relative importance to the EU member states themselves?
Huw Evans: It absolutely matters that there is a high level of regulatory co‑operation, whatever political structures are put in place and ultimately agreed by Parliament. Why? It is primarily in the interests of customers. It is in the interests of all customers, whether individual or corporate, that there are highly established and sophisticated regulatory relationships and regimes that work across borders in our heavily interconnected and globalised world economy. We must not lose sight of the fact that ultimately it is for customers that regulatory relationships are most important, and obviously that they ensure an orderly financial system. That has to remain an important priority throughout this process.
As to our international influence within the European Union, undoubtedly of course we cannot leave the European Union and hope to maintain any significant level of influence directly on how it will evolve, although hopefully, if a sophisticated treaty could be established that had a close working relationship between the EU and the UK, it is possible to see a way in which influence and soft power could be used as part of that rather than the sort of hard power last person in the room‑type power that we have at the moment.
In the international sphere, for the reasons Miles articulated about the role of the UK in the world economy and London as a financial centre, I hope we can exercise that influence effectively. It is certainly something from an insurance perspective that we are committed to in the development of the insurance capital standard. I think we will have to put more effort into using our influence and, dare I say it, seek to make more friends and build more alliances than perhaps we had to do when we were one of the largest players in the EU.
The Chairman: And hope we are not entirely dependent on the kindness of strangers, as Mark Carney put it. Mr Celic.
Miles Celic: I echo very much what Huw said. Clearly, if we are not in the room, if we are not part of the EU, if we are no longer part of the EU 28, we do not have the ability to vote on issues. We do not have access to or participation in the mechanisms and structures of the institutions. I would like to think that intellectually we can still contribute. There will clearly be a need to look at UK diplomatic policy and how we engage with the individual capitals, the individual members of the European Union, in our mutual interest. I also like to think that we would explore the possibility of continuing to be a part of initiatives where the UK can play a role. We have heard talk of that recently for defence and security issues, some of which sit outside the European Union formally, but I look to the capital markets union initiative, for instance. There certainly seems to be an intention to continue with the capital markets union idea, and it would be a much more powerful contribution to European competitiveness and growth if it included the 40% of the capital markets that sit in London and the UK. It would be able to access a much deeper, more liquid pool of capital. How realistic and viable it is that the UK could continue to play a part in that outside the European Union, I do not know, but I certainly think it would be worth exploring, again on the basis of mutual interest.
The Chairman: Mr Hoffmann, do you think, in a perverse way, that your members’ interests have been strengthened by Brexit, having the UK on side?
Stefan Hoffmann: I do not want to comment on the British position. Our experience is that it is always possible, even as a third country, to find and arrange useful solutions. Sometimes it needs extra effort. It is probably less easy than being a member of the EU. You need some extra things, such as more flexibility. What we really think is that the UK and Switzerland will, after Brexit, become more similar in some ways. There are two things that will likely happen: we will become more similar in the sense that we are both third countries, not EU member countries, and therefore we will probably have more common interests in the future than we used to have in the past; on the other side, we will become even more competitive because we are in similar positions. Those are two divergent effects that Brexit could trigger , but we are looking forward and, whenever you find a solution or arrangement with the EU, it could help us too in some way, I am quite sure.
The Chairman: That concludes today’s public evidence session. The Committee is going to continue its meeting in private, but we have found the session with you extremely helpful. Thank you so much for coming, and the very best of luck as you go forward to carry your messages. Thank you.
