The following speech was given today by John McFarlane, Chairman of TheCityUK, at the TheCityUK Annual Dinner at Plaisterers’ Hall in London:
My Lords, Chancellor, Ministers, Chancellor of the High Court, Aldermen, Ladies and Gentlemen. It is a privilege for me to welcome you to TheCityUK’s Annual Dinner.
At such a busy time, it is good that we can come together to reflect on the year, to celebrate successes and consider the priorities going forward.
I would particularly like to thank Shearman & Sterling for their valued support in making this dinner possible.
I am delighted to welcome the Chancellor of the Exchequer this evening. Chancellor, we greatly appreciate your attendance, and the support that you, City Minister Steve Barclay, and your Treasury colleagues, have given to our industry across what has certainly been an unprecedented period.
I am now well into my third year as Chairman of TheCityUK, an organisation set up in the aftermath of the financial crisis to promote the UK-based financial and related professional services industry.
TheCityUK is the only cross-sectoral, industry-led body of its kind, and it has been a privilege to take on such a strategic role at this time in our country’s history.
I have been impressed at how the organisation has brought together the leaders of our sector, to address its most pressing issues.
So together with Paul Manduca, the Chairman of our Advisory Council, Miles Celic, our CEO, fellow board members, TheCityUK team, and sector colleagues across our industry, we are genuinely solidifying the UK’s position as the world’s leading international financial centre and Europe’s financial hub.
We do this by promoting policies that drive competitiveness, support the creation of jobs and bolster the economy, engaging with governments, regulators and others at the highest level here, in the EU and across the world.
Chancellor, I’m sure it’s no surprise to you that Brexit has been top of our agenda.
Early on, we set ourselves the task of bringing together the industry on this vital issue to ensure a unified voice and build consensus.
But there is life beyond Brexit, so we also turned our attention to the future.
Brexit means the UK and the EU must move to a new and different relationship. As a country, we must continue to look outwards, and keep open to the world. The UK prides itself on being a pioneer in establishing and operating an open economy.
I have worked in this sector for 42 years, in this country and in several other countries. In this time I’ve felt our role is not always understood nor appreciated. While we may not grow or manufacture anything tangible, we do enable these things to happen.
Throughout its history the sector has often faced tumultuous times and challenge and we have learned important lessons along the way. Time and time again, we have demonstrated resilience and adaptability. We are called upon to do this once more.
Our financial sector and its ecosystem are vital national assets. We employ over 2.2 million people, two thirds outside London. Our expertise is renowned globally.
We provide more than one-tenth of total economic output, and contribute over £86bn in tax receipts to the Exchequer.
We host over 200 foreign law firms from more than 40 jurisdictions. The primacy of English law and the UK’s reputation as the world-leading centre for dispute resolution are also cornerstones of our advantage.
Britain is home to more than 250 foreign banks accounting for 17% of international bank lending and some 40% of global foreign exchange trading. More US dollars are traded here than in the US.
People do business here because it makes sense. We operate to the highest standards.
For our industry, the pool of talent is truly global. Across the UK, 11% of our employees were born overseas, and in London this figure is around 30%.
But let us not shy away from hard truths. Many parts of our sector have lost the respect of society, and this was exacerbated by our role in the global financial crisis.
We must focus on rebuilding the trust that has been lost, and move on to be recognised instead, for making a real and lasting contribution to society.
So, as we enter into a new period in our trading history, it is vital that the UK continues to be seen as a beacon for what can be achieved through open and free markets.
Brexit isn’t a time for retreat, but an opportunity to build on existing relationships and to build new ones.
Our departure from the EU in March 2019 is a reality we must and do accept. What we can influence though, is how we exit, and how we create a new prosperous relationship with the EU and the rest of the world.
This needs to be done sensibly, both politically and economically.
In doing so, we need to be realistic, that in leaving the EU we cannot retain all the benefits we enjoyed as a full member. Brexit is therefore an impediment to the sector’s ability to conduct its business and serve its customers and clients.
Some activities currently performed here will be required to move into the EU.
Should this occur in areas that rationally and economically should be retained in the UK, this will prove detrimental to everyone.
So, going forward we do face a number of related issues.
There is a tangible threat of a cliff-edge in a number of areas and no individual firm can accept the possibility of this. They have plans in place, and will take the necessary action to maintain their business and serve their customers. Time is running out.
Ensuring contract continuity post-Brexit is critical, as is the grandfathering of existing contracts. It’s in everyone’s interest not to interfere with historical contracts otherwise it could necessitate the need to re-paper millions of historical transactions, particularly derivatives, hedging and insurance contracts, for no material purpose.
Also retaining the economic and capital benefit of netting of transactions is critical. Any move to transfer euro and EU transactions from a cross-currency netting or clearing system into a separate EU entity, will inevitably be less economic - transaction costs will rise, as will margin and capital requirements.
It could even place at risk the economic viability of continuing to provide such services, other than in London or New York.
Beyond this, free trade agreements often take time to negotiate. But this need not be the case if there is both political will and commitment. However, it has been a very long time since the UK has done this by itself.
Often in trade negotiations, we end up being hostage to protectionism and carve-outs rather than full openness.
While goods trade agreements are commonplace and relatively easy to arrange, services agreements are extremely rare.
The UK has a large goods trade deficit with the EU partially offset by a surplus in services. It is transparent that it is substantially in the interests of the EU to be open to a goods only agreement, given its large surplus. It is the complete reverse for the UK, and should not be considered.
What should be pursued is a trade agreement on both goods and services. Since the EU retain a significant net surplus, rationally this should be achievable.
In my mind, it is not helpful, to rely on off-the-shelf EU solutions like “Norway” or “Canada”. The UK financial and related professional services sector is different. It is also unique, and demands a bespoke approach.
Looking further afield, opportunities will open, including in the US, emerging markets and the Commonwealth countries. Securing them however, will depend on the UK moving quickly to establish new relationships.
In the financial services space, focus should be on the area of wholesale and international financial services, which is highly complex, and where we have a global competitive advantage.
This requires the support of a regulatory framework based on mutual recognition and regulatory cooperation.
And for our related professional services firms, the ability to practice across the EU, to have mutual recognition of qualifications and to draw on skills and talent from across their networks to serve clients is critical.
London is not the UK’s financial centre, it is the world’s financial centre for everyone’s benefit. It exists as the global financial centre because it has a genuine economic advantage.
Other centres will struggle in the near term to offer similar benefits, and a move to them will result in detrimental outcomes for everyone. Over long periods, our strength might be replicated, but not in the near-term.
Leveraging genuine economic advantage should therefore be the principle that underpins decisions in an international marketplace, and I trust this logic will win through.
So, nearly one year into the negotiations, many of the critical issues, are yet to be progressed, particularly our relationship post-Brexit, and how we might transition to this.
Make no mistake, securing the right long-term outcome is the more important.
This said, a transitional arrangement is valuable if it leads to a favourable agreement, provides time to secure this, and ensures financial stability. However, a transition to exit only, is of limited and diminishing value.
For transitioning to be workable, it will require a firm legal and regulatory underpinning. Such an arrangement doesn’t currently exist, and while we are working on how this might be arranged, we mustn’t underestimate its difficulty.
Since exit from the EU is not far away, time is of the essence. The longer it takes to secure a services trade agreement and a transition arrangement, the more damage will be done.
Firms are planning to ramp up their spending on contingency from the beginning of next year, and need clarity on the post Brexit arrangements in the first quarter.
As some have suggested, we should not though see leaving the EU as an opportunity for a bonfire of regulation. We are largely subject to global standards, and conform to them.
The UK rightly has a reputation as a well-regulated, safe and stable financial centre, and we must maintain this.
Chancellor, you are respected for your support for our sector and that support in these negotiations is greatly valued.
It was also encouraging to hear your colleague, the Secretary of State for Exiting the European Union, David Davis recently commending the “innovative ideas on possible new frameworks” developed by the International Regulatory Strategy Group - our public-private partnership with the City of London Corporation. In this respect, I would like to thank Mark Hoban for leading those efforts.
But Chancellor – I know you will also agree with me, that we need to look beyond Brexit.
We cannot take for granted that our historic position as a global leader will endure without renewal. So, in partnership with PwC, we were the first to set out a bold vision for the sector’s future, and a roadmap to implement it.
London has become expensive. We will therefore need to re-balance the distribution of jobs and opportunity elsewhere across the country, and this is happening already. We held our first national conference in Manchester last week and the recent appointment of City chairs is an important initiative.
The growth in digital and mobile communications and applications is exponential. The UK must remain a global leader in this, and in the FinTech subset.
This will require the rollout of fast fibre and the early adoption of 5g, as well as accelerated innovation in products, channels and in digital business solutions.
Like we have seen in India this year, in the UK we should urgently consider the benefits of people being biometrically or otherwise digitally enabled.
As part of this, my personal view is that we should work quickly towards eliminating cash from the system.
We should instead, embrace a cashless digital society as already achieved in Denmark and Sweden.
And for you Chancellor, it would make a significant impact on the Exchequer through from fully electronic expanded VAT collection.
Of course, this, and open banking, while making it easier for society to use our services, exposes us to online economic and disruptive crime. This requires, in parallel, a more robust level of digital security.
All of this can only be achieved with the best digital and entrepreneurial talent available to us, both home grown and imported.
Fortunately, the preparatory work of expanding our trade and investment links with developed, emerging and niche markets is already underway, through the Financial Services Trade and Investment Board, under the chairmanship of the City Minister.
Finally, while the responsibility to transform ourselves largely rests with the sector and its institutions, we can only achieve this in partnership with government and regulators.
Chancellor, we are particularly grateful to you for the personal support you have shown, and believe together, in partnership, we can create the future to which we genuinely aspire.
Thank you, and it is indeed my pleasure to hand over to our distinguished guest, the Chancellor of the Exchequer.