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«Summer 2014 Review of the Balance of Competences between the United Kingdom and the European Union The Single Market: Financial Services and the Free ...»

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3.14 Since 2008 the Government has made a number of interventions in the banking sector in order to protect depositors, maintain banks’ liquidity and capital and encourage lending to creditworthy borrowers.10 Interventions have taken the form of loans, guarantees and share purchases. At its peak, total Government support for the banking sector, which includes contingent guarantees, as well as cash outlay, exceeded £1tn (76% of UK GDP).11 Northern Rock and Bradford & Bingley were both taken into full public ownership in 2008, and between 2008 and 2009 the Government injected capital of £20.5bn and £45.8bn into Lloyds Banking Group and Royal Bank of Scotland (RBS) respectively. The latter case was the largest bank bailout in the world, and the Government currently holds around 80% of RBS shares. As of March 2013, the Government’s total cash outlay was £115bn, with a further £26bn committed in guarantees.12 UK Financial Services in the Single Market

3.15 In addition to its domestic importance, the UK financial services sector plays a key role in the EU economy. Figures Five and Six highlight the UK’s large share of EU activity across financial markets. This shows the extent to which the UK financial services sector is of greater national importance than the financial services sectors in many other Member States, although some smaller Member States, such as Luxembourg and Ireland, have Open Europe, Continental Shift: Safeguarding the UK’s Financial Trade in a Changing Europe (2011).

See: Independent Commission on Banking, Issues Paper: Call for Evidence (2010), Annex. Figures taken from from ONS, Pink Book (2010).

HM Government, Scotland Analysis: Financial Services and Banking (2013). Available at:

www.gov.uk/government/uploads/system/uploads/attachment_data/file/200491/scotland_analysis_financial_ services_and_banking_200513.pdf, accessed on 17 June 2014.

National Audit Office (NAO) www.nao.org.uk/wp-content/uploads/2013/07/HMT-Accounts-2012-13.pdf.

NAO, The Comptroller and Auditor General’s Report to the House of Commons (2013). Available at:

www.nao.org.uk/highlights/taxpayer-support-for-uk-banks-faqs/, accessed on 10 June 2014. See also:

Scotland Analysis: Financial Services and Banking.

For more information, see: www.nao.org.uk/highlights/taxpayer-support-for-uk-banks-faqs/. Accessed on 13 June 2014.

38 Review of the Balance of Competences between the United Kingdom and the European Union:

The Single Market: Financial Services and the Free Movement of Capital financial sectors that are larger as a proportion of GDP. Furthermore, Oliver Wyman/ TheCityUK estimate that around £45bn out of a total of £58bn of European capital markets and investment banking revenue is transacted in the UK, again suggesting the share of UK activity in the EU is significant.13 Figure Five: International Transactions in Financial Services: Exports, Imports and Balance 2012 (€bn)

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3.16 The size and depth of the UK financial services sector is important for the EU as a whole, bringing benefits to all Member States. It supports the development of businesses, investment in new technology, and growth and employment across the EU. And with London’s position as a global financial centre, the UK acts as a hub and point of entry for non-EU firms into the Single Market.

3.17 The figures speak for themselves. The UK is the largest centre for cross-border borrowing, with 251 foreign banks operating across the UK in March 2011, more than in any other country worldwide, and around half of all European investment banking activity conducted in London.15 The UK insurance industry is the largest in Europe and third largest in the world, after the US and Japan.16 With an estimated £5.2tn of assets under management at end-2012, the UK is the largest asset management centre in Europe with around 36% of the European market and the second largest centre in the world.17 The UK is the second largest global centre for hedge fund managers18 and pension fund assets after the US.19 And the UK is the largest centre of foreign exchange and OTC interest rate derivatives activity, with 41% and 49% of global turnover respectively in April 2013.20

3.18 This relationship has mutual benefits. The EU is the largest destination for UK exports of financial services, with over a third of the UK’s trade surplus in financial services in 2012 coming from trade with other EU Member States.21 The UK’s membership of the Single Market facilitates access to the world’s largest single market with GDP of €13tn and 500 million people and as its financial centre helps channel capital flows to the economies of Europe.22

3.19 The existence of the EU Single Market and UK access to it were considered in the evidence to be critical to the consolidation of the UK’s position as a leading international financial centre. Respondents highlighted the importance of the EU as a market, the value of the passporting regime which enables firms to be authorised in the UK and then operate across Europe, and the role of the Single Market in facilitating access to non-EU markets. Evidence emphasised the UK’s share of the single market in financial services, the link between the UK’s position as a global financial centre and the development of the Single Market, and surveys setting out business support for access to the Single Market.23 TheCityUK, Key Facts about the UK As An International Financial Centre (2013), p7.





OECD Insurance Statistics 2012, measured by total gross premiums written from 2011.

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OECD, Performance of Pension Funds, (2012) p5, available at: www.oecd.org/daf/fin/private-pensions/ PensionMarketsInFocus2012.pdf. Accessed June 2014.

Bank for International Settlements, Triennial Central Bank Survey: Foreign exchange turnover in April 2013 preliminary global results (2013); OTC, Interest Rate Derivatives Turnover in April 2013: Preliminary Global Results (2013).

TheCityUK estimates based on ONS data, UK and the EU: A Mutually Beneficial Relationship (2013), p4.

Eurostat, Basic Figures on the EU: First Quarter 2014 (2014), pp. 3-4. Available at: epp.eurostat.ec.europa.eu/ portal/page/portal/product_details/publication?p_product_code=KS-GL-14-001. Accessed June 2014.

See: Association of Corporate Treasurers (ACT), Association of Foreign Banks (AFB), Association for Financial Markets in Europe (AFME), AIG, Bank of America Merrill Lynch, Barclays, BATS Chi-X, British Bankers’ Association (BBA), British Insurance Brokers’ Association (BIBA), Sharon Bowles MEP, British Private Equity & Venture Capital Association (BVCA), Citi, the Confederation of British Industry (CBI), Franco-British Chamber of Commerce (FBCC), Financial Conduct Authority (FCA) Financial Services Practioners Panel, an insurance industry roundtable, International Regulatory Strategy Group (ISRG), International Underwriting Association (IUA), the Law Society of England and Wales and the Law Society of Scotland (the ‘Law Societies’), JP Morgan, Lloyd’s of London, Nomura, Royal Bank of Scotland (RBS) Group, Royal Sun Alliance (RSA), the Scottish Government and Standard Life, submissions of evidence.

40 Review of the Balance of Competences between the United Kingdom and the European Union:

The Single Market: Financial Services and the Free Movement of Capital

–  –  –

3.20 There were positive views on access to the Single Market from across industry participants, most notably those that undertake cross-border activity, such as banks, insurers, asset managers, market infrastructure providers and end users of financial services.24 Some multinational stakeholders specifically highlighted the UK’s access to the Single Market as a factor in deciding to locate in the UK. Nomura, for instance, stated that, ‘The Single Market has been a key attraction for us in choosing to locate in the UK’.

Evidence from the Association of Foreign Banks (AFB) argued that:

Considering the volume of the UK’s business with Europe itself, there is a need for the UK to remain in the EU and to influence the EU business environment and rules. If Britain withdraws from Europe, then foreign banks may reassess their reasons for maintaining their business in Britain and may decide to continue their business elsewhere.

(AFB)

3.21 However, evidence also suggested that these benefits are not felt equally across all sectors, notably areas of activity that are primarily domestic in nature. For instance, the Association of Professional Financial Advisors (APFA) noted that, ‘The financial advice sector, being made up primarily of wholly UK based businesses with predominantly UK customers, does not use the benefit of a single market, yet suffers the costs of having to comply with EU directives’. The Building Societies Association (BSA) also noted that the lack of cross-border activity meant that access to the Single Market had not benefited their members.25

3.22 An alternative view was that there would be potential for the UK financial services sector to flourish outside the EU. Evidence from Business for Britain cited estimates that the EU financial services industry will spend €33.3bn on complying with regulation between 2012 and 2015, with a large proportion of this impacting on the City of London.26 Some evidence also suggested that the likely negative impact on the UK financial services sector of leaving the EU had been exaggerated and that the UK should repatriate powers over financial regulation.27 However, Sharon Bowles MEP cautioned that leaving the EU would See, in particular, ACT, submission of evidence, p2; BATS Chi-X, submission of evidence, p1; BVCA, submission of evidence, p8; CBI, submission of evidence, p8 and Record of 11 December insurance industry stakeholder event, p1.

BSA, submission of evidence, p2.

JWG Analysis Report, Dirty windows: Regulating a Clearer View (2012).

See: Lord Flight, submission of evidence, pp3-4; David Campbell Bannerman MEP, submission of evidence,

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curtail UK influence, noting that Norwegian representatives have had to lobby UK MEPs in an attempt to ensure EU rules took account of their interests.28

3.23 In summary, the financial sector makes a significant contribution to the UK economy in terms of services and products for businesses and consumers as well as growth, employment, revenues and trade. However, the recent crisis has highlighted that the financial sector also presents considerable and costly risks to the wider economy and public finances. Access to the EU Single Market is key for many financial services firms, and a number of stakeholders emphasised the importance of this in their decisions to locate in the UK.29 Importance of the Free Movement of Capital to the UK

3.24 It is important to recognise the critical role of the Free Movement of Capital in supporting the effective functioning of the single market in financial services and developing the UK, and London in particular, into a global financial centre.30 The processing of payments and capital movements is essential for large financial centres, as deeper economic integration requires cross-border payments to be made easily and cheaply.

3.25 A review of the literature on the Free Movement of Capital commissioned by HMT and published alongside this report, also discusses evidence that capital liberalisation promotes the efficiency and development of the financial sector. For example, financial market liquidity may increase, and transaction costs decrease, where the international movement of capital provides for a greater number of market participants. The Free Movement of Capital also allows the banking sector to diversify country-specific risks, as banks can borrow and lend funds from and to a wider range of sources than would be possible in a less open economy.31

3.26 The UK financial sector’s interconnectedness with EU and global financial institutions does present some risks, particularly when exposure is heavily skewed towards certain regions. It is well-documented that, in the run-up to the financial crisis, European banks were heavily exposed to mispriced securitised debt based upon loans to households and companies in the US.32 So while open capital markets bring clear benefits to the UK’s financial sector, an interconnected system also poses risks. Since the financial crisis, rule-making at both an EU and international level has focussed on addressing these risks.

3.27 The literature review also highlights financial instability as a key risk associated with global capital flows. However, it considers this against the numerous, substantial economic benefits arising from open capital markets.

Sharon Bowles MEP, submission of evidence, p20.

A number of studies have sought to quantify the direct impact of the single market in financial services. For instance: Cecchini et al, The European Challenge, 1992: The Benefits of a Single Market (1988); Heinemann, F and Jopp, M, The Benefits of a Working European Retail Market for Financial Services (2002); London Economics, Quantification of the Macro‑Economic Impact of Integration of EU Financial Markets (2002); and ECB, Financial Integration in Europe (2012). See also a range of studies on the Single Market and financial integration on the European Commission website: ec.europa.eu/dgs/internal_market/studies/index_en.htm and ec.europa.eu/internal_market/economic_analysis/reports/index_en.htm, accessed on 30 May 2014. However, this is a challenging area of research, in part due to links between the financial services sector and the health of the wider economy, with feedback loops that are difficult to capture and a lack of certainty over statistical data.

IRSG, submission of evidence, p18.

See, for example, John Springford, CER, submission of evidence, p4, and external MPC member Ben

Broadbent’s speech at the Institute for Economic Affairs (February 2014): Available at:

www.bankofengland.co.uk/publications/Pages/news/2014/039.aspx, accessed on 30 June 2014.

John Springford, CER, submission of evidence, p4.

42 Review of the Balance of Competences between the United Kingdom and the European Union:

The Single Market: Financial Services and the Free Movement of Capital



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