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[...]The Single Market stands to benefit all members of the EU, but the UK is particularly well placed. We’re business friendly; we’re an open economy with a skilled work force; we’re comfortable with diversity; we're ready to welcome talent from abroad; and we speak English. These strengths make us the obvious launch pad for international investors looking to break into the single market – three quarters of foreign investors cite access to the EU's single market as a key reason for their investment in Britain. It makes us a great export base. Everyone benefits. Car manufacturers, farmers, architects, broadcasters, advertising executives. They're all successfully selling into the EU and attracting investment from it. Today, nearly 50% of our exports go to the EU and 50% of our foreign direct investment comes from other EU countries.
It's difficult to think of a part of the British economy where membership of the single market has brought more benefits than financial services. The UK is the EU’s largest financial centre. A global financial hub, it offers a breadth of services attracting business from all over Europe. Companies based here advise on the deals, arrange the financing, draw up the contracts and provide the insurance. A quarter of the financial services income in the EU is generated here in the UK.
Ambitious European companies come to Britain looking for funding and advice in a financial sector that can give them what they need. Nearly half of the equity raised on capital markets in the EU is raised here. 40% of the EU’s listed SMEs are listed on UK exchanges. Nearly 40% of European assets under management are managed here. We’re home to around 40% of the world’s foreign exchange trading and 50% of derivatives trading.
Last year, London was once again rated by the Global Financial Centres Index as the world’s most competitive financial centre – hardly a sign, by the way, of a City drowned or strangled in red tape as is sometimes claimed. The benefits go well beyond London. There are over a million jobs in the financial services sector in the UK of which two thirds are outside London. 85,000 in Scotland, 100,000 in the North West of England. 8% of our national income comes from the industry and it contributes around 13% of all corporation tax receipts.
Of course, that success owes much to the UK’s intrinsic strengths. I am not arguing for one moment that it is down solely to the single market. But it’s the single market that connects the UK as a financial centre to the rest of the European economy, and it's a crucial link that underpins the UK as a global financial services hub.
How does the single market create that link in practice? One crucial aspect is that British companies benefit from the passport system that means they can do business wherever they choose in Europe. From a UK base, they can offer services in 27 other EU countries. Regulators have to be kept informed, but no separate authorisation is needed.
For British banks, that means they can lend freely into the single market, and they do. Last year, they lent over 1 trillion euros and took over 1 trillion euros in deposits across the EU.
For banks from elsewhere in Europe, the single market makes it easy to set up subsidiaries and branches on this side of the channel, supporting investment and creating jobs here in Britain. 20% of banks operating in the UK are headquartered elsewhere in Europe.
For international banks and financial services from outside Europe – in particular the US – the single market means they can use London as their European HQ, without having to set up subsidiaries elsewhere in Europe. Half the world’s financial firms have chosen to base their European headquarters in the UK - in part for that very reason. [...]
The benefits of the single market passport system go well beyond the banking sector. A UK investment manager can be appointed to run investments for continental institutions. Continental corporations can make use of UK market infrastructure to access global markets. It is the British fund management industry that looks after a major chunk of the 8 trillion euros invested in UCITS – Europe’s globally successful investment product.
In the insurance sector, British companies can provide their services without having to undergo any sort of equivalence assessment. The same goes for reinsurance, for which London is the world’s leading market. In 2014, the UK exported 22 billion pounds worth of financial and insurance services to the EU.
Over the past decade, the surplus from Britain’s trade in financial services has more than doubled - from 23 billion pounds in 2004 to 58 billion in 2014.
This, ladies and gentlemen, is a success story of which we should be proud, and which we should be keen to keep.
In my job as European Commissioner for financial services, I am working to strengthen and deepen that single market. That's why I've launched a Call for Evidence to review Europe's regulatory framework for the financial sector, and to check it's as growth friendly as possible. That's why I'm looking at financial services from the point of view of the consumer to see whether we can improve competition and choice – and lower costs and improve the quality of the services we use every day. And that's why I'm working to build a Capital Markets Union – a Single Market for capital - to help money flow throughout the EU.
The goal of the Capital Markets Union is to connect savings more effectively to growth, to channel investment to projects in need of financing, to give companies a greater choice of funding, and to increase the options for people saving for the long term. Why do we need to do it? Well, the EU's economy is about the same size as America's, but our capital markets are about half their size. If we could grow our equity markets across the EU to bring the smaller ones up to the European average, 25 billion euros of additional capital could be raised each year. [...]
All 28 Member States stand to gain, but Britain is obviously well placed to make the most of the opportunities that deeper capital markets would create. The UK is already running a surplus in exporting financial services to the rest of the EU. If capital markets were to grow across the single market, British services would be more in demand, and our financial service companies would have more new investment opportunities to tap.
If the single market is working well for British financial services, now, if it can be made to work better still, what would the implications be for the sector if we voted to leave the EU? What would the alternatives be? How would they work? [...]
So, for the moment at least, we have to work on the basis that – for the Leave side - a vote to leave the EU is a vote to leave the single market. After having spent the last three decades making the case for it, shaping its rules to fit our interests and working with our partners to take it further, the UK is advised to abandon it for an unspecified new trade arrangement. Terms and conditions unclear: subject to negotiation. A negotiation with 27 countries who sell 8% of their exports to the UK, but on whom we depend on for nearly half of ours.
What would it mean for the financial services sector? Well, leaving the single market completely would leave our financial services industry without its passport; without that crucial right to provide services anywhere in the EU from just one country. Without a new agreement, our banks, investment firms and insurers could face new restrictions on cross-border business. Trading venues, central counterparties and central securities depositories could also be affected unless these infrastructures were recognised as equivalent.
Let me explain in a little further detail. I've talked about the crucial importance of passporting for Britain's financial services industry. Passporting is only available to countries inside the Single Market.
If you're not in the Single Market you can, in some cases seek equivalence, whereby the EU deems your national standards to be as good as the EU's. Equivalence lets a company provide services into the EU but, unlike passporting, it doesn't let you set yourself up in the European market. To do that, you would have to set up a separate subsidiary with its own capital requirements, subject to EU and any additional national rules. That is neither cheap nor simple.
Now, getting agreement on equivalence isn't easy either. Negotiations take time. A couple of months ago I reached an agreement with the United States on equivalence negotiations on central counterparties – CCPs or clearing houses. That negotiation on that one narrow issue took four years, even though there was good will on both sides and both I and my counterpart wanted to do a deal quickly.
And so: if you don't have passporting; if you haven't yet or aren't able to negotiate equivalence; then you're left subject to “third country” rules. You can only do business with an EU country if its regulator and supervisors agree and you're subject to their rules, and you could have to do that individually for each EU Member State you want to do business in, so no cross border rights. And, of course, you might not enjoy all the protections of EU law against discrimination based on where a business is from. [...]
Trying to avoid those restrictions, fighting to keep that precious access to the single market: Britain's negotiators would have to face up to a new reality. The reality of negotiating from outside; of trying to persuade trading partners who have every reason to defend their own turf. And even once a deal is finally done, the reality of having to accept that new rules would and could be set with the UK outside the room, without its interests represented at the table, simply informed of the results and any new requirements.
There is absolutely no reason to believe that discussions would be quick or easy. Greenland's negotiation with the EU simply as an overseas territory – the closest precedent - took three years even though there was really only one subject to talk about, fish.
Britain's European partners want Britain to stay. They've just agreed a hard fought settlement in response to the British Government's case for change. They clearly think that if Britain leaves it would be damaging for the European Union and their own national interests at a time when Europe faces serious challenges.
So from what I hear working in Brussels, listening to the national governments of the countries of Europe, I believe there would be a deep sense of rejection felt by Britain's European partners [...] If Britain chooses to become a competitor rather than a partner, why wouldn't they seek a competitive advantage in the new relationship? To build up their financial services sector. To roll out the red carpet to our bankers, insurers and asset managers. [...]
The benefits of membership of the EU and the Single Market have been significant for British business and the British economy. In the EU, Britain's biggest export earner, financial services, are flourishing and if Britain remains there should be more and better to come.
But if Britain leaves it is certain that there will be barriers to trade and that will damage the British economy, jobs and growth. [...]