My Lords, I start by congratulating the committee and my noble friend Lady Falkner on what is a very meaty report—I fully accept that. But I am afraid that I find myself in the camp of the noble Lords, Lord Davies, Lord Liddle and Lord Desai, and my noble friend Lord Bruce in this debate.

I start by trying to find at least a little bit of common ground. We can all agree that the financial services industry is absolutely crucial to this country. My noble friend Lord Bruce quoted the number of employees and the tax that it generates, and 30% of that is generated from an EU client base—the client base within the 27. A very significant part of the financial services industry that we have here and which underpins so much of our economy is essentially generated out of the 27. We access that, as others have described, through a very diverse set of regulations and directives, from direct passporting for the banking industry and much of the insurance industry, and rights of delegation for asset management. The reason why we can have the London Stock Exchange acting as the global foremost CCP which clears virtually all euro-denominated derivatives as well as many in other currencies is because of liquidity provided by the European Central Bank and underpinned by a location policy. Many of the fintechs that the noble Baroness, Lady Neville-Rolfe, talked about survive because they were pan-European from the day when they were born and function across borders through the e-commerce directive. Many of them have based their future plans and what they expect and hope for on the single digital market. So we are deeply embedded in this process.

There are two other big issues for our financial services industry. I am not going to address them here, but let me mention them by title. There is freedom of movement. So many of the staff—one-third of all those in our fintech operations, for example—come from continental Europe. They are not going to come here under visa terms, because why should they live with those restrictions when they can live without them elsewhere. Then there is the whole issue of data exchange.

I want to go back and pick up the point that the noble Lord, Lord Desai, made. The British-to-British conversation that takes place all the time, about how we manage to keep financial services thriving at the current level and growing in a post-Brexit world, comes without any recognition of where the European Union is coming from—and positions that we ourselves would take if we were in its position. I hear so often, “They need us more than we need them”. You hear that almost on a continuous basis. But there is a lack of capacity in the rest of Europe. Over the last 10 or 20 years, nearly all financial services capacity has been sucked into London. It has thrived in London and has come to this financial centre, particularly with regard to the wholesale markets. That is where things are today. If you are sitting in the EU, you recognise that as a reality, but it is a reality for now. Five years or 10 years from now, why should that continue to be so? Surely, you look for an arrangement, when the UK decides that it is going to step out of the club, leave the EU and become a third country, and you look for an opportunity to bring that business back into the EU, perhaps salami slice by salami slice, and build capacity gradually.

We often hear from the British the threat that, “If the business doesn’t thrive in London, it will move to New York”. That is just from one third country to another third country—perhaps a less attractive third country, and perhaps one where the time difference is more of a problem. But it is frankly not a major issue, if you are sitting within the EU and what you are looking to do is to over time build that capacity. To think that the EU 27, which by purchasing power is the second largest economic bloc on the globe, would allow its crucial financial centre to be outside its supervision and control, is fairly extraordinary. We would have to make an exceptional case to argue that that should happen. I do not think that any of that is recognised in the discussions that we constantly have about the solution that we would like.

That leads me to the issue of what is often called bespoke dynamic mutual recognition. We will have mechanisms where we recognise them as acceptable players and they recognise us as acceptable players, but when we dig beneath that we find that it requires fundamental change in the EU to achieve it. This is an organisation that lives in a rules-based society and has a legal framework structured through the ECJ, and all that would have to be reconfigured to meet the requirements of mutual recognition. New institutions would have to be created, staffed and funded, and the EU would fundamentally have to change how it operates. Why would it do that?

I am afraid that the very unsatisfactory third-country equivalence that is on offer—and I agree that it is very unsatisfactory—works perfectly well for the EU. Nobody in the UK is going to stop them coming to use London markets and say, “No, you can’t come here and have access, we’re going to take it away from you”. We need their business. It is perfectly acceptable for them to work on a basis whereby, essentially, on 29 days’ notice the European authorities can simply remove the business or set in place new requirements or new rules—and it works very well with that strategy of moving attractive pieces of business salami slice by salami slice back to continental Europe as the capacity develops and as it is capable. We delude ourselves in thinking that the EU is going to go through extraordinary contortions and change its fundamental way of working to accommodate a mutual recognition framework, even though we think that for us that would be ideal.

The same thing could be said of a free trade agreement. I would love to see a free trade agreement that contained services. I was at an event today at the City of London where the speaker said, “If the EU wishes to prove itself to be the leading free trader in the world, it would be an excellent opportunity to create the template to include financial services in a free trade agreement”. I just do not see that that is where the EU is at this moment in time. It is not on its priority list to identify itself as the leading free trader and start to create a framework that redefines global trade and WTO rules. If it does have that ambition, it is certainly not going to be doing it in the next 12 months or two years. That is the kind of thing that you might develop over five or 10 years. It would be long and tough and, obviously, it would have to be framed as an arrangement that has served not just an arrangement with the UK but with all the other various financial centres around the globe. So it is not something that is going to be immediately available, which drives us back to this very unsatisfactory arrangement of—I am now losing the terminology. What is the word that I want? It begins with “e”.