The City Of London
October 14, 2009
Mr. Mark Field (Cities of London and Westminster) (Con): I congratulate the hon. Member for Selby (Mr. Grogan) on introducing this important debate. I shall focus mostly on hedge funds and alternative investment matters, which was the original title of the debate and a subject on which the hon. Gentleman focused in the latter part of his speech.
The hon. Gentleman gave us a quick tour d’horizon of the history of the City of London, and he was right to say that roughly 350,000 people work there every day. For the first time since censuses began in 1801 and certainly since the arrival of the railways, its residential population is beginning to increase, albeit incrementally. None the less, it is a place not only for work but, to a large extent, for rest and play.
I stress that the present lord mayor has firmly been making the case during his programme of overseas visits that the City is not simply about the banks. The banks may have been particularly hard hit in the past year or so, but other parts of the financial services sector have not suffered to the same extent. When seeking to deal with the banking sector, it is important to avoid having a negative impact on those other parts.
The lord mayor and Stuart Fraser, the leader of the City of London corporation and chairman of policy and resources, have sought to highlight the fact that, as well as the banking industry, insurance, communications, technology, legal, accounting and other related professional and business services industries have an essential role to play in stimulating economic recovery and growth. The hon. Member for Selby rightly pointed out, with great fairness, that the whole UK benefits greatly from a thriving financial services business; it may be based in London, but it has great strengths in other centres such as Manchester, Leeds, Edinburgh and Glasgow.
Mr. Spring: I know that my hon. Friend is aware of the fact, but because of the long-standing nature and history of the City of London, its livery companies and various guilds, as charitable foundations, are hugely focused on the broader community, not only in London but outside. They generously contribute to all parts of the United Kingdom in a most commendable way.
Mr. Field: That is an extremely good point. Some of the livery companies have strong connections with other areas; for instance, given the historical and traditional importance of steel, the Cutlers are strong in places such as Sheffield. The fact that a huge number of schools have received large sums from trusts set up, often centuries ago, by the livery companies bears witness to what my hon. Friend says, as does the fact that large tracts in Greater London and outside the square mile?places such as Epping forest, Hampstead heath, West Ham park and Queen’s park?are some of the finest open spaces, which are of great benefit to Londoners and those who live in the home counties.
As the hon. Member for Selby said, the financial services global competitiveness group report was published on 7 May. It called for greater co-ordination and strategy in the way in which the UK financial services industry promotes itself. I take on board his concern that too many City folk may have been involved, but it is fair to say, as he did, that although the City was regarded?certainly between 1914 and about 1986?very much as a club, it has become much more open, and there is now more social mobility in some areas than we could have dreamed of only 20 or 30 years ago. City professionals may therefore come from different walks of life than would have been the case a generation or so ago.
Since last year, the City of London corporation has been working to set up a new body with the aim of providing a single focus for promoting the financial services industry to a domestic and international audience. It will work alongside existing bodies in international finance, and Sir Stephen Wright plays an important role in that regard, working with the Mayor of London, who clearly has an interest in the issue. There has been some tremendous co-ordination under the auspices of the City of London corporation, with one eye very much on the future and the importance of our capital, alongside Beijing, which held the Olympics in 2008, and Rio de Janeiro in Brazil, which will be a big global capital in 2016.
As a starting point, a small steering group has been established, and it is anticipated that the new body will be launched and perhaps named later this year. It will be independent, practitioner-led, politically neutral and cross-sectoral. Above all, it will try to represent the financial services industry across the UK, not just in central London. The Government, particularly the Treasury and UK Trade and Investment, have been closely involved in the development of the initiative, which will form one of the most important elements of the City of London’s outlook in the years to come.
I want now to say a few words about hedge funds. In many ways, their rise and power represent one of the biggest changes to the global economy over the past half a century. Largely for that reason, there has been a demand, which predates the banking collapses of the past two years, for an alternative investment directive in Europe.
Hedge funds are predominantly limited liability partnerships, so they are exempted from much of the regulation that applies to investment banks and even mutual funds. As pools of highly mobile capital, they have fast developed a reputation for moving financial market mountains by anticipating future expectations. There is no doubt that they thrive on volatility, and the crux of the controversy that surrounds them is the degree to which they cause or affect fundamental shifts in financial markets.
As the hon. Member for Selby said, this relatively unpoliced, unsupervised and, until recent years, fairly low-profile sector of the financial services world is now firmly in the sights of the European Commission, as well as of Mr. Will Hutton of The Work Foundation. However, the Commission’s proposed directive to regulate hedge funds and the private equity sphere betrays, as my hon. Friend the Member for West Suffolk (Mr. Spring) said, a lack of understanding about the business’s workings.
Alternative investment funds have already accepted that the new regulatory climate means that they will be required to boost transparency, as well as to accept new controls on disclosure and, most likely, on clearing, settlement and custody. However, the draft directive goes a long way beyond that and may make it quite impractical for funds owned by non-EU entities, which make up a significant proportion of the funds operating in London, to distribute their products in the EU.
The combination of such an approach with other perceived regulatory and fiscal burdens may persuade hedge funds to relocate to other financial centres, such as Switzerland, or to return to the United States, with its much more mature market. Similarly, hedge funds that relocate may provide the critical mass for emerging financial centres such as the Gulf or the far east. Such an outcome would be in the interests of neither the UK and the City of London, nor the EU.
At a supranational level, the directive would diminish competition, and I entirely endorse what the hon. Member for Selby said, because competition is key. We will no doubt experience a big hue and cry about huge banking profits in the press in the next week or two, but the point is that competition has simply diminished and died away to a large extent. In fairness, I suspect that most of the huge profits that we will see this year will be an exception, and I hope that there will be new players in the market. We must remember, however, that regulation itself is the biggest barrier to allowing new, innovative companies into any new market. One concern is that a highly regulated market will have a very detrimental effect.
Dr. Pugh: The hon. Gentleman is putting forward the hypothesis that regulation invariably leads to capital flight. In a sense, that is making the case for no regulation whatever. However, there is clearly such a thing as a proper degree of regulation, which attracts capital; regulation is not necessarily negative in its effect on markets.
Mr. Field: If things are taken to an absurd level, one would have to agree. Clearly, there needs to be some regulation, not least to protect consumers. To return to the history of the City of London, I was joking with my hon. Friend the Member for West Suffolk earlier that we should look at the great scandals that took place in the Victorian era, when mines and railway promoters ripped off consumers. Clearly, that did nothing of value. There is a strong argument for saying that much of what should have given this country’s industry a competitive advantage was undermined because there was no proper regulation or sense of transparency in the City of London in that era, when transparency and regulation were very much in their infancy. It is at least valid to say that. Clearly, having an entirely laissez-faire approach does nobody any favours?indeed, it does not bring in crucial investment.
To return to my earlier point, the directive as currently drafted would, at a supranational level, diminish competition and restrict flows of liquidity into the single market. It would also be seen as protectionist at the very time when barriers need to be brought down, rather than erected. At a domestic level, I fear that it would significantly diminish London’s critical mass as a financial centre and reduce individual and corporate tax revenue. The hon. Member for Selby rightly said that the City of London has been a huge cash cow in the past, and one hopes that it will be one in the future.
Mr. Spring: This is an important point. Some of the countries that have perhaps been driving the ambition for further regulation have virtually no hedge fund activity. Does my hon. Friend agree that the success of the City of London and the diversity of financial services?I agree that financial services should be properly regulated, but that has not been the case in the past?are hugely important for the whole EU, which is diminishing in importance as trade flows and economic activity move eastwards? The success of the City is one anchor of our future prosperity, and we risk losing it at our peril.
Mr. Field: I entirely agree. That is an important point. Power is shifting eastwards to India and China. They have two and half billion people between them, and they will be the two big economic superpowers of our lifetimes?certainly by the middle of the century. That shift has undoubtedly been accelerated by recent events, and nothing would be more catastrophic for Europe?whether within the confines of the EU or as a time zone?to relinquish what should be and has been one of its traditional advantages. The importance that should be attached to the financial services business as a whole cannot be overstated, given the propensity of the 20 million or 30 million people a year who are added to the Chinese and Indian middle classes to save, which means that there will be a great reliance on what should be a great industry for us.
To the directive’s opponents, the European Commissioners’ attention on these issues seems to have been promoted all too often by an unholy alliance of continental bankers and politicians who are concerned in part to effect something of a power grab. Eighty per cent. of the hedge funds managed in Europe are accounted for by London, while fewer than 20 per cent. originate in Paris.
The plain truth is, as my hon. Friend the Member for West Suffolk pointed out in an intervention, that the asset management business has not been directly implicated in the global financial crisis, so one must ask why the EU is suddenly giving such priority to its regulation. Typically, hedge funds are small start-up businesses?a far cry from the large international banking institutions whose antics, in part, jeopardised the entire global financial system last autumn. Their offshore domicility often owes much to the need for simplicity in tax and regulation, as places such as the Cayman Islands are not beset by double taxation treaties and reclaim bureaucracy.
The impetus for a European directive derives from panic in response to the economic crisis, alongside a partisan vision of hedge funds and private equity as a wild west show of amoral speculators and asset-strippers. Even one or two people in the Labour party have been known to espouse such views. However, there has been no crisis of asset management. Unlike banks, hedge funds neither leveraged themselves to the hilt?of course, they lacked the balance sheets to do so even if they had been so inclined?nor ran down from adequate levels of liquidity. Indeed, those that have failed?several have?have not threatened the entire financial system.
In truth, one of the unsung successes of the Financial Services Authority?I hope that I am not too far out of line with my party’s views on this matter?has been its ability to keep the hedge funds sector ticking along relatively nicely in recent years. It cannot make sense for a European directive to insist on onerous hedge fund registration requirements by giving Commission officials the right of veto over their investment strategies. That will simply result in the drying up of investment from outside the EU to hedge funds here, which is, as my hon. Friend the Member for West Suffolk pointed out, against not only UK interests but French and German interests and those of the other 24 nations of the EU.
Mark made the following interventions in the debate as well:
Mr. Mark Field (Cities of London and Westminster) (Con): Without talking too much about ties, I have to admit that I, too, am a clip-on man.
On social usefulness, surely one of the biggest problems that we face, and one reason for the catastrophe in financial services, is the sub-prime market. From the mid-1990s, in the United States of America, it was those who thought there must be more social usefulness in relation to financial services who tried to persuade a huge group of people who should not have had financial products to go that way. Much as Lord Turner may have concerns about social usefulness, when politicians or those with an interest in politics try to impose social usefulness in this area, it can often go awry.
Mr. Mark Field: Although broadly I very much agree with that point and I think that in time the failure of Lehman Brothers will not be seen as the great mistake that conventional wisdom suggests it is, is not the problem the nature of the guarantee? Whereas all of us would accept, I think, that depositors should have their interests guaranteed?there is now an implicit if not an explicit guarantee that all deposits will be guaranteed by the Government?the difficulty that arose in relation to many of the banks that have had problems in the past 12 months is that bond holders also had that guarantee. The extension of that guarantee is relevant in relation to the idea of institutions being too big to fail. The issue is not simply size, but the nature of the guarantees that any Government give.
Mr. Grogan: I accept that point absolutely. The problem will not go away. I was referring to whether we should divide the banking system so that the public are less at risk from failures in investment banking, essentially, and so that there are fewer links into the retail banking sector. Let us consider, for example, the failure of the big insurance firm AIG in the United States. Basically, most people in that firm were involved in conventional insurance. It was perhaps 100 people in one unit, involved in more speculative activity, who brought down the whole firm and put at risk the world economy.
Mr. Field: There are two points. Clearly, we already have a tax of stamp duty on general share transactions. Many of the markets?the urodoll or urodollar market in this country for example?came about simply because of American taxes. Does the hon. Gentleman not recognise that having a range of taxes, particularly on a regional rather than global basis, might see potentially risky transactions being moved to some of the more wild-west elements of the financial services world? Historically, going down that tax route has not tended to work.
Mr. Grogan: I agree with the hon. Gentleman in so far as I think that such a tax would have to be done internationally. Other measures for banking structures and so on could be done domestically, but all those who advocate such a tax, from the IMF to Lord Turner, recognise that it would have to be done internationally.
Mr. Mark Field: I praise Crossrail to a certain extent, although there are no votes in it for me. Most of my residents, particularly those in Mayfair and the Barbican, are not particularly happy with the idea. The hon. Gentleman will know that the Crossrail Act 2008 is now in force, and that it would be relatively straightforward now that the planning consents and so on are in place. Indeed, more than £1.2 billion has already been spent on compulsory purchase and demolition. Should the hon. Gentleman regularly visit the bookshops at the top of Shaftesbury avenue, towards Tottenham Court Road tube station, he will know that the area is already the site of some Crossrail works.
I hope that it is not necessarily either/or. However, insofar as there are plans to limit the amount of investment in the area, Crossrail is now well ahead of the game, and it will make an enormous difference to the whole of the United Kingdom and not only that part of central London in which it is located.
Mr. Grogan: When I am promoted after the next election, perhaps to the role of Economic Secretary to the Treasury, I shall carefully take account of the points made by the hon. Gentleman. If I was drawing up a list, I would put them in the following order: high-speed rail, Crossrail and Heathrow.
Mr. Mark Field: I have a suggestion; in many ways, it is a "back of the envelope" suggestion. It is that unless the senior directors of a bank can explain, within two sides of A4, a product that they are trying to create, such a product should not be marketed by that bank.
Mr. Hoban: My hon. Friend makes a good suggestion. There was a disconnect between the directors and the boys in the engine room: each seemed to think that the other knew what they were doing. I just wonder if that disconnect was not a cause of the crisis.
Mr. Mark Field: I agree. I hope that Northern Rock goes down the mutual route, and that the mutuality of building societies will come back into vogue. Does the Minister not recognise, however, that ever stronger regulation is an impediment to the diversity to which she refers?
Sarah McCarthy-Fry: It is about getting the balance right and recognising that just because an organisation is managed mutually, that does not mean that the consumer assumes less risk. If consumers invest in an institution, they are entitled to the protection of regulation, whether the institution is a mutual organisation or a plc. It is about getting the balance right.