Financial Services

Lord Bilimoria Excerpts

Thursday 20th June 2013 Grand Committee

[Lord Bilimoria]

My Lords, in 2011, the financial and insurance services sector contributed more than £125 billion to the GVA of the UK economy. That is more than 9% of our total GVA. London itself accounted for 46% of the total GVA of the finance and insurance sector in 2009. The contribution to jobs approaches 4%. The other point is that trade in financial services contributed huge amount to the trade surplus that the UK has in services. The banking sector alone contributed £21 billion to UK tax receipts in corporation tax, income tax and national insurance. The OBR has shown that in 2007-08, the effective tax burden from corporate and income tax as a share of the GVA was the highest for the financial intermediaries. That is partly because of the relatively high profits that the sector makes compared to its contribution to GVA. Again, according to the OBR, in 2010-11 the financial sector accounted for around 7% of government receipts once the bank payroll tax and bank levy were included.

It is a huge sector. As the noble Baroness, Lady Goudie, said, the financial services sector accounts for 9.6% of GDP, but if you add the professional services—a further 4.9%—it makes up almost 15%. Relative to other countries, the financial services sector is very important for Britain. It is much higher than in the United States, where it is just over 7% of the economy, and it is more than double a percentage of our GDP compared with countries such as Japan, France and Germany.

Of course, we then come on to the question of whether we have a balanced economy. I thank the noble Lord, Lord Dykes, for initiating this really important debate at this time. The noble Lord, Lord Flight, mentioned the importance of the City of London. The joke is that the Lord Mayor of London—and the City—makes the money and the Mayor of London, Boris Johnson, spends the money. I do not think that this bizarre situation exists anywhere else in the world, where you have power and finance in a square mile of a huge city. Do we have the balance right? Do we have the relationship right? Does it need to change? I am not suggesting for one moment that it needs to, but I would be very interested in the Government’s opinion on this very important relationship.

The noble Lord, Lord Dykes, spoke about the European Union. One of the UK’s great advantages, particularly when it comes to financial services, is that we are not only at the top table of the European Union but we are seen by countries such as India as a gateway to Europe. As a founding chairman of the UK-India Business Council, I know how important this is for Indian companies. It is crucial that we stay at the top table of Europe, although I completely agree with the noble Lord, Lord Dykes, that any talk of a tax on financial transactions would be a disaster. We need to keep the balance right and thank God we do not belong to the euro.

Another advantage that London has is AIM. The Alternative Investment Market started in 1995 and is coming up to its 20th anniversary. It is a huge success but to this day, AIM shares are not allowed to be included in ISAs. I declare my interest as the senior independent director of the Booker Group. When I joined the board nearly six years ago we were an AIM company. We then graduated to the main list and are now a FTSE-250 company. I find the situation so difficult to understand. I believe the Chancellor said in the Autumn Statement that this would be looked into and that consultations would start in 2013. They still have not started and AIM shares still cannot be included in ISAs. So we are not really encouraging investment in these shares as much as we could. AIM is a crucial market in encouraging entrepreneurship and growth companies, not just for the UK but I know how attractive an AIM listing is even to companies from India. Perhaps the Minister could talk about the importance of AIM, in particular AIM in ISAs.

When I used to promote Britain when doing business with India, I would always speak with pride of our light-touch regulation and of what Margaret Thatcher did in the 1980s in opening up Britain and the City of London with the big bang, and how this gentlemen’s club and closed shop opened up into being a meritocracy, and the world’s greatest financial institutions flocked to London, and London has flourished. But later, after the financial crisis, my colleagues abroad would say, “Ah, what happened to your light-touch regulation?”. I would speak with pride about the independence of the Monetary Policy Committee, one of the best things that Gordon Brown did when he was Chancellor.

However, in 2007, when this country was hit by the subprime crisis that became the credit crunch, that became the financial crisis, that became the great recession, that turned into the sovereign debt crisis, that turned into the eurozone crisis, we realised the mistakes that we had made. The Treasury, Bank of England and the FSA, which in all the good times leading up to this crisis were a happy merry-go-round, suddenly turned into this great blame-go-round. I remember taking part in the debates on the Bill to nationalise Northern Rock in early 2008. Northern Rock went bust in September 2007 and was nationalised within six months; it cost £26 billion to bail out a company—the biggest bailout of any one company in the history of the world. We are now talking about RBS and Lloyds. It has now taken six years to come up with our new financial supervision regulations which will be much more robust. Perhaps the Minister could talk about that.

We get into problems and are attacked because of our tax system and companies not paying enough tax. Well, the GAAR—the anti-abuse regulations—have been brought in, but will not stop the Starbucks and Googles from what they are doing. This brings me to the point of perception and reality. I chaired a meeting of the Industry and Parliament Trust. Sadly, the public’s trust in business is 16%, and in government it is 17%. Shockingly, in a poll after the Olympics which asked, “Are you proud of Britain?”, the vast majority of the public were. When asked, “Are you proud of British business?”, only 4% were.

Earlier this week, I spoke at Oxford University for the reputation executive leadership programme at the Centre for Corporate Reputation in the Saïd Business School. It is clear there that the finance sector, and bankers in particular, have a terrible reputation at the moment. There is a lack of trust. On brands, which I spoke about, the financial sector, London and the City are a brand. What is a brand? I know about brands from my own business, Cobra Beer. A brand is what a brand does. The Harvard Business Review recently published a survey of 25,000 companies over 40 years. It identified the companies that were successful over a sustained period and called them miracle makers. They followed three principles: first, they followed “better before price”; secondly, “revenue before costs”; and thirdly, only those first two principles mattered. “Better before price” is all about quality. The City has fantastic quality, our financial sector has amazing quality and our professional services have the best of the best in the world.

“Revenue before costs” is about whether we are growing enough. Are the Government committed to growing the financial sector? I hope that with the arrival of the new Governor of the Bank of England—a Canadian, of which I am proud; it shows our openness as a country and an economy—not only will we target inflation but GDP growth. Will the Minister confirm that? It would promote growth in our financial sector.

I conclude that, while we may not have an empire any more, one of the legacies of the biggest empire that the world has ever known is the City of London and our great financial sector. It is one of the jewels in the Crown of our great country.