Financial Services

Lord Dykes Excerpts

Thursday 20th June 2013 Grand Committee

Asked by

[Lord Dykes]

To ask Her Majesty’s Government what measures they are taking to support the contribution of the United Kingdom financial services sector to the economy.

[Lord Dykes]

My Lords, I very much welcome this debate and thank the Minister for being in attendance to answer the important points that I hope will be aired. Inevitably, I must deliberately leave out some items. There is so much to cover. The Minister and others in the debate will be delighted to learn, I am sure, that I am not going to try to cover everything. It would be a great mistake to do so.

I begin by congratulating the Minister and his colleagues on the agreement on the markets in financial instruments directive that was reached in the EU the day before yesterday. As the FT said yesterday, this was a good day for Britain in Europe,

“protecting the City of London against discrimination—proof that Britain’s interests are best served when the government sits at Europe’s top table rather than outside the room”.

That is an important lesson for the future.

The Parnassian beauty of this debate is that everybody more or less has the same time—nine minutes for every speaker, I think—as a result of our modest but high-quality list, including my old friend from the City, the noble Lord, Lord Flight. We changed the phraseology of the Question because I did not want the old Question concerning the City of London to obscure the obvious reality that there are many financial institutions elsewhere in the UK, from the West End of London to Edinburgh and other great cities. That is a fact of decentralisation, which is also a good thing.

The overall background is also the vital factor of our membership of the European Union, and I am inevitably going to cover some points about Europe. Membership of the EU is crucial for Britain and I think that the madness of leaving is dawning more and more on sensible people, even some of the more old-fashioned of our colleagues represented by an uncomfortably large group of rather right-wing Tory MPs in the other place. The latest House of Commons Foreign Affairs Select Committee report spells it out loud and clear, although it wisely steers clear of the immaturities implicit in hysterical referendumitis. I welcome the elegant but firm rap on the knuckles for inexperienced British Ministers set out in paragraphs 26, 27 and 28 of the committee’s conclusions and recommendations. I also welcome the bulk, but not all, of the evidence given to the committee by Business for New Europe, which sets out a solid enthusiasm for our continuing membership of the EU for practical reasons.

I declare an interest as a former member of the Stock Exchange and of a large institutional stockbroking firm in the City for many years, and other City interests. Those of us who are proud of the good side of the City of London and its immense contribution to Britain over the years, including assisting the general public in myriad ways with practical financial instruments, were heartened by the flattering words in January of the Swedish Minister for Finance, Anders Borg, who said that for Sweden,

“keeping Britain in the EU is a very high priority. We have a big banking sector and a lot of work goes through the City of London. If the UK leaves the EU it could create a lot of problems”.

A balance is also needed between excessive adulation of the City, which is wrong, and unfair criticism. I hope that my own references to this in the debate that I opened in Grand Committee on 22 April on the dangers of UK isolation in Europe, at col. GC 290, in the last but two paragraphs at the end of my speech, caught that balance. We also need to grasp the fact that the other member states have some hesitations on the bad or toxic side of City financial activities, which came to their monstrous conclusion in 2007-08 and onwards.

Indeed, I detect that some of the right-wing comics that masquerade as newspapers in this country are less keen to say that brilliantly talented spivs who are good at fund management speculation and excessive risk-taking using other people’s money here will go abroad if we deny them lavish and unjustified bonuses or force them—horror of horrors—actually to pay conventional UK income taxes. If they insist, say I, let them go abroad.

Coming back to the positive aspects of our financial services sector, we can indeed be proud of what has been achieved here over the years on a secular growth basis. As we know all too vividly, this country usually has a large and uncomfortable physical trade deficit with most other advanced countries in the world with the possible exception, depending on the latest figures, of the United States, which is also a rather inefficient and heavy importer. Just as Germany is immensely proud of its industry—particularly its motor vehicle industry, which is one of the wonders of the world—we admire our own financial services sector for what it achieves in a non-visible surplus for us in direct and indirect investments, insurance, shipping and, of course, banking and fund management forms.

When government is called on to “protect” a valuable sector, I trust it will always be in the sense of upholding the single market rather than seeking artificial propping-up exercises, which would not be justified. Happily, our present coalition Government have always upheld the principles of transparency, free and open markets—with a genuine single market—and robust competition. The Prime Minister has moved away, thankfully, from calls for what seemed to be special unilateral privileges, as in the bizarre antics of December 2011 in Brussels, to asserting rightly the equality of conditions philosophy. I think that will now persist.

At this stage, I would particularly welcome it if my noble friend the Minister could bring us up to date on government thinking on the eurozone’s proposed financial transactions tax and our most recent responses, since it seems to have stalled somewhat as a formal proposal among some inner core member states. Even if talks resumed soon, I doubt whether it could commence before 2015-16 at the earliest. I assume meanwhile that the City of London Corporation is maintaining its strong opposition, although many foreigners are puzzled when, after all, we have a pretty onerous stamp duty system on quoted investments and property purchases in this country.

However, we remain highly integrated with financial markets within other EU members. I believe we account for three-quarters of foreign exchange trading in Europe, some 85% of all hedge fund assets and well over two-thirds of all interest rate derivatives, despite the fallout from the world crisis in the previous decade—a crisis which, we need to remember, started in the USA, apart from the Northern Rock debacle of the previous year. Just as official circles in the UK quite rightly hammer home the primordial need for the single market to develop more deeply in every sphere so that, EU- wide, consumers of goods and services can benefit from equal conditions in the theoretically perfect market set-up, so the other member states are justified in insisting that Britain remains a good member of the club and accepts freely agreed EU-wide legislation for market conformity in all spheres. The general public interest surely demands this in commonsense terms.

The mid-May ECOFIN meeting in Brussels highlighted some of these imperatives for, as usual, a raft of new Commission objectives in draft legislation were discussed to gain some progress in complex fields. I have already mentioned the markets in financial instruments provision; my thanks again to the Minister for what he has achieved there. There is the latest text of the market abuse directive, the mortgage credit directive, directive IV on capital requirements and the legislation drawn up to deal with money laundering. The amended text of the savings tax agreement with third countries and the Council draft for the EU savings directive were also discussed briefly at that meeting. If my noble friend the Minister has time today to refer to some of these, I will be grateful. I will understand if he is unable to cover them all.

In other large areas, does my noble friend have time to refer to the Government’s responses to the need to return RBS and the other taxpayers’ emergency stake in Lloyds Bank Group to the private sector and to shareholders, how the other leading banks are faring in returning to giving adequate support to UK industry and commerce and, if he has time, what position the Government take on the Co-op Bank crisis, which is a sad development? Finally, if he can deal even briefly with official attitudes to the latest developments in the attempts by the LSE and other leading bourses in Europe to achieve synergy and modernisation, I would be most grateful.

Perhaps it would be reasonable at the current state of play to ponder the future in a wider sense. I believe that the impact and success of the British financial services industry will continue, both as a great national asset and as a solid contributor to the overall strength and cohesion of the Union’s single market. What is disturbing, however, is the way in which subtle and sometimes not-so-subtle elements are creeping into this overall scenario which, particularly at times of severe socio-economic austerity in many parts of the EU, are in danger of increasing irredentism and fissiparous pulls among traditionally friendly allies within the 28, weakening the single market philosophy. We need to acknowledge that the others really and profoundly want us to stay as members, but seemingly not at the price of conceding to us anything other than the normative and steady moderations of the Union’s acquis, which for them is constant reform, and most definitely not the old-fashioned notion of reform that has been expressed in some parts of the other place in recent months.

It is never a weakness in framing sensible policies to appraise what the others think of us. They were not impressed at us being the odd man out so often in recent times. They were contemptuous when we failed to join them in the eurozone when it first started, and of course we were slow to offer them real support when their crisis over a smallish number of weak member states began in 2008. That is now water under the bridge and it is time for us to work together. We are taking the lead, I hope, in pursuing the tax evasion problem, particularly with France, Germany, Italy and Spain, which will also oblige us to deal at long last with our many island tax havens from the old Empire.

Finally, I would just add a reminder. Professor Pauline Schnapper, the leader in British studies at the Sorbonne Nouvelle University, reminded us recently that the EU has actually been evolving in a rather British direction over the past 15 years, showing greater pragmatism and empiricism alongside enlargement. That should help us even more to shun isolationism in the coming years. As I believe the euro will remain and in the future will be an even stronger international currency, I hope that one day we will regain our nerve and even join the eurozone.