Financial Services

Lord Deighton Excerpts

Thursday 20th June 2013 Grand Committee

[The Commercial Secretary to the Treasury (Lord Deighton)]

My Lords, I thank my noble friend Lord Dykes for giving us an opportunity to discuss this important question. I think that some very interesting issues were raised. I am not sure that there is much disagreement over principle; on practice and implementation, there may be some more. Everyone gave their own measure of how important the financial services sector is to the UK economy, and the obvious implication of that is that we need to nourish and protect it, and to use it as an engine for our future growth; I think that everybody accepts that. My own numbers demonstrate that the financial services sector represents 10% of our gross domestic product, 12% of our tax revenue and half of our trade surplus, and employs over 1 million people—two-thirds of whom are outside London. It was very helpful to hear reference being made to the broader industries involved, such as the pensions industry. I was at a meeting recently with the Indian finance Minister, who asked us to help train India’s whole actuaries sector, such is the respect with which our pensions industry is regarded.

I am also very persuaded by the soft power arguments in support of our law and education expertise. Every time I travel with the aim of trying to bring money into the UK or help UK businesses overseas, there is a British law firm that is regarded as the leading light in virtually every territory. It is an extraordinarily good example of soft power. It is a similar case with our education system. The countries in which we are most effective are those where the current ruling elite were educated in the United Kingdom. What worries me is that when I look at the next generation, a smaller proportion have been educated here. However, it is a very powerful base from which to develop relationships that help us to win business.

As well as being a major employer, the role of the banking sector in particular as a provider of credit and financial services to businesses and consumers is critical. What we are really talking about in most of this discussion is how we can build a safe and secure system, repair the damage that was caused during the crisis, and put it on a sound footing in order to deal with all the issues.

I was slightly worried that the tone of the comments of the noble Lord, Lord Davies, meant that he was looking for a fight around regulation. I am not a fan of light regulation like my noble friend Lord Flight. I am a fan of very good regulation and this Government have been the leader in devising the architecture and the systems that are now being put in place to make this system better. We are absolutely in agreement. It is good regulation we want, not lots of bureaucracy, and that is a critical distinction to make. We all accept that the financial crisis was in part caused—certainly exacerbated—by certain practices within the banks and we have to get that corrected to ensure that it does not happen again and we do not leave taxpayers with the bill.

This is probably a good time to follow up on what my right honourable friend the Chancellor talked about in the Mansion House speech last night: the plan going forward for RBS and Lloyds in particular. There are three key objectives in the plan to restore them to good health: first, that they can play a strong role in their support of the economy; secondly, that any transactions that result in the sale of shares represent excellent value for money for the taxpayer; and, thirdly, that we will do whatever we can in restructuring and working with the banks to return them to private ownership. As the Chancellor announced, Lloyds is a lot closer so it is being prepared for a sale of shares to institutions; RBS is still some time away. With regard to the noble Lord’s suggestions, one of the restructuring options being looked at is the so-called good bank/bad bank split, which is pretty consistent with dividing it into a retail and wholesale bank. Certainly something that will be evaluated quite carefully is whether that is the better structural option.

My noble friend Lord Dykes referred to the Co-operative Bank and the surprising speed with which that problem was revealed. The bank is working very well with the regulators to ensure that its capital position is being addressed. It is being addressed without recourse to the public purse, which is a good step forward in terms of how these resolution processes take place. However, the Government continue to support mutual structures, building societies, et cetera, so that really is an important part of competition in the banking sector.

We have had quite a discussion about rebalancing, which is a very popular word that is applied to almost every aspect of our lives these days. In terms of making the banking sector less crucial to the UK economy, I am much more interested in growing other industries than in shrinking the banking sector just for the sake of it. It would be sensible to shrink it if it was too engaged in risky businesses, but I do not think our objective should be simply to reduce the scale of the banking business. The focus needs to be on ensuring that we have a healthy business. As was pointed out, Hong Kong has a bigger relative financial sector than we do. The focus needs to be on our broader economic strategy to help support other businesses, particularly those that can bring jobs and growth to the economy outside the south-east of England, where the financial services jobs are predominantly based.

One of the proactive things that we are trying to do as a Government to ensure that the financial services sector is protected is to ensure that the way in which we regulate and tax the market and all the infrastructure services we provide to the City of London continue to allow it to be the most effective, successful, dynamic financial sector in the world. That should be our objective. That is how we bring business in. That is why banks and other institutions want to come here. We should also support very clearly our own institutions as they develop their interests overseas; we have talked about insurance companies, for example, and how effective and successful they can be overseas. We have to get our financial regulation right. Finally, we have to incentivise banks to lend to the real economy, and other markets and forms of disintermediation have to work so that we can get key parts of the economy financed. I take on board the noble Lord’s comments about AIM. I accept that ISAs cannot be included for the time being. We will follow up with noble Lords when those proposals become clearer later in the year.

I note that the Government announced the creation of the Financial Services Trade and Investment Board—really as a promotion body to help push the City forward. Historically, we have generally left the City to its own devices because we thought it was so successful, but this is a body with some very good people from the Government involved to work through what we can do to support the industry and to make it successful around the world. My experience of working quite intensively with both the lord mayor and the mayor has been that this works quite well in tandem. We also, of course, have the Treasury as a third strand of the Government promoting the City. It had been suggested to me in the past that we should share the role by having both a day mayor and a night mayor—noble Lords can choose which one they would like to put in which category.

The board is up and running and it is doing very well. The kinds of things that are on its agenda are, for example, helping us to be the leading centre for the internationalisation of the renminbi and, talking of India, to help us to be well positioned as the rupee is eventually internationalised so that we can capture that business. My noble friend Lord Flight gave a very eloquent exposition of the UK investment management strategy, demonstrating that, in general, it is a good thing. We need, however, to be careful about how it is regulated—again, we are back to good regulation. The abolition of stamp duty reserve tax, which was a big step forward, was really aimed at making our industry the best one in the world. As an example of what followed, we have seen Santander choosing London as the base for its world-wide asset management business, which is a great step forward. In March, we also established an Islamic task force to try to establish the UK as the preferred choice for the Muslim world to invest in and do business with. These are the kind of new initiatives.

We have talked a lot about the EU and the interesting challenge around being the major financial centre in Europe but not a euro country, and some of the issues and challenges which that throws up. The general sense I got from this debate—which I certainly share—is that noble Lords do not read very much in the papers about when the UK has pushed legislation so that it actually gets the right outcome, not just for this country’s interests but in the market’s interest—and MiFID was a wonderful example of that. Of course, the EU-US free trade agreement should be another example; financial services will be a very big part of that.

We talked a little bit about tax. I agree that the GAAR—the anti-avoidance measure—may be limited. As we saw in Northern Ireland, however, with the G8 meeting, the only real way to address these tax issues is through international collaboration. I am delighted that our Government are taking a lead on tax and transparency and really setting the pace to help to improve those things. We have talked enough about Vickers and what is coming there.

On the comments on diversity, I could not agree more that there would be nothing healthier for some of these financial institutions than to have a broader and more diverse group of people working in them, particularly at the senior level. My own example is that I joined a US investment bank when I left university because I did not feel comfortable in a merchant bank because I had not been to public school. I can only imagine how a woman feels on the trading floor of a US investment bank, because it is a distinct male environment. It would benefit from that diversity. I am an absolute supporter of that. All my experience in professional life has demonstrated the enormous power that comes from that diversity.

I should address the financial transaction tax. The noble Lord is absolutely right. If applied equally around the world, it is certainly a runner, but the way that it is structured now it just will not work. I think that our case is being very effective in persuading countries who were on the fence to see that perhaps it may not be in the market’s interest.

In closing, we have heard how important the sector is, how we are reforming it, how we are making sure that it addresses the problems of the real economy, but also what an important sector it is for the future of this country. I appreciate the comments of noble Lords in what was a very useful and interesting debate.