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Lord Christopher: My Lords, when I had been in this House for a few weeks friends would ask, "What is it like in the House of Lords?" I did not want to tell too much of the truth, but I said that I understand that when you drown your whole past life flashes in front of you. This is one of those occasions when part of it flashes because the noble Lord, Lord Brooke, and I had a period when we were—I would like to say working together—as now, sitting across a room, but happily on this occasion we are on the same side. I warmly congratulate him on the debate and particularly on his contribution which we will all want to read and study later on.
I must also declare a modest interest. I am the chairman of TU Fund Managers Limited. Its history is not without relevance to this debate. It was founded in 1961 because the trade union movement did not trust the City an inch. It needed a long spoon and TU Fund Managers became that spoon. It also did not entirely trust itself because it made sure that it was owned by a charitable trust, so that no one could walk away with what we were able to produce. It has developed well. Its investors include members of the trade unions as well as Members of your Lordships' House—I certainly will not name them—and of the one down the road. It has been supported over the years.
There is no question about the importance of the City of London. I need not dwell on that. I am concerned that this is not widely understood. Indeed, British people are pretty ignorant about money, the management of money and what happens to it; and credit cards have made it worse. The children of one lady who works for me decided they wanted to go to Disney Land. She said: "How shall we pay?" and the youngest said: "Well, mummy, use your card in the wall like you usually do." That was her limited understanding of it, which at her age was all right. But there is a need for widespread education and co-operation between government and educational institutions to ensure that more is understood.
My anxiety is that the sheer success of the City in prevailing in future circumstances may lead to some complacency. That must be guarded against. We are seeing a huge shift in economic power around the world—Russia, India, where over the past 15 years the share of world output has gone up by 40 per cent, Brazil and China, where over the same period the share of world output has gone up 250 per cent. Goldman Sachs estimates that by 2020 China's GDP will be the same as the United States, and that by 2050 it will be ahead of the United States. By 2050 India will be the world's third largest economy and Brazil and Russia
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will equate with Japan. That is not a situation that we can ignore and we must take regular steps to prepare for it.
What will be the world's stock exchange system over that period? How and to what end will it evolve? Today we see the prenuptials of a possible marriage between the New York Stock Exchange and Euronext. The Borsa Italiana, the Italian stock market, could well make a ménage a trois. Where will that lead us all and what do we expect to be the outcome? That will have tied up the main exchanges of Paris, Brussels, Amsterdam, Lisbon and I think one of our minor markets as well. Where will it leave London, the Deutsche Bank and NASDAQ? I feel for Mrs Clara Furse, the chief executive of the LSE. She has played very hard to get over recent months—and would-be brides have lost good grooms this way before. Has she got it right? What should she do? President Chirac, typically, says that it should all be France and Germany, although the fact that Euronext is Dutch is perhaps a detail. But what are the long-term interests in this area? Who is offering any advice or thought? It is allegedly not a political issue—that is probably correct—but those who will be deciding these things should be aware, I suggest, of what certain courses of action would or could mean for the UK and for Europe. It is not just economics. As the noble Lord, Lord Brooke, and others have said, it is about regulation—and heaven forbid that we have the Sarbanes-Oxley regulations here.
Climate change was referred to, but not as I expected in the context in which I saw it. What will be the import of climate change for insurance and all the markets related to insurance? Will there be uninsurable risks? Will there still be people, as the noble Lord, Lord Brooke, said, who will insure anything? I sense a real need for a period of embracing a wide range of considerations with a view perhaps to seeing—the noble Lord, Lord Brooke, mentioned a whole list of interesting reports that are available—whether some sort of business plan for the City over the next 20 to 25 years could be developed.
I turn now to some current issues that call for attention. The noble Baroness, Lady Valentine, touched on some of the points. This relates to the United Kingdom tax regime and its impact on location decisions in funds management. While the UK has established itself as a premier global financial centre in Europe, if not the world, this has not been so in the fund management industry. Core asset management functions—research, portfolio management and so on—are well established in the UK, but as a domicile for funds we are losing out to Dublin and Luxembourg. In large measure this is down to unintended consequences of the tax rules.
A report by economic consultants Oxera, commissioned by the Investment Management Association, looked at these issues in detail and concluded:
"The UK has already missed out on a considerable proportion of the market for investment funds. Even if the management of the funds remains located onshore, the development of offshore
- centres has employment and revenue consequences for the UK. Luxembourg and, in particular, Dublin have seen substantial growth in activities associated with the support and servicing of funds, and have developed as 'centres of excellence' in these activities. Offshore fund domicile is therefore a matter that deserves close attention by the UK authorities".
That has manifested itself in a significant growth in both those countries as domiciles for funds at the expense of the UK. In 1994 Luxembourg managed €256 billion and in 2004 €1,106 billion, which is a growth of 332 per cent; in 1994 the UK managed €174 billion and in 2004 it was €486, which is a growth of 179 per cent; but Dublin, which in 1994 had only €13 billion, rose in 2004 to €434 billion, which is a growth of 3,238 per cent. We cannot ignore statistics of this nature. It is well documented that the UK has a number of tax provisions which have unnecessary, adverse and unintended consequences for both the industry and, I suggest, for the Government.
I shall mention one or two of these. The charging of SDRT, which is a stamp duty on fund units, is alleged to have caused some £13 billion of exchange traded funds to locate in Dublin, even where they are linked to UK indices. There is the charging of withholding tax on distributions by money market funds, even though the underlying instruments pay gross, which is alleged to have caused $250 billion of UK-managed institutional money market funds to locate in Dublin and Luxembourg. There is the definition of trading activities, which has made it impossible to locate hedge funds onshore. The basis for charging corporation tax on UK-domiciled funds of funds has made it inefficient for UK funds of funds to invest in offshore funds and has effectively prevented offshore funds being marketed to UK investors, despite the existence of the UCITS passport under the European directive.
There is the charging of VAT on fund management fees, which is alleged to have made it more efficient for a UK-based asset manager to manage an offshore fund than to manage one in the UK. I believe that there is likely to be some change to that before long. The delay in the follow-through of the Pension Fund Pooling Vehicle has caused that important new product area to domicile in Luxembourg and Ireland. Lastly, uncertainty in the bases for charging corporation tax on UK funds is alleged to make it difficult to make long-term product development decisions.
I want to comfort my noble friend by saying that I do not expect him to answer those points today—unless he can say, "We are going to put them all right tomorrow", in which case I will congratulate him very warmly. However, I hope that I have got across that the City is doing marvellously. But we must not rest on our laurels; we must ensure that both the Government and the City move forward so that, 25 years from now, when most of us will be gone, we will not have seen a huge move away to places such as China, India or, indeed, New York.
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Lord Hodgson of Astley Abbotts: My Lords, we are indeed fortunate to be holding this important debate today and I add my thanks to those that have already been given to my noble friend Lord Brooke of Sutton Mandeville. Before I go any further, I should declare a number of interests, all of which are on the register, but I especially draw the attention of the House to the fact that I am chairman of two entities regulated by the Financial Services Authority.
Like other noble Lords, I note the rich success of London stretching back over many years and surviving a number of quite extraordinary upheavals to the country: two world wars, the end of empire and, more recently, the emasculation of our country's manufacturing base. One may compare and contrast that with the two main rivals to London: New York, backed by the fantastic resources of that huge country, and Japan, whose manufacturing operations have had fantastic success since the Second World War. That serves only to underline the significance of the City's scale of achievement. The fact that it has been able not only to survive those upheavals but to strengthen and grow despite them owes much to its ability to react quickly and confidently to change.
However, as the noble Lord, Lord Christopher, has just warned us, complacency is omnipresent and we must not take our past successes for granted. I return straight away to the question of regulation. The growth in the volume of regulation is frequently remarked on in your Lordships' House, and the City has not been spared from that trend. That gives us cause for concern, because it is light-touch regulation that allows free market forces to flourish and has presided over some of the greatest growths in the City. To illustrate that, I cite an article written by John Plender written 20 years ago in volume 63 of the journal, International Affairs. He wrote:
"The aspirations of British financiers to play a grandiose role on the international stage have certainly met with more success than the similar aspirations of British politicians to play a bigger role than Britain's economic strength could support. Yet the reason for that post-imperial Indian summer reflects the fact that the United States chose, until recently, not to take advantage of its own economic strength to promote American financial institutions in the international sphere.
Instead, successive American administrations introduced regulations and restrictions whose effect was to drive US depositors and borrowers off shore. Dollars emigrated to London, where exchange controls did not prevent banks from doing non-sterling business. So thanks to this action by the United States, the City, which had lost its sterling empire, gained a dollar empire".
That was 20 years ago. More recently, during the past few years, the City has been the beneficiary of the rush to judgment by US legislators that led to the Sarbanes-Oxley regulations referred to by my noble friend Lord Brooke in his opening remarks, which have given London a further competitive advantage. That heavy-handedness by US Administrations must be a warning to us. Contrast the decision by Cecil Parkinson, when Secretary of State for Trade and Industry in 1983, to require the City to abandon fixed minimum commissions, which is an example of the deregulation and free market economics that have opened the way for the City to prosper.
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Initially, the present Labour Government seemed ready to take a surprisingly practical and common-sense approach. I applaud their decision to establish the Monetary Policy Committee of the Bank of England and give it responsibility for the detailed setting of interest rates. I wish that my party had done that. However, more recently, while the Government remain very keen to talk the deregulatory talk, they seem less ready to take the appropriate deregulatory action.
One illustration of the increase in regulation is the increasing burden of and on the Financial Services Authority. A short chronology of the FSA from its creation in 1997 shows an exponential increase in its workload and remit. By June 1998, it had assumed responsibility for banking supervision. In May 2000, it took over the role of the UK listing authority from the London Stock Exchange. In June 2000, it took over the responsibilities of the Building and Friendly Societies Commission, as well as the responsibility to prevent market abuse. In October 2004, it took on responsibility for mortgage regulation and, finally, in January 2005, it took on the regulation of general insurance business.
There is undoubtedly a benefit of there being only one regulator to oversee the financial services industry, but that rapid growth has led to criticism that the FSA is now overstretched and that some of its regulatory practices are inappropriate. Inter alia, that growth is reflected in the size of its budget. In 1999–2000, its budget was £158 million. In 2002–03, it reached £180 million. In 2006–07, it will be £276 million. There is not just the cost of funding the Financial Services Authority. There is also the internal cost for firms of complying with its regulations—men and women who have to work in compliance departments of financial service businesses. Many suggest that that is probably three times or more the cost of the external funding of the FSA. If that is right, and many academic commentators suggest that it is, we are now costing a short billion pounds a year through regulation by the Financial Services Authority. We need to keep an eye on that. We need to ensure that we are getting value for money from it.
A parallel concern is that the FSA is seen as being very closely linked to the Government and therefore vulnerable to what can best be described as political nudges. The Government are in danger of failing to distinguish risk from fraud. Risk that goes wrong is not necessarily fraud. It is vital that that distinction is maintained. We must not fall into the habit of tending to punish people who take risks. That is at the heart of our worries about codifying directors' duties that formed part of our debates on the Company Law Reform Bill. Risk taking is the bedrock of great business success. If it is stifled, the competitiveness of London as a financial centre will quickly follow suit.
An example of the Government's trend towards criminalisation is to be found in the Company Law Reform Bill, which has just left your Lordships' House. As a result of the takeover directive issued by the European Union, the Bill introduces a statutory framework for the Takeover Panel. A major part of
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that is uncontroversial, but there are areas where the Government have decided to go further than the requirements of the directive. For example, they have introduced a criminal offence for failure to comply with the panel's rules about bid documentation. This is quite unnecessary gold-plating; no other European Government have thought it necessary to provide a criminal offence in order for them to comply with exactly the same directive. Further, the Government have radically enlarged information gateways for the panel—information gateways are the requirement to collaborate with other bodies by passing information to them. As a result of this, the Takeover Panel may find itself acting as a proxy arm of a series of other government bodies.
In case noble Lords think I am exaggerating, I refer them to the Company Law Reform Bill, with which the Minister and I have a passing acquaintance. Schedule 2 lists the bodies with which the Takeover Panel must collaborate. It runs to six pages. Paragraph 34, of a total of 73, says that the Takeover Panel must pass information required under the Fair Trading Act, the Consumer Credit Act, the Estate Agents Act, two competition Acts, the Enterprise Act, the Control of Misleading Advertisements Regulations, and the Unfair Terms in Consumer Contracts Regulations. That is just one list in 73 paragraphs. In the debates on the subject, the noble Lord, Lord Sainsbury of Turville, and the Attorney-General, the noble and learned Lord, Lord Goldsmith, could not give us convincing arguments for criminalisation, and failed to see the damaging effect of such a trend.
The past success of the panel—it has been a huge success—has been its ability to engage the trust and respect of the City for its absolute independence, its absolute integrity and its absolute confidentiality. Aside from this creep towards criminalisation, the Government have also failed to implement a number of fiscal measures that would greatly increase the productivity of the City and encourage more people worldwide to use London as a basis for their businesses. Here I again follow the noble Lord, Lord Christopher, by talking about the failure to abolish stamp duty on shares. I quote now from a paper published by the Institute for Fiscal Studies, entitled, Stamp duty on shares and its effect on share prices, by Steve Bona in June 2004:
"Stamp duty is thus shown to depress share prices, particularly for firms whose shares are frequently traded. This may increase the cost of capital faced by firms, which in turn could have negative repercussions on investment. Stamp duty also distorts the signals that share prices send about the profitability of firms, as share prices are also affected by expectations of future turnover volumes and stamp duty rates. Our results show that these effects are real and measurable".
It is almost unbelievable that the City of London is the only one of the world's three major financial centres with a stamp duty on shares. Yet despite the weight of evidence against retaining it, the Government have persisted with a short-sighted viewpoint that is committed to hanging on to this out-dated tax. In his powerful speech at the second City of
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London biennial meeting on 13 December 2001, entitled, "The Increasing Impact of Stamp Duty on the UK Economy", Don Cruickshank, the then chairman of the London Stock Exchange, laid out the reason why reform is needed in this area, and the range of institutions backing such a change. It is a shame that the Chancellor has not yet found the time to listen to the argument. Alas, I fear he will not be prepared to do so, as he has often been deaf to reasoned arguments and instead preferred government by sound bite.
I invite the House to consider the sorry saga of the on-again, off-again operating and financial review that has dogged this Government since their gold-plating first glinted in the Westminster sun. All in all, after a promising start, the Government are showing dangerous signs of reverting to their old Labour command-and-control roots. If so, they will endanger the future of the City of London. At best, this Government's report card on the City reads, "could do better".
12.54 pm
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