City of London

I congratulate the hon. Member for Selby (Mr. Grogan) on securing the debate and keeping us on our toes by leaving us marginally uncertain as to its exact title of the debate. I thank him, too, for sharing his 10-point plan with us. Why he is not Chancellor of the Exchequer I do not know. I assume it is because he is far too cheerful. Down this end of the Chamber, we have a caucus of northerners—or we did have when the hon. Member for Pendle (Mr. Prentice) was here—but none the less we have no doubt about the importance of the City and the financial sector to the UK and world economies, the British balance of payments and Government revenues. It is critical. We also have no doubt that that is built around a degree of integrity, probity and good regulation, connectivity with the rest of the world, length of experience and downright financial skill. We can, I suppose, praise that without necessarily overestimating it. I sometimes get very big brochures sent to me by the City of London, telling me how it pretty well accounts for most of the UK economy. I am never quite certain whether the information includes all businesses with a head office in London as belonging in the City, or whether it estimates appropriately the substantial economic contribution made by London outside the City. It is also worth mentioning in passing that certain cities, such as Edinburgh, have proportionately—though not in size—a bigger financial sector even than London's. We should not, however, underestimate the importance of the City. Look at what goes wrong when things go wrong there. We suffer in our constituencies and across the land. There has been a long and heated debate in the north and throughout the country about the relationship of the City to the wider economy, and in particular the relationship between manufacturing industry and commerce and the City, manufacturing generally being something rather grim up north and City life being something rather sophisticated down south. A refrain that has gone on for decades—as long as I have been thinking about the economy and politics—is criticism of the City for a degree of short-termism and for being attracted by property rather than production, services rather than sustainability. This is a slightly artificial debate, and all sorts of qualifications are needed, as well as recognition of the positive role that the City has played in the economy as a whole. However, the picture for most of our lifetimes has been of the growth of the services and financial sector in the economy and the decline of the manufacturing sector, even below EU levels, and even given our acceptance of the fact that we all have a problem resisting the modern challenge of China, India and the like. Coupled with that has been the rise of new financial giants. We have mentioned some of those: hedge funds, private equity and venture capitalists within and without the banking sector. It is easy to see it, sometimes, in terms of a further tilt away from the long-term investment in which the mutuals engaged and long-term investment in general. I know that there are some pretty solid defences of current City fashion, and the hon. Member for Cities of London and Westminster (Mr. Field) did a good job of presenting such defences. I, too, have read the handouts from private equity houses and organisations that emphasise that they are not a bunch of shameless asset-strippers, as they are sometimes characterised by people who do not qualify their remarks sufficiently, and that in fact they re-engineer companies, reconfigure them and in some cases provide more employment and certainly greater profits. I know too—it is a perfectly valid point that has been made several times in the debate—that they are not responsible for the credit crunch. That was the result of very traditional high street banks, which formerly nobody was agin, behaving rather badly and uncharacteristically, in a way that suggested more than a flirtation with casino-type finance. The hedge funds, on the other hand, have had very limited interest and involvement in the mortgage market. However, it has to be said—it was mentioned, I think, by the hon. Members for Selby and for Cities of London and Westminster—that hedge funds did play a part in accentuating financial panic because they are such big players and deal in bank shares, often at critical moments and often with money borrowed from the banks. If we want to avoid the evils that have beset us recently—the frauds, the Madoff affair, which was essentially a hedge fund affair, the foolishness that has characterised patterns of investment, and the instability that has been all too prevalent recently—we cannot duck the problem of regulating the new financial giants. We cannot back away from that. We must consider the possibility that something needs to be done if not because those organisations are responsible for the past but because, as the hon. Member for Selby said, there might be problems in the future, particularly given the fact that these giants are moving huge amounts of money around the globe and they are relatively opaque financially. They are big players that add enormously to liquidity, which is often said in praise of them. However, they engage in aggressive market behaviour while, ultimately, bearing few of the social costs. When we talk about hedge funds, we have to put it on the record that 50 per cent. of them, for whatever reason, are situated offshore in places such as the Cayman Islands. I am not saying that they are in league with the pirates of the Caribbean, but we would prefer them to take their fair share of social responsibility, particularly as they have a powerful social effect. I recognise that many operate onshore in the USA and the UK, but they should be prepared to pay up in tax terms for the advantage of working in a well regulated economy. That said, it also has to be pointed out that last year, according to my figures, hedge funds alone paid £3.2 billion in tax revenue, which the UK can scarcely do without at the moment. I do not want to be generally damning because if we look into what a hedge fund is supposed to be, we would find that the definition is a little more fluid than one might expect. There are different kinds of beast under the label of hedge funds. The French do not use the words hedge fund; they use the expression "fond spéculatif" because not all such funds hedge. The case for a degree of regulation beyond self-policing is quite strong, but the extent of that regulation is the issue. Fundamentally, we all agree that we want to secure the economic advantages that the funds bring, but we also want to ensure that the social benefits are provided, too. As the hon. Member for West Suffolk (Mr. Spring) said, it is a matter of balance and getting that balance right. I put it on the record that it is not a straightforward equation—that the more regulation that we have, the more capital flight we will get. Mention was made of the Indian financial market, which is regulated much more restrictively than the British markets at the moment, but is still attracting significant capital and investment. There is a debate to be had and Mr. Rasmussen, if nothing else, has started it. He has the Mayor of London going, and there are all sorts of views about whether or not this is a Euro-plot against the British hedge fund industry, which accounts for 80 per cent. of the European total. Nevertheless, the debate is well worth having and should be conducted in a relatively mature way. The insurance companies are having another sensible debate about solvency. To some extent, there has not been a great deal of discussion about the type or quality of debate. In this place, we have talked more about who is to regulate, and not how people are to regulate. The bottom line for me as a northern MP, whatever regulation or fiscal policy we have, is that we must move away from short-termism, or make regulation much tougher. Moreover, we must move the economy in the direction of sustainability in financial and economic terms and not encourage an environment of the fast buck. I shall close with a little story that encapsulates the debate. I hope that the hon. Member for Cities of London and Westminster will sympathise with the plight of the company that I describe. I represent a seaside town which for decades had a profitable sweet factory, making a product called Chewits. I did not eat it much myself, but it sold well at the seaside. I went to see the company when it was in process of retooling; it was profitable and doing rather well. It employed people who had to operate at a relatively skilled level and it provided a good mix of employment. It was then bought by a City company. The machinery was sent to eastern Europe, the skilled work force was sacked, the job mix in the town was worsened, the carbon footprint of production was increased and the land was sold for housing. The UK economy did not benefit, but profit was made in the City. That may be the operation of a free market, but I question, in those circumstances, whether it is wise.