City of London

I congratulate the hon. Member for Selby (Mr. Grogan) on securing the debate, even though it had a changing title. As my hon. Friend the Member for Cities of London and Westminster (Mr. Field) and the hon. Member for Southport (Dr. Pugh) said, it was until relatively recently entitled "The Impact of the Hedge Funds on the UK Economy" and we had all geared up for that. None the less, the broadening of the title gives us the opportunity to make some more wide-ranging remarks about the City. I will, if I may, be critical of the hon. Member for Selby, who used lazy shorthand in the title of the debate. He will have offended people who work in Canary Wharf or in the west end, and people who see themselves as part of the financial services sector but who are not located in the City. He has also forgotten about the people in Whitely, just outside my constituency boundary, who work for Zurich Financial Services, and the 300 people who work in the Lloyds Bank call centre in my constituency. They are all part of the financial services sector, as indeed are the staff of banks and insurance companies and the stockbrokers who are dotted across the whole of the UK. When we talk about the size of the financial services sector and the contribution it makes to the UK economy, we should remember that it is a sector that is based across the whole country and not just in the Square Mile. We must be careful to remember that because it represents a means by which the financial services sector can start to re-establish trust with people by reminding them that it is an integral part of our lives. The debate about hedge funds and the activities of the people in the City and the insurers remind us that they have an impact on our lives. Today, we have talked about hedge funds in a bit of a bubble, but who are the investors in hedge funds? It is not just high net worth individuals; it is our pension funds. Two thirds of the investment in hedge funds come from pension funds, including that of the Church of England. There is therefore a direct relationship between the returns that they make in those funds and the benefits that we enjoy in our pensions. We cannot view the City in isolation, and nor should the City or the financial services centre think of itself in isolation from the rest of the economy. The hon. Member for Selby had a 10-point plan. I will not go through each of the 10 points, but I want to pick up on a couple. Bonuses, for example, are an important issue for people to understand. Over the course of the past two years, the taxpayer has supported the banking system through the stakes taken in RBS or Lloyds, which we supported, and the indirect guarantees and indemnities that are on offer to the financial services sector. The current stability of the banking system is a consequence of taxpayers' support, not just here but across the world. That support was given to help its balance sheet and not its bonuses, and banks must remember that as they come into the bonus round over the course of the next few months. The bonuses are a product of taxpayers' support and they should not lose sight of that. On the hedge fund directive, which both the hon. Gentleman and my hon. Friend the Member for Cities of London and Westminster discussed, we must remember that it is not just about hedge funds. It is the alternative investment fund management directive and it affects hedge funds, private equity and endowments. The Wellcome Foundation and the endowment of Oxford university are affected by it, as well as the funds in Germany that are used to finance wind farm investment. Most Latvians find the finance for their houses through funds and they will be affected by the measure, too. What is happening across Europe is that people who thought carelessly that the measure was just about those nasty big hedge funds are now realising that it has much greater impact. Why are hedge funds attractive? It is because people want to invest in them and they want the returns from them. However, I think that some people feel under pressure from hedge funds, whose activist nature creates and promotes change in financial markets and economies. In some economies, people are reluctant to accept that change is a good thing in that way. Some people think that there is a zero-sum game here for Europe—that by introducing tougher regulation on hedge funds, Europe will see business moving from London to Frankfurt or Paris. However, it will not move to Frankfurt or Paris. That business will move outside the European Union: it will go to Singapore, Geneva or New York. The regulatory drive in Europe risks making Europe uncompetitive and forcing jobs and business not out of London, but out of Europe. That is an argument that we need to make, not just here in Westminster but in Brussels and in other European capitals. There is another lesson that we should draw from the hedge fund directive. When the directive was being drawn up, the Government failed to recognise the wider impact that it would have. I think that Lord Myners is rectifying that, but it would have been far better if the Government had been engaged much earlier while the directive was being thought about, rather than just waiting until it was published. Can the Minister tell us if the Chancellor of the Exchequer spoke to the Commission the week before the directive was published, because I understand that the Chancellor's French and German counterparts did? It would be helpful to know if the Chancellor was able to put a word in to stop the directive from being published. It seems that the French and German Finance Ministers were rather more successful in getting their views known.