City of London

There needs to be proportionate regulation of the sector, which recognises the risks and responds to them. My hon. Friend the Member for Cities of London and Westminster talked about the Financial Services Authority. The FSA has been very effective in regulating hedge funds, because the regulation is proportionate to the risk. The directive, as it is currently drafted, is not proportionate to the risk. It is a rather muddled document. Furthermore, because of the lack of due process in putting it together, the costs of the directive could potentially outweigh its benefits. We want proportionate regulation that reflects the risk that these funds pose, not regulation simply for the sake of it. Let me speak briefly about the wider financial services sector. Clearly, the actions of certain banks and financial institutions created the financial crisis that we see today. There was a failure to recognise the risk that certain financial institutions took on through the way that mortgages were sliced and diced and repackaged into collaterised debt obligations, or CDOs squared, tripled or even cubed. There were complex transactions that meant that there was a loss of understanding between the product that people bought and the underlying mortgage. There was also a failure to understand the risk attached to these instruments. I do not know what other Members read on their holiday, but "Fool's Gold" by Gillian Tett is a book on the subject that is well worth reading. She sets out in it how little some banks understood about these instruments when taking them on. Their creators—JP Morgan—actually took on very few of them and came through the financial crisis in good shape.