City of London

First, I want to congratulate my hon. Friend the Member for Selby (Mr. Grogan) on securing this debate. I would also like to thank him for his very kind remarks to me and I am sure that, when we win the next general election and form the next Government, he will be considered for a starring role. I am afraid that I cannot contribute to the debate on bow ties because I have never worn one, hand-tied or otherwise. However, I can confirm that I am a Guardian reader. The impact of the City of London on the UK economy is, of course, a highly topical issue and one that deserves a rich and informed debate. I think that we have had a rich and informed debate today, which has gone much wider than the original title of the debate, and I thank my hon. Friend for changing that original title to enable us to look at some of these wider facets. We have had contributions from several hon. Members. The hon. Member for Cities of London and Westminster (Mr. Field) concentrated on the hedge funds, because that is an area of expertise for him. The hon. Member for Southport (Dr. Pugh) touched on hedge funds, but he also looked at the wider economy and regulation. The hon. Member for Fareham (Mr. Hoban) touched on hedge funds, bonuses and the wider financial services sector. My hon. Friend the Member for Selby presented us with a 10-point plan—double the five-point plan. I hope to cover as many elements of that 10-point plan as I can, but of course time is limited. I will do my best. The hon. Member for Fareham made an important point when he asked what we are actually talking about when we talk about the City of London. Technically speaking, of course, the square mile and its environs, including the west end and Canary Wharf, form the hub of the major global financial centre, but I think that the term "City of London" is more often used as a metaphor for the wider UK financial services industry. That is what I have taken it to mean in the context of this debate. As my hon. Friend the Member for Selby said, the UK financial services industry plays a vital role in our economy. As I have a bit of time, I will start by laying down some facts and debunking a few myths about the City of London and its position that frequently, and perhaps unhelpfully, circulate. There is an impression that London is only about financial services. That, in turn, translates into concerns that the UK economy as a whole is unbalanced. It is easy to assume that London's economic output is completely dominated by finance, but the sector generated 17 per cent. of London's GDP in 2006, compared with a UK average contribution of 7.5 per cent. to regional GDP. That is interesting to note, particularly when one thinks of the remarks made by the hon. Member for Southport about the northern regions. Even regions better known for their expertise in advanced engineering and low-carbon technology have financial sector output nearing the national average. That includes Yorkshire and Humberside. Balance is a relative concept. The UK financial services industry as a whole, depending on the extent to which financial intermediation activity is measured, accounts for between 7.5 and just over 10 per cent. of national output. As a further comparison, the manufacturing sector alone accounts for about 14 per cent. of UK output. Of course we stress the financial services sector's importance to the UK economy, but comments about its dominance need to be considered in context. Many references were made to the importance of City competitiveness, which assumes that the UK financial services industry is only about London. The hon. Member for Fareham and I, who have neighbouring constituencies, know that there are many financial services sector industries outside the City. The reality is that London is home to just under one third of overall UK financial services employment; individual regions such as the north-west generate almost 10 per cent. Regions differ by sub-sector. London is strong on broking and fund management, the east of England on life insurance and south-western Scotland on life insurance and pensions. Our long-term objective—anybody's long-term objective—is fair, efficient, stable financial markets that support economic growth and prosperity. That means that there must be interaction between the financial services industry and the wider economy—another point that has been made—but achieving that optimal interaction is, of course, riddled with tensions and challenges. There is a criticism predating the current crisis about the detachment from the broader economy with which the City—sometimes "the City" is used as a synonym for the higher value-added or exotic elements—is seen to operate. On one level, that has to do with the complexity of the products, but on another, the sense of detachment cuts to the heart of economic morality. I cannot remember who made the point that some see it as encouraging a brain drain from other economically valuable sectors at the expense of local economies. A second tension is the apparent misalignment between risks borne by taxpayers in allowing the financial sector to grow and the actual benefits gained by those citizens from the sector's basic role in allocating capital and helping society manage risk. A third is the combined gravity of the Government's actions to tackle problems in individual financial institutions and restore system-wide stability. Questions have been raised about whether there is an optimum size for the UK financial sector relative to the wider economy. That, in turn, has generated a debate, mentioned by many hon. Members, about whether individual financial institutions have become too big to fail and, if so, what the appropriate regulatory response is. Having identified what the tensions are, I will try to answer the questions raised about how we propose to address them. The Banking Act 2009, the Turner review and the Treasury's wide-ranging White Paper "Reforming financial markets" have given us some pointers for where to go: more effective prudential regulation and supervision of firms, greater emphasis on monitoring and managing system-wide risks, greater confidence that the authorities are ready and able to deal with problems involving systemically important institutions and greater protection for the taxpayer when an institution fails. My hon. Friend the Member for Selby mentioned the Glass-Steagall Act. The only point that I would make is that banks of all sizes, not just institutions above a certain size, have encountered difficulties. I am not convinced that a cap on size would necessarily be an effective way of managing risks. I believe that looking at systemically important institutions and managing risks is a better approach. I absolutely agree with my hon. Friend about mutuals. I would; I am a Labour and Co-operative Member of Parliament. In "Reforming financial markets", we made the point clearly about the importance of the mutual sector, particularly in creating a diversity of institutions. There has been a tendency to concentrate on one type of institution, and diversity balances risk.