London: Financial Centre
Lord Brooke of Sutton Mandeville (Conservative)
rose to call attention to the importance of London as a world financial centre; and to move for Papers.
My Lords, four and a half years ago in your Lordships' House, the noble Lord, Lord Levene of Portsoken, in the City of London, initiated a debate to call attention to the place of the financial services industry in the economy of the United Kingdom, and to move for Papers. His kindness in so doing enabled me to make my maiden speech in uncontroversial terms. Since then, he has remained chairman of IFSL, the former British Invisibles—an activity frivolously stigmatised by Nigel Dennis in Cards of Identity as a form of profiteering conducted by ghosts—and has become chairman of Lloyds. Prior to the earlier debate, he had been a most distinguished public servant, a most enterprising exporter in visible trades, a chairman of the Docklands Light Railway, chairman and chief executive of Canary Wharf and a most notable Lord Mayor of London in the final year of the old millennium. He is the epitome of the spirit of the City of London and it is most happy that he is going to be speaking here again today.
When I made that maiden speech, I embroidered it with fripperies—a medieval City trade which, alas, never made it to becoming a livery company—but none of that is worth reviving within a five-year period. What I shall repeat is my declaration of interest in being a former name at Lloyds, now seven years in run-off, and the remark once made to me by a foreign banker working in the City, when I was the City's MP, that what distinguished London from all other centres was that somewhere in London there would always be someone who would do a deal on any risk, and that that was not so elsewhere.
What illumines today's subject as an index is the depth and richness of source literature about it. I cite the Corporation of London's research publications, including the recent work on the bond markets and its regular City News Monitor; the briefing from the British Bankers' Association, which also published in March The Importance to the UK Economy of a Successful Financial Sector, which it commissioned from Lombard Street Associates; the Greater London Authority, which timorously produced briefing yesterday afternoon; London First's report, a little earlier in the year, written by the Centre for Business and Economic Research, entitled Keeping the UK Competitive, which I suspect may be the harbinger of the appearance of the noble Baroness, Lady Valentine, in today's speakers list; and, of course, the most recent searchlight on these matters from the Treasury, whose spokesman in your Lordships' House is again, most happily, responding to the debate.
Financial services in London: Global opportunities and challenges, published at the time of the Budget, marks the debut of the Economic Secretary, Mr Balls, on financial services matters, accompanied by his first relevant interview, which was in the Financial Times on
It is an index of London's past as a trading and financial centre—all my observations include Canary Wharf as well as the City—which has so much to do with the traditional accumulation of experience and expertise, that the City has been the richest and busiest archaeological site in Europe in the past quarter of a century, with a quarter of its land space still without deep basementing, and is thus prodigal in its still-buried social treasure. But the City's tradition has always been, mutatis mutandis, global. The Jews were mulcted out of Cheapside in the early 13th century by royal taxation, but were back by the end of it. They were replaced by the Italians. Anyone in your Lordships' House who has read Maurice Druon's great six-novel series, Les Rois Maudits, about Europe in the Middle Ages will recall the Lombard role in London both as bankers and as international intelligence agents. There was a major enclosed German enclave around what is now Cannon Street station deriving from the Hanseatic League. The names of merchant banks in 20th-century London, before they were subsumed after Big Bang into larger groupings, were redolent of inward immigration, whether from the Continent or Scandinavia, during the previous 200 years.
How do the statistical data back London's present claims? Of the 347 authorised banks located in the UK a year ago, 264 were branches or subsidiaries of foreign banks—the largest number of foreign banks of any financial centre—and more than half of the UK's banking-sector assets are held by foreign banks. We are the largest source of cross-border bank lending, with 20 per cent of the global total, and an even larger recipient of cross-border bank lending, with 23 per cent of that same total. Around half of European investment-banking activity is conducted in London. Five of the 16 largest banks in the world, by tier-one capital, are from the UK, and, of the UK's top 12 companies in the DTI's 2003 value-added scoreboard of wealth-creating companies, five were banks. In niche markets, we have 36 to 43 per cent—depending on one's source—of the world's over-the-counter derivatives traded, 70 per cent of the Eurobonds traded, 90 per cent of non-ferrous metals traded and 50 per cent of the world's shipping brokerage. Forty-six per cent of Eurex trading turnover in 2005 was based in the UK. Fund management, a lead shared with New York, comprised £3,000 billion of assets in London in 2005. Three-quarters of European-based hedge fund assets at the end of 2005 were managed out of London. London is the world's largest international insurance market. In international legal services, we again share the lead with New York.
Perhaps the best global encapsulation of our position is contained in the Globalisation and World Cities Study Group and Network data by Taylor and Walker. Their measure is based on 46 global service firms, with a marking ranging from zero for no presence in a financial centre to three for having their headquarters there. The maximum score—46 times 3—is thus 138. New York scores just over 100; London is just below. Paris is third at around 70. Hong Kong, Tokyo, Los Angeles and Singapore are at or above 60. Frankfurt, Milan, Sydney, Brussels, San Francisco, Washington and Madrid are at or above 50. Toronto is above 40. That ladder, although very rough and ready, underlines the domination of London and New York.
London's achievements are the fruit and product of our past. How healthy is the continuing present? The financial sector has been the fastest-growing in the economy since 1992, just as—to avoid a charge of south-eastern bias—Edinburgh has been one of the swiftest-growing cities in the UK on the back of financial services. The financial sector is growing at more than double the rate of the economy at large, and its productivity is growing at more than three times the national economic figure. London's productivity as a whole is about a quarter ahead of the rest of the economy.
I should add that there are paradoxes and apparent inconsistencies in London's overall performance beyond the financial sector, but that can be dealt with on another day. However that may be, in output terms total financial exports grew from £5.4 billion in 1993 to £10.1 billion in 1997, or by 86 per cent over four years, and from 1997 to 2004 by 76 per cent over those seven years to £17.8 billion. I am not seeking to make a political point with those numbers, but simply remark that although the absolute growth remains remarkable, the relative growth is slowing down. Overall, however, the financial services surplus and net investment income, taken together, cover most of the deficit in invisible trade that amounts to almost 5 per cent of GDP. They are crucial to our overall national economic health.
Before concluding on the potential policy contribution to success reinforcement, I want to say a brief specific word on emerging markets. Inflows of external finance to emerging markets have risen from $200 billion in 2002 to reach $550 billion in 2004, and are likely to have increased further in 2005. Asia is the largest destination, followed by central and eastern Europe, Latin America and the Middle East. Despite the spotlight on Africa, sub-Saharan Africa, apart from South Africa, remains sadly peripheral. The UK is a major source of external finance for emerging markets, with a 17 per cent share of international bank finance on a global basis, as well as a 13 per cent share of portfolio investment, making us second only to New York.
With New York we are the most important destinations for foreign listings of companies from emerging markets, on the London and New York stock exchanges. Substantial growth opportunities remain, as only 6 per cent of global inflows of portfolio investment and international bank lending are to emerging markets. Given the time, I will not include the statistics for the outward direction.
As for policy contributions, I shall also leave judgment of the FSA to others. The Corporation of London is broadly approving, but the authority is not without its critics elsewhere. My observations in this category of comment will be addressed, in alphabetical rather than priority order, to global warming; inflation; regulation, especially from Brussels; skills; and transport, these last two being encompassed by the imminent and threatening comprehensive spending review.
On global warming, it is worth saying that in trading terms the £2 billion fall in the trade surplus in financial services between 2004 and 2005 was mainly due to insurance payouts as a result of Hurricane Katrina. Closer to home, I remind your Lordships' House that when the Thames Barrier was opened on a bipartisan basis in 1982 it was expected that it would be used once every three years, whereas it is now being used seven times each year—a 21-fold increase in less than a quarter of a century. To put Hurricane Katrina in perspective, if the barrier ever failed we would be writing a cheque for £36 billion.
On inflation, I simply state that the London cost of living has risen by more than 5 per cent in the past year against a national rate of 1.8 per cent. I remark neutrally that this information, which has emerged from the Mayor of London's office, does not appear to refer to the 15 per cent compound growth in his own precept since the mayoralty was set up in the millennium year.
On regulation, despite recognising that the price of liberty is eternal vigilance, I take comfort from Mr Balls's interview with the Financial Times last month when he said that nothing should be done to risk our light-touch, risk-based regulatory regime. He went on, incidentally, to say that if control of the London Stock Exchange were to change hands, Her Majesty's Government would want to satisfy themselves that any owner's plans and any implications for the way it was regulated met the test of being what is best for the City as a financial centre in the long term. I declare a personal interest in that Senator Sarbanes is one of my oldest friends, but I have the impression that Sarbanes-Oxley has helped London more than New York.
On skills, I have to declare an interest at the margin as pro-chancellor of the University of London. When I was an MP there was more higher education in my constituency than in any other in the UK. London Higher, the sector's umbrella body, has recently published massive and impressive data on higher education's contribution to the London economy. But the best indices of its future contribution—and that of further education—are, first, that 1.5 million adults in London have low or intermediate skills and, secondly, that when unemployment is rising elsewhere, new vacancies in the City rose 58 per cent between the last quarter of 2005 and the first quarter of 2006, and have overtaken the supply of new candidates. It would be sad if growth were held back by that becoming a continuing phenomenon.
On transport, I refer to the speech of the noble Lord, Lord Levene, in 2001 when he asked, semi-rhetorically, whether we had to wait four years for the upgrading of the Waterloo and City Line. We now know the answer to that question. The two crucial lines are Crossrail and the extension to the East London Line, if Thameslink is fated to the Waterloo and City Line experience. The East London Line will presumably be a beneficiary of the Olympics. As to Crossrail, which joins up with the East London Line at Whitechapel, it will reduce the time from Ealing Broadway to Liverpool Street from almost 40 minutes to 20, and from Heathrow to Canary Wharf from 70 minutes to just over 40. Those are real gains in productivity.
A final idiosyncratic analogy: in 1577, Sir Francis Drake, whom some might describe as a self-employed pirate, circumnavigated the world in the "Golden Hind" with a crew of 76 and 18 guns. When he returned to London laden with treasure, the Queen, who had taken a private equity interest in the voyage, topsliced the treasure to give Sir Francis £10,000 in 1577 sterling. She then repaid the entire royal debt and still had £42,000 over to invest in the Levant Company. Put another way, the noble Lord, Lord Skidelsky, tells me that in 1930 economists calculated that if the entire treasure had instead been invested at 3 per cent compound, it would by 1930 have exceeded the entire national wealth of the whole country. Describing the piracy more properly as enterprise, our financial services are a national treasure and we should cherish, protect and sustain them. I beg to move for Papers.
Lord Brennan (Labour)
My Lords, the remarkable statistical analysis which the noble Lord, Lord Brooke, has just given us of the functioning of London as a financial centre amply justifies his conclusion that it is a critical part of our national and economic life.
It is trite to say that Britain is a trading nation, but because it is we are eternally adaptable. The past 40 or 50 years have resulted in adaptation in the field of financial services that has taken us to the leading position just described. It is therefore entirely appropriate for this issue once again to occupy our attention, and the noble Lord is to be commended for the debate.
I propose to examine briefly those characteristics of the London financial world which attract business to it, and to consider how we can best advance the interests of London internationally as against domestic issues and regulations.
I extract four issues from the City of London's analysis of the matters that give it its competitive advantage: first, its regulatory environment; secondly, its access to international financial markets; thirdly, the availability of a business infrastructure; and, lastly, a fair and just business environment. Within those four, we find the inevitable tension between some required measure of regulation and an appropriate amount of flexibility to allow the market to develop.
I propose to examine whether internationally those aspects of our competitiveness are being reasonably protected and can be better advanced. First, on the European Union, the majority of the countries of Europe have no significant financial markets of the like of London. We are talking about London, Frankfurt, perhaps Paris, and one or two others. It is extremely important that in our dealings with Europe, especially the enlarged Europe, we do not allow our national interest to be subjected to a one-size-fits-all approach that accommodates smaller countries and smaller markets, which inevitably in those countries will give rise to a governmental desire to protect them in European negotiations.
I would like to review recent events with that caution in mind. First, there is the financial services action plan. I have three preliminary considerations for your Lordships. First, it was a major regulatory programme, with 39 of the 42 issues eventually dealt with; and for that we must say that it was a reasonable effort in bureaucratic efficiency. There are two problems arising from that point. First, there is the cost benefit. I am told by those in the field that fully implementing all of those 39 issues would cost hundreds of millions of euros across the European market. What is the cost benefit of such an exercise? In particular, if we in this country are to consider implementation in full measure, what is the cost benefit to us? The second consideration on the FSAP is that it was not sufficiently directed at users as against the people in the market themselves. I am concerned that we should not regard this plan as being the end of European analysis of what we need in the financial markets. It was a means of progressing matters over a period of years and, thus far, it is enough.
I want to make three points about European legislation. I congratulate Commissioner McCreevy on telling us that if he finds that legislation in Europe is not working, he will seek to amend it or withdraw it. If he does that, it will be a remarkable achievement. Secondly, in Britain we would be against—as would most of Europe—a single, high-profile, Brussels-based regulator. That would produce delay, compromise and inadequate sensitivity to our market in particular. So we want the minimum legislation in Europe. The future with regard to the FSAP, which as I said has reached its adequate end point at the moment, is that there will be a review by 2009 and there are no present plans for a second such plan. The Commission's White Paper on the plan, generally speaking, coincides with the Government's conclusion.
I will conclude on Europe by proclaiming British pragmatism. We must not allow bureaucratic legislation to overtake our pragmatic market approach. The best that we should hope for are three things: common concepts generally accepted in the markets; the enforcement of fundamental principle; and supervisory co-operation. I find it difficult to understand what is meant by "supervisory convergence". Those three things will enable us to maintain our pragmatism and appropriate flexibility.
The second international issue I want to raise is that of London in the world markets. Although I have taken Europe first, those within Europe who look at the matter objectively must appreciate that London is not just our gateway to the world, it is theirs as well to a large extent. Regulation by Europe should never forget that important fact. I congratulate the authorities and planning agencies in London on what they are doing—we will probably hear later about London First—and the City of London in particular. The list of visits which the noble Lord read out from the present Lord Mayor is quite phenomenal; we should take from that the very important emphasis on China and Asia. We should be concentrating on those sectors of international business in terms of attracting investment, savings and funding.
Secondly, I am particularly concerned that the Government give UK trade and investment not only support but push. For those of us who travel the world on business, there is a real concern about the level of connection between British business and the business sectors of the countries that we visit. Historically, the embassy—in particular the commercial attaché, the trade functionary—provided a bridge. In many countries, that is no longer the position. UK Trade and Investment exercises a separate function, Partnerships UK another. Is it efficient? It requires really careful analysis, in particular about the support that they should be giving to London around the world.
The last issue concerns the role of the Government. I congratulate our Chancellor on one particular feature of his activity. Wherever he goes in the world, he pushes Britain's financial interests. He does so regularly in Washington and at G8 meetings and recently demanded open competition in Europe. That is extremely important. Support by the Chancellor and the Government will assist London to protect and advance its present position.
On the future internationally, in the Budget in March the Chancellor announced a high-level group designed to examine and make proposals about the future of London as a financial centre. We eagerly await the group's results. It has a feature that I want to develop more generally. In the advancement of London as a financial centre around the world, it seems entirely appropriate most of the time that those like the noble Lord, Lord Levene, with the expertise to advance its interests, should at least advise UK Government negotiators and representatives and I see no reason why, on the appropriate occasion, they should not form part of a trade delegation on important questions. I think that that accords with the Chancellor's present view.
My final proposal may appear academic at first sight, but it is not so intended. When the financial services action plan began and the director general, Alexander Schaub, began its work, there was real concern in the City that Europe might finish up driving us rather than us leading them. That has been successfully avoided, but in the future there is a real need for London's financial sector to be seen always to be at the cutting edge. I invite those in the City to consider setting up a centre for financial standards and corporate governance based in London and directed towards our own country's requirements and those of Europe but, more particularly, towards the interests of international trade. It would have three functions: first, to review and monitor what is going on at the moment; secondly, to negotiate improvements with governments and regulators; and, thirdly, to examine any new legislative proposals. That would put us at the cutting edge.
One statistic which struck me most about London as a financial centre was that it produces 1.4 million jobs. That is a phenomenal sector of our employment. Lastly, it contributes almost 5 per cent of surplus and net investment income to our gross domestic product. That demands that government and Parliament should give it regular support and encouragement.
Lord McNally (Leader, House of Lords; Liberal Democrat)
My Lords, it is always a great pleasure for me to follow the noble Lord, Lord Brooke, in any debate. We first got to know each other particularly well 25 years ago when we had to leave the platform at an NUS conference because of the hostility of our audience, and we had some time in the green room to get to know each other. It is worth reflecting that a large number of our hosts that day are now members of Her Majesty's Government.
It is also a pleasure to anticipate the speech of my noble friend Lady Hamwee. She is a member of the Greater London Assembly, formerly a chair and now vice-chair of the Assembly, and has been termed by the London Evening Standard "the Mayor's watchdog"—a marriage made in heaven if ever there was one.
I well realise that my own reputation is not that of a City slicker, so I should perhaps explain my intervention in the debate today. Up to 2004 and for the previous 11 years, I worked as the external public affairs adviser to the Policy and Resources Committee of the City of London Corporation. In those 11 years, I served 11 Lord Mayors—one of whom, the noble Lord, Lord Levene, will be speaking later—four town clerks, three policy and resources chairmen and two directors of public relations.
I started the job in 1993 with two prejudices. My background was that of a former Member of Parliament for a north-west of England constituency. Like many MPs from north of the M25, I had the prejudice that London gobbled up a disproportionate amount of public investment. I remember that in those days in the other place I had a mantra about the money being spent on the M25, the Jubilee Line, Terminal 4 and the Channel Tunnel. It all seemed to be coming to London and it was unfair. It was an "us and them" attitude, which, I fear, has not entirely gone from the other end of this building.
My second prejudice was about the City of London Corporation itself. I saw it as an anachronism of pantomime pomp and embedded privilege out of keeping with 20th-century Britain. I hasten to say that that was in 1993 before I had experience of another body with a democratic deficit and a penchant for dressing up. But, by the time I finished my stint, I had changed my view on both counts. The City of London Corporation remains an anachronism but it is one that works. It is one of those British accidents of history that we find ourselves with a sector-specific local authority which has become a proper representative of the most important and dynamic sector of our economy. It has done so on the basis of being a very efficient local authority, a good neighbour to the other London boroughs and an effective focal point for lobbying on behalf of its stakeholders both in Whitehall and in Brussels, based on some very high quality research about London, which helps to make its case.
As well as having respect for the corporation and its work, I have also changed my view about the relationship between London and the rest of the country. We will hear many facts and figures today from people with far more authority than me. I shall quote from one of those excellent research papers, to which I referred, produced by the City of London about wholesale financial services. It states:
"London is the location for over two thirds of the EU's foreign exchange and derivative markets—markets in which the EU is world leader. It also has 42 per cent of the total EU share trading, including three quarters of EU share trading in foreign company listings. London leads the EU's hedge fund, pension fund and insurance fund markets".
It also has over a quarter of the EU insurance premium market. These figures and the other statistics we will hear today mean that it is not by accident that London has become a genuine leader in a clutch of services which become ever more important in our globalised world economy. I recently heard the head of one of the leading international banks say:
"When a company wants to do business in north America it may go to New York. When it wants to do business in Asia, it may go to Tokyo or Hong Kong. But if it wants to do business with the world it comes to London".
Yet the facts are that London has created a pre-eminence in financial services which, as we have heard, underpins hundreds of thousands—if not millions—of jobs. That is why today's debate is so important. It is vital that we address the issues needed to maintain London's pre-eminence as a world financial centre as a matter not of London interest but of national interest. A prosperous and successful Britain needs a prosperous and successful London. And a prosperous and successful London needs a prosperous and successful financial services sector.
To make that happen needs constant attention to a Rubik cube of issues by a variety of agencies. Government have to ensure a continuing balance between regulation and flexibility. We take to heart what the noble Lord, Lord Brennan, said about the need for pragmatism. We need regulation to protect probity, for a reputation that is lost is hard to regain, as some of the accountancy firms have found to their cost. But we need flexibility to encourage the entrepreneurship which has given the City global leadership.
To take up the point made by the noble Lord, Lord Brennan, I welcome the establishment of a City of London office in Brussels, backed by a stakeholders' steering group. It is vital that London retains its role as Europe's financial capital. It is important that we remain at the heart of the decision-making to ensure that European regulation underpins rather than undermines London's strength.
I mentioned the need for the right physical and social environment. I commend the report published by London First, Keeping the UK Competitive. I attended a very good briefing by London First earlier this week. I promise the noble Baroness, Lady Valentine, that I will not steal her speech. Indeed, I very much look forward to it. I was very impressed by the report's emphasis on the need for investment in transport and education, and I look forward to hearing the remarks of the noble Baroness.
I also commend the initiatives taken in the City, often encouraged by the City of London Corporation, of companies offering mentoring and other educational support to make use of the talent on London's doorstep. I have some concerns, which I cannot go into today, but I am worried that the Olympics and their financing will turn into a blame game rather than getting it right and committing to success. Let us make no mistake, if the Olympics are a failure in terms of project delivery, that would bring damage and disaster of national proportions.
I am worried that Crossrail continues to be supported in the most ambiguous way by government. There is a need for a realistic assessment of the kind of Crossrail project that can be delivered, and then some real commitment from the Treasury. My other concern is that the Treasury continues to play a game of poker with London about long-term projects, keeping its cards close to the chest and never actually revealing how much it is willing to give in real support.
If we are going to accept London's case for light-touch regulation, an onus falls on the City itself. In its briefing, the British Bankers Association gave the warning that over-regulation would,
"undermine the economy's future growth if the performance of the financial sector were to be hobbled by unduly onerous taxation and regulatory controls, if Britain's reputation for economic and financial stability were to be damaged in any way, or if the City of London were to lose its attractions relative to their potential international financial centres".
But such a plea for freedom carries responsibilities. A sector that says that it needs vast public expenditure on transport and other infrastructure cannot avoid making a fair contribution through taxation. A sector that thrives on social stability and the attractions of a well educated workforce cannot exist simply as an island of prosperity amid surrounding social deprivation. A sector that relies on a reputation for probity and security must play a full part in society's battles against common enemies of organised crime and terrorism.
A couple of years ago there was criticism that the professions were not co-operating in the fight against money-laundering and organised crime as they could—and it would be interesting to hear an update from the Minister on that. At a personal level, the drug that destroys your son's or daughter's life, the terrorist bomb that kills your best friend or the world crisis that sends your pension fund into freefall might all have been aided and abetted by the ever-so-respectable accountant with whom you play golf or the lawyer whom you see every morning on the 7.45 to Cannon Street.
The noble Lord, Lord Brennan, rightly emphasised that part of the City's strength is in the rule of law. The case for zero tolerance of corrupt and illegal practices extends beyond the personal; unless we are willing to tackle the corrupt and illegal practices in financial services, in our professions and trading practices, we will always be playing catch-up with the criminal and terrorist fraternities who co-operate with each other and know how to use all the benefits of globalisation to their own evil ends.
"My word is my bond" used to be the motto of the City of London. It may no longer be fit for purpose in today's more complicated world, but London's reputation for probity and fair dealing, underpinned by a law that is respected and efficiently policed, is still our greatest asset and one that it is in the greatest interests of us all to sustain.
Baroness Valentine (Crossbench)
My Lords, I am grateful to the noble Lord, Lord Brooke, for introducing this important debate. It could not be more timely or relevant and raises issues with which I deal daily in my role as chief executive of London First.
The financial and business services sector is the most successful part of the UK economy. Forty per cent of the UK's export growth from 2000 to 2004 has come from London, and the majority of that from this sector. London is one of only three truly global financial centres, along with New York and Tokyo. The predicted European competition from Paris and Frankfurt has come to naught; London remains the top destination for European investment and the location of choice for European headquarters. But this competitive edge cannot be taken for granted; the Asian economies are strengthening at an impressive speed and the rest of Europe and America are not resting on their laurels, either. If the UK is to remain a global player, the competitiveness of the financial sector must be protected and promoted and some very real threats must be addressed.
London can rise to meet these challenges, but only if we clearly understand what they are. Decisions must be based on sound and continuous dialogue between the financial institutions at the sharp end of wealth creation and the public decision makers who can ensure that London's competitive edge is sustained, nurtured and promoted.
I shall therefore concentrate on why that dialogue is so important, and the issues it must deal with. These are of two kinds: those where we are in a strong position which we must safeguard, and those where we must do better. Our tax and regulatory regimes fall into the first category; they currently have the edge over our competitors, but we are walking a fine line. Any change to either regime endangers our competitiveness. Furthermore, tightened immigration laws could have an unintended impact on our ability to continue to attract the brightest and best from around the world.
We must do better on transport infrastructure. The transport system is already overstretched and certainly cannot support the projected level of growth. Above all, we need an unequivocal commitment to build Crossrail as soon as possible—even now, we are looking at an earliest date of 2016—not just as a transport project, but as an investment in increased productivity and the future success of the economy.
Before dealing with these issues in more detail, however, I shall make the point that investment in London supports the prosperity of the entire UK, and draw attention to London's undoubted strengths. It used to be said that what was good for General Motors was good for the US. It is now true that what is good for London is good for the UK. London's contribution to the rest of the UK is substantial on many fronts. It makes a net contribution to UK public finances. Recent estimates put this contribution at up to £18 billion in 2003–04. In addition, recent research undertaken by London First shows that London's relationship with the other regions of the UK is increasingly collaborative. Its businesses bring an income from the rest of the world, which generates demand and supports jobs in the rest of the country. It attracts younger people and develops their skills, some of whom move away in their thirties and forties, taking their skills and spending power with them.
There are some obvious reasons why London attracts these individuals and companies. First, it is perfectly located in terms of geography and time zone. English remains the language of business. Secondly, London has a large, diverse and highly skilled workforce. This talent pool is not only specialised, it is also familiar with many business cultures and languages. London has been voted the best European city for access to qualified staff for the past 15 years. Thirdly, London also has an array of world-class support services, such as advertising, market research, accountancy, law and world-class universities. Finally, our regulation of global investors is, on the whole, well developed and balanced. The Financial Services Authority is a highly recognised brand, perceived as an international benchmark. The openness of the FSA and its willingness to engage constructively with industry practitioners has been a key factor in its success to date.
However, we cannot take any of these advantages for granted. The world is changing and we must anticipate and meet the challenges. The financial services in London have themselves changed dramatically in the past two decades. Financial institutions no longer reside only in the square mile. Canary Wharf has become the location for a thriving financial community, and hedge fund, private equity and corporate finance firms inhabit the West End. Global investment banks have replaced UK institutions, meaning that those deciding on future investment in the London office may no longer reside locally. The governance structures that surround these institutions have also changed; the FSA and the Greater London Authority, to name but two.
In essence, the "old school ties" that bound the members of the financial community to the Bank of England and the Treasury, are no more. As the first-ever female executive at Barings, I might be expected to be rather pleased to witness the demise of the old boys' network, but there are some elements of this relationship which are an unfortunate loss.
An effective dialogue between the financial community and, in particular, the Treasury is essential. The creation of the Chancellor's task force is a positive step, but the remit of that group should go beyond promotion and also look at what the UK Government can do to improve the product. Going forward, there need to be new ways for the financial community to talk to the public sector about ongoing competitiveness. Conversations need to include the City of London, the Greater London Authority and, indeed, local government representatives. Given the immediacy of the threat presented by the emerging Asian economies, this dialogue needs to be speedy and proactive.
From my discussions with members of the financial community, I am well aware of the main concerns that would emerge from the business side in that debate. As I have mentioned, the UK is seen as broadly competitive in terms of its regulatory and tax regimes, but this competitive edge is fragile. According to Cushman & Wakefield's European Cities Monitor, London's ranking, in terms of the climate that the Government create for business, has slipped from second to sixth place in the past three years. Business is increasingly footloose, and companies will quickly migrate to more favourable regimes, as can be seen by the speed with which financial institutions have chosen to outsource significant aspects of their business to India in recent years—and that by no means involves just low-skill jobs.
While we remain broadly competitive with the rest of Europe on taxation, the gap with the euro-zone is closing. In 1993, the tax burden as a percentage of GDP was 8 per cent lower than Europe, whereas by last year that advantage had fallen to 3 per cent. This reduced competitive advantage makes the kind of proactive dialogue I referred to earlier more vital. I shall give two examples: while some might argue that retrospective tax is retrospectively fair, it also disproportionately reduces business trust in government. Secondly, foreign domicile tax likewise may look attractive to a Chancellor looking for new sources of revenue, but risks a greater, unintended impact. On regulation, while we appear to be winning out to the US at present because of Sarbanes-Oxley, we should remember that we are simultaneously introducing the well intended Company Law Reform Bill, which might also have unforeseen consequences.
The relative ease of immigration has made it possible to import key skills, as well as to attract global headquarters. We must be vigilant that the current débâcle at the Home Office causing tightening-up of immigration practices does not have an unfortunate impact on the flexibility of leading firms to attract those with the best financial skills from anywhere in the world.
These issues can be addressed through appropriate regulation and legislation, but the biggest threat to London's competitiveness is its overcrowded transport system, which needs straightforward investment. London's population is set to grow by some 700,000 in the next decade, with around half a million more jobs. The transport system is already overstretched and certainly cannot support these projected levels of growth. By 2011, all the main Tube arteries will technically be overcrowded. Some of us might say that they are already. There is only one genuine solution to this problem and that, as I have already stated, is Crossrail. It will provide 40 per cent of the extra transport capacity that is needed in the next decade. It will link Heathrow to all the key financial centres from the West End through the square mile to Canary Wharf and is a must if London is to sustain and build on its position as the leading global financial centre.
By promoting the Crossrail Bill, the Government are now taking the project forward as quickly as possible. But we need a commitment to funding of the order of £1 billion a year in the three years covered by the Government's upcoming spending review before we can have confidence that this project is really going to happen within the necessary timescale. It would be criminal for the Government to risk the success of the most productive and global part of the economy, indeed the success of the whole UK economy, for the sake of this vital scheme.
To conclude, London's position as a global financial centre is facing fierce international competition. This is only to be expected, but it must also be anticipated, and we need to take urgent action. First, we must reinvigorate a frank and positive discussion between government and business. That dialogue must ensure that our tax, regulatory and immigration regimes continue to support rather than frustrate this sector. Secondly, we must establish where London is doing poorly and work out how to "fix it". The Chancellor's task force should focus on action, the best evidence of which would be active sponsorship of the Crossrail project. The Government need to take bold, long-term investment decisions, and make the necessary commitments now. To risk the competitiveness of this sector is to risk not only the ongoing success of London but of the UK economy as a whole.
Lord Christopher (Labour)
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 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.
Lord Hodgson of Astley Abbotts (Shadow Minister, Home Affairs, Shadow Minister, Trade & Industry; Conservative)
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.
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 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 London biennial meeting on
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".
Baroness Hamwee (Spokesperson in the Lords (Regional & Local Government), Office of the Deputy Prime Minister; Liberal Democrat)
My Lords, I, too, thank the noble Lord, Lord Brooke, whose championing of London has been well known over many years. He and others have declared quite detailed interests. My main interest to declare is that of being a Londoner, albeit an adopted one, and, as my noble friend has said, a Member of the London Assembly, which does not mean that I speak for the Mayor. I was surprised to receive the briefing that other noble Lords received yesterday, and even more surprised to find that it was very much in accord with the notes that I had just written. It would have saved me a little time had I had it a few minutes beforehand.
Others have focused on the precise terms of the debate—the importance of London as a world financial centre. I found that I simply took that as a given. I also take as a given the fact that London contributes to the UK as a whole, so that its success is crucial to the UK's success. One of London's exports to the rest of the UK is funds. I am aware that this is not a universal view and that there is a good deal of jealousy outside London of our success—a feeling that Government and the media are far too London-centric, and that we whinge on in a way in which we should not. I think that speeches today have made it abundantly clear that the reasons for being so concerned to preserve and support London's success are very well founded.
I shall make three obvious points—sometimes one wants to state the obvious—which are interlinked. The first is that London in this context is more than the City as defined by the square mile, Docklands and the West End. It is the whole of our capital city. Secondly, we need always to be alert to what makes London successful now and in the future, given what other cities and other nations offer. Thirdly, the people who will ensure London's success are attracted not only by the business climate but by the quality of life here. London does attract people. It is a growing city, and it needs to accommodate that growth. You do not add a population equivalent to, say, Leeds over a very few years without knowing how you will do that, but that is a debate in itself.
There is a big outflow from London annually, mainly of older people, but there is an even greater inflow, of whom the largest component is international. We are a relatively young city, and we are an increasingly diverse one. Our links around the world must be an advantage. The noble Lord, Lord Christopher, talked about the growth of India and China. The latter is particularly astonishing, and those emerging markets, in my view and clearly in that of other noble Lords, are to be befriended. London can be part of that growth.
Our financial services—as narrowly defined by banking, commodities, trading and so on—are not the only area projected to offer employment to a great degree. Indeed, they are a relatively small area of growth. Business services will grow more than any other sector. London's economic consultants, accountants, lawyers, advertising agents—which I think the noble Baroness, Lady Valentine, mentioned—and even public administrators will have a lot to contribute. I make that point because China, for example, needs to create an efficient public enterprise and a modern financial system. Our relationship with the emerging markets must mix rivalry and friendship. The current Lord Mayor has a staggering record of travelling; I was aware of his enthusiasm for China before he became Lord Mayor. He is also developing relationships, and rightly so. We must look to supporting business services in the widest sense. In this context, "ancillary" is not a derogatory term. Those services are not only available in the City; London is polycentric. Business services are often delivered from inner and outer London as well as from central London—on a directly international basis and to support domestic activities which in their turn have international links. There are many aspects of this, including encouraging innovation. Our universities may not quite be a unique selling point but they are certainly close to it. Increasing skills levels generally to ensure that we have local skilled personnel is hugely important. As a community, we need to "up-skill".
If, as the chief executive of a major company, you are looking at where to locate, you will also want to look at what employees want, and quality of life is high up the list. As a city, if we are to retain people who may be free to move and to attract those who might go elsewhere, that is an important factor. In, I think, 1991, I spoke at a conference about London's role as a world city and was given some slides for illustration. I got to the bit about the pomp and ceremony of London just when the slides came into action with a jerk and a judder. Unfortunately, the first slide to accompany my comments on ceremony was a dust-cart. But I guess that those services are important too.
I would never underestimate factors such as our cultural life, leisure activities and retailing. But, as has been said so powerfully, transport very obviously can make the difference between London being a liveable city on a day-to-day basis and it being scarcely tolerable. Looking at London as a polycentric city, orbital and local transport is important, but I knew that I would not be the first person to mention Crossrail. It has had quite a lot of coverage this week, but, on reading it in detail, it amounted really to only another launch. It will not be the Minister's fault if he can give us no news, but the Government must not only take forward the Bill but also make Crossrail a reality. I worry very much not just about access to the City and the Docklands from outside London, but also access for housing, commercial products and so on, which so much depend on Crossrail.
My noble friend Lord McNally rightly warned about the Olympic Games and Paralympic Games becoming "blame games". The Mayor of London has described the track as likely to be euphoria, as on
There may be non-Londoners who say that London is greedy, the Government should not focus on it so much, and that it does not need the support that we all talk about, but if London's position as a world financial centre slips, the rest of the UK will soon notice. Its mix of activities and its being a place—I refer to all London—where people want to live and work help to ensure that position.
Lord Levene of Portsoken (Crossbench)
My Lords, I am most grateful to the noble Lord, Lord Brooke, who served with such distinction in another place as the Member for the City of London, for having initiated this debate and for his very kind remarks today. I declare an interest as chairman of Lloyd's and the IFSL, the body which promotes the financial services industry internationally, and also as a serving alderman and past Lord Mayor of the City of London. Having been on both the receiving and transmitting ends of so many speeches concerning the dominant position of the City of London, I am well aware of the danger of bombarding one's audience with statistics. I will try to avoid that as much as possible, but I believe that a few numbers are necessary to illustrate the point.
A number of your Lordships will be familiar with the history of Lloyd's and the very difficult times through which it has passed; difficult for both the society and its membership. Happily, Lloyd's has survived and is now restored to the pre-eminent position in the world's insurance industry and benefiting from the world's best known brand name in insurance. Collectively, the UK insurance market is the largest in Europe and the third largest in the world after the United States and Japan, but, if we ignore domestic business, the London insurance market is the world's largest international centre for insurance and reinsurance, with premia in the London market now exceeding £21 billion per annum, more than half of which is placed with Lloyd's. The London market insures 15 per cent of the world's marine market and nearly 30 per cent of its aviation market. At Lloyd's we insure many of the world's leading companies, including 86 per cent of the Dow, 89 per cent of the FTSE 100, two-thirds of the Fortune 500 Global Companies, 84 per cent of Europe's top 50 and all the world's top 20 banks.
Insurance, however, involves a lot more than collecting vast sums in premia. It also, of course, involves making good the damage following disaster as an enabler and a rebuilder. Lloyd's suffered the largest losses of any market in the world as a result of the 9/11 atrocity and subsequently received fulsome praise from the US Treasury Secretary for "stepping up to the plate". Following last year's hurricanes Katrina, Rita and Wilma in the Gulf of Mexico, Lloyd's will pay out nearly £3.5 billion. The lack of discipline which meant that in the past such huge claims could come close to wiping out the market has now been corrected. Despite enormous claims in the gulf last year, Lloyd's suffered only a very small overall loss.
We do not deal only in disasters. Around the world we cover many major projects, such as the huge construction project known as "the big dig" in Boston, in the United States, and the construction of the bridge linking the Peloponnese to mainland Greece; we cover liability insurance for the new Airbus A380 super jumbo; and we cover, of course, many sporting events and teams, such as Wimbledon, the Ryder Cup, the World Cup, the English and German football teams and the Olympic Games.
The recent agreement by the Chinese authorities to grant a licence to Lloyd's to act as a reinsurer in China, a decision for which we owe a considerable debt of gratitude to our Prime Minister for all his help, will enable Lloyd's to bring its 500-year experience to what is fast becoming one of the most important economies in the world. We are now beginning to benefit from the work carried out in Brussels for the creation of a single market in financial services. This is a long, difficult and complex task, but we are finally beginning to see the benefits of it. In this respect I thank in particular the EU Commissioner for the Internal Market and Services, Charlie McCreevy, who since his appointment has done a great deal to help us.
Lloyd's largest market in the world is the United States of America, where our business now amounts to some $10 billion every year. But surprisingly, and unhappily, in the field of reinsurance in the United States, Lloyd's is the largest victim of totally unjustified and discriminatory treatment. It is not what we expect from our largest trading partner and a country with which we have been doing business at Lloyd's for more than 200 years, and where earlier this year we marked the centennial of the San Francisco earthquake, after which Lloyd's played such an important and crucial role in the subsequent rebuilding of that city.
Like so many other markets, we thrive on competition, which we believe is both good and healthy. But that competition must take place on an even playing field, and more must be done in the UK to compete with offshore centres, whose regulatory and tax regimes appear to the outsider to be more welcoming. We applaud the recent announcement by the FSA of a reduction in approval times for new insurance and reinsurance start-ups, but we are disadvantaged by the disparity in tax regimes, whereby we have to compete with offshore centres in which the rate of taxation is as low as zero. We much welcome the recent statement by the Chancellor on the importance he attaches to the financial services industry and hope that this will be matched by every effort being made to maintain London's ability to compete most effectively.
We have an enormous advantage in London by virtue of our language and our geography. English is now the internationally accepted lingua franca for business from Beijing to Buenos Aires. Our geographical position enables us to trade with the Far East in the morning and with the United States in the afternoon. This is a huge advantage. It is recognised by the concentration of global financial services here in London, where they feel both welcome and comfortable. But we must do everything possible to maintain that position and to improve it, whether that be in our local infrastructure, where, as so many noble Lords have remarked today, we are still very badly let down in terms of transport, and, again, as so many have also said, where the go-ahead for Crossrail is not only overdue but absolutely essential. We must also ensure that those who speak in the name of London, not far from here on the other side of the river, recognise the value of our business relationships and do not engage in insulting comments about our most important customers.
Nationally, more than 1 million people are employed in financial services, and additionally in central London more than 300,000 are involved in supporting services from the legal and accountancy professions. The £18 billion surplus on trade in financial services in 2004 was more than double that of any other nation.
I mentioned earlier the Chancellor's recent initiative to establish a new City of London taskforce to promote financial services globally, and to be backed up by a new business advisory council. But it is disturbing to note from details published by UKTI that although they show correctly that the financial and legal sectors contribute by far the largest share of UK GDP, at nearly 9 per cent, by contrast UKTI allocates to that the very lowest share of its programme expenditure, at only just over 1 per cent. This cannot be right, and I hope that the Minister might indicate that there will be a substantial rebalancing of its efforts to match the importance of the industry.
Happily, here we do not need to worry about the condition of the metatarsal of one individual; we are blessed with a huge number of extremely able people from many different nationalities who choose to work here in London. We need to support them all and to let them know that their outstanding contribution to the national economy will receive the highest possible level of support.
Viscount Trenchard (Conservative)
My Lords, I am grateful to my noble friend Lord Brooke of Sutton Mandeville for introducing this debate. My noble friend provided a wealth of statistics showing just how important the City of London is to the nation, not only to those who derive their livelihoods from it, but to all those whose savings and pensions are invested in or through it, and to the economy of the country as a whole through its major contribution to taxes.
I should declare my interests as director-general of the European Fund and Asset Management Association, and as a director of certain investment companies as disclosed in the Register of Interests. I have worked in financial services for more than 30 years, including 23 years with Kleinwort Benson, now part of the Allianz Dresdner group, of which I spent half running the firm's operations in Japan. I have therefore seen the City not only from within, but also through Japanese eyes. I played a part in persuading many leading Japanese companies to list their shares on the London Stock Exchange, including Toshiba, Fujitsu, Honda and predecessor banks of both Mizuho and Tokyo Mitsubishi UFJ.
The City has been consolidating its position as the world's leading financial centre. Today's Financial Times reports that London has extended its lead as the prime destination for foreign direct investment in Europe, enabling the UK to hold on to first position among European countries in spite of having inevitably lost market share to lower-cost east European countries. However, we cannot take London's continued pre-eminence for granted. Its position may now be threatened on a number of fronts and it has become increasingly clear that the Government's ostensibly benevolent and supportive approach to the City is an illusion. After his early inspired decision to grant operational independence to the Bank of England and his first two years during which he had to stick to his promise to follow the spending plans laid down by the previous Conservative Government, the Chancellor has reverted to the old Labour formula of tax and spend. The Sunday Times reported last weekend that tax freedom day this year was
The most damaging decision taken by the Chancellor was to abolish the privileged tax status of pension funds and charities. This act, besides robbing pension funds of the value of the dividend tax credits just when they needed them most, resulted in a significant reduction in their weighting of UK equities as compared with other types of investment, leading to weaker stock market performance. The cumulative costs to pension funds of this exercise amounted to several hundred million pounds, and the large pension deficits that many companies now carry have started to act as a deterrent to mergers and acquisitions activity, affecting another of the City's major business lines.
The City has not only geography and the English language to thank for its significant lead over its continental competitors. The accumulated skills and human capital, its relatively untarnished reputation for high standards and fair play, the fairly sensible regulatory regime that we have enjoyed for many years, and the competitive position as regards both personal and corporation tax that we have enjoyed from the early days of the Government led by my noble friend Lady Thatcher until recently, have all played a major part in making the City pre-eminent among financial centres and keeping it there.
However, as the noble Baroness, Lady Valentine, explained, our tax advantages have now been substantially eroded. Many more people pay higher rates of income tax while many of our competitors have slashed their rates of both income and corporation tax. The noble Lord, Lord Christopher, referred to Ireland's low corporation tax rate of around, I think, 15 per cent and its great success in the business of managing funds. Our taxation regime is immeasurably more complicated than it was when this Government took office and Britain now has the seventh highest rate of corporation tax among the 25 members of the European Union. Many British companies are considering moving their place of incorporation overseas to escape the Chancellor's increasingly aggressive attack on what used to be called sensible tax planning. For example, it was reported last weekend that Hiscox, a major Lloyd's insurer, has decided to move to Bermuda.
It is not only in the field of taxation that we are in danger of losing our competitive position. There has been a massive increase in regulation, both national and European, over the past few years. The costs of compliance with this are high. Much of it is unduly burdensome and not justified by any cost benefit analysis.
While the decision to merge the former nine financial regulators into one—the Financial Services Authority—was generally welcomed, the FSA has presided over a move away from our traditional principles-based, light-touch regulatory framework towards one that is unduly prescriptive. My noble friend Lord Hodgson referred to the massive increase in its budget.
Sir Callum McCarthy, the chairman of the FSA, was a practitioner—and, for some years, a colleague of mine—before he became a regulator. He has the right experience on which to form his judgments on what regulation we need and what is unnecessary and harmful. His determination to be more rigorous about the costs and burdens that regulation places on firms is to be welcomed.
The FSA says that it shares,
"the Government's commitment to better regulation, regulating only where necessary, doing so in a way that is proportionate to risk, and reducing regulatory burdens and unnecessary bureaucracy where possible".
The trouble is that the Government do not practise what they preach. It is much to be regretted that the Government refused to make the preservation of the competitiveness of financial markets one of the FSA's objectives under the Financial Services and Markets Act. Instead, the competitiveness of the City is protected only by the lesser status of a "principle" to which the FSA will have regard in pursuing its "more important" objectives.
Increases in taxation and regulation are now combining to make the United Kingdom a less attractive place for foreign multinational companies to establish their European headquarters. The London Stock Exchange looks as if it has missed the boat in terms of exercising leadership in the consolidation of the world's major stock exchanges. The London Stock Exchange may be in danger of losing its attractiveness to major foreign companies. The Tokyo Mitsubishi UFJ Financial Group has announced it is cancelling its listing in London but that it will retain its listing in New York.
I continue to believe that completion of the single market for financial services is in the interests of the City of London and both financial services firms and consumers throughout Europe. However, it is very important that scrutiny of European legislation by this House and by another place is improved. As the noble Lord, Lord Brennan, told your Lordships, there has been a massive increase in financial legislation emanating from Brussels, much of it unduly prescriptive. The single market will work for all if it is in London's image and builds on its success and its ethos of "My word is my bond".
But our financial markets are not European markets, they are global markets. We must ensure that London remains fit to play its pre-eminent role as one of the only two real world financial centres. Unworkable European legislation, such as the savings tax directive, has caused artificial distortions in the market and has reduced consumer protection by accelerating the transfer of investments away from regulated products. Large investment flows have also taken place to new financial centres such as Dubai and Singapore. MiFID—the markets in financial instruments directive—also represents a considerable additional compliance burden for financial companies even though a great deal of what it contains is already required by other legislation, albeit in slightly different form.
London has a long tradition of welcoming foreign traders and has always maintained an open trading culture. In that sense, it perhaps has more in common with New York than with Tokyo, Frankfurt or Paris. These three are essentially domestic markets to which foreigners are granted access and in which they may participate, whereas a large part of business conducted in London and New York consists of foreigners trading with foreigners.
Increasing European employment legislation and the UK's adoption of the Social Chapter represents a threat to London. The beneficiaries of this will not be the other European centres, where the situation is worse, but new centres such as Dubai, Singapore and Shanghai.
The Government must pay more attention to preserving the special position and huge success that London enjoys. We had a trade surplus in financial services of more than £16 billion in 2005 and the City accounts for some 5.5 per cent of GDP and employs 1.4 million people. Regulation must be principles-based wherever possible; it must ensure a level playing field between different sectors; it must be no heavier than is necessary; and it must be justified by a cost benefit analysis.
Unfortunately, the burgeoning tentacles of the state and the increase in the proportion of GDP accounted for by the public sector mean that we are bound to have to pay higher taxes for some time than we would have done if this Government had protected their golden legacy. However, we must ensure that our taxation rates, both personal and corporate, are as attractive as possible and compare well with those of our competitors. Tax must be simplified and stamp duty should be abolished as soon as practicable. Proper savings incentives should be introduced and the beneficial tax status of pension funds and charities should be restored. The Government should do at least some of these things—and quickly—if they are to succeed in giving even a semblance of credibility to their claim to be a friend of the City.
Lord Marshall of Knightsbridge (Crossbench)
My Lords, I, too, am grateful to the noble Lord, Lord Brooke of Sutton Mandeville, for the opportunity to participate in this important and timely debate. I do so principally against the background of my role as chairman of the CBI's International Advisory Board and also as chairman of Nomura International, which has had its European headquarters in London for some 42 years. It ensures that I am also an approved person of the FSA, a status which I believe is enjoyed by certain of our previous speakers. I also speak for this country's visitor economy—the tourism industry—as the chairman of VisitBritain.
I shall endeavour not to be too repetitive, but I am afraid some element of that is inevitable. The importance of London as a—I would prefer to say "the"—world financial centre and the need to remove impediments to its continued growth and competitiveness have already been stressed in forceful and eloquent terms. The CBI has long put forward such views. A definitive review published just under two years ago was titled UK financial services: a global player that needs championing.
We have already heard many statistics but, significantly, financial services here act as a spur to the wider economy, lending at the time of the CBI review around £200 billion to UK businesses and processing some 6 billion transactions a year. The factors which combine to make London one of the world's leading financial centres include our history of openness, our historic trading culture, the economies of scale resulting from concentration of firms in one key location, our central position between North America and Asia, an adequate business infrastructure, a largely enterprise-based economy, the English language and a flexible workforce, including the availability in London of people who are fluent in almost every other language on earth.
The international competitive nature of UK financial services has provided distinct advantages in an increasingly globalised marketplace. However, there is no case for resting on laurels. We need to be vigilant if we are to hold on to London's pre-eminence at a time when world financial markets are changing in structure, regulation and reputation. Dubai is setting out its stall as a financial centre for Arab wealth and, very recently, Saudi Arabia announced plans to develop a major financial centre in Riyadh. We therefore need to act speedily and effectively on key issues which have already been outlined by previous speakers. We need to act especially on transport—I mention once again Crossrail—and on skills and training.
One of the industry's problems that has emerged over the past few years is that of a somewhat tarnished image. The difficulties over endowments, pensions and split caps have lowered consumer confidence and trust in financial services. The added public perception of excess profits, unrealistic levels of executive pay and obscure charging policies has created a burden of poor reputation.
In these circumstances, it is perhaps understandable that the regulatory regime introduced in 1991 is geared heavily towards the expectations of the consumer, but too much regulation, weighted heavily in favour of consumer protection rather than encouraging competitive markets, stifles innovation and product development. Clearly, effective consumer protection is important, but the CBI believes that the promotion of competitive markets is ultimately the best way to serve consumer interest and offer customer choice.
At first glance, the revised UK regulatory system appears to perform well, with London outperforming other key financial centres, yet, below the surface, there is increasing unrest over the mounting regulatory burden. Financial services companies have told the CBI of a rise in the level of regulatory interference, increased costs associated therewith and a regulatory process becoming more and more out of step with the needs of the industry. Although it has been mentioned previously, we must be mindful of what has happened in New York and the effect of the Sarbanes-Oxley legislation. It is deterring foreign companies from listing in the United States and raising the possibility, perhaps the probability, of listed companies delisting.
Concerns here fall into two broad categories: first, the volume of legislation and bunching of new regulation over a short period, with short timescales for consultation and implementation; secondly, the manner in which the industry is regulated at both UK and European Union level. The financial services action plan, unveiled in 1999 and included as a priority at the following year's Lisbon summit, aimed to develop an integrated European financial market. As the noble Lord, Lord Brennan, noted, the plan identified 42 targets, including 26 directives, as being necessary to achieve its objective. Almost all of these proposals have been passed at EU level and must be implemented in member states. The focus has moved to common implementation and enforcement by creating networks of financial regulators and supervisors alongside development of a global dimension of the European Union financial market, particularly in respect of relations with the United States.
At the end of last year, the European Commission published its White Paper on financial services policy, covering the period up to 2010. In response to the preceding Green Paper, the CBI emphasised a number of key policy elements, which are generally reflected in the White Paper. Needless to say, they focused on the avoidance of excessive, impractical and regressive regulation. The CBI recognises firmly the need for a robust regulatory environment, but it calls for a moratorium on new measures. The priority is the need for consolidation and the proper enforcement of existing regulation. The CBI has proposed that government establish a special working group—a panel of wise men and women—comprising experts from all parts of the financial services sector to consult on any new UK or EU legislative proposals and their implementation. The idea is to ensure that government are fully aware of the implications for London's world-class industry and the wider economy of any proposed legislation. I shall take this opportunity to retable this proposal.
Taxation is of course enormously important to business and the financial services sector. At the CBI, we are concerned at the growing practice of introducing tax policy changes under the anti-avoidance banner. The introduction of complex changes to tax law without prior consultation creates uncertainty and instability. This serves to undermine perceptions of London's and the UK's competitiveness and reputation as an international business location.
Clearly, London as a global financial centre has a profound impact on the national economy at virtually every level of commerce and industry. Not least is the visitor economy, which is now worth an annual £74 billion to this country, with expected substantial growth up to and beyond the 2012 Olympics. London is the jewel in our tourism crown, and the financial sector plays a significant part in making this so. The funding available from successful financial services clusters for environmental improvements creates an attractive visitor and working location. Examples are the river path in the City and Jubilee Park in Canary Wharf. The heritage and elegance of the City, juxtaposed with the spectacular new developments such as the Swiss Re Tower and the stunning modernity of the Canary Wharf complex, give London a sense of dynamism, of constant evolution and of being a timeless city to enjoy.
Britain, and London in particular, is still too often seen overseas, particularly in the new developing markets, as a dour and foggy place, locked in the novels of Dickens and Conan Doyle. When events such as the London Marathon pass through the financial districts of Canary Wharf and the City, this outdated impression is instantly dispelled by television broadcasts throughout the world.
Let us not forget the support for exhibitions and cultural events that is provided by finance houses as part of their corporate social responsibility programmes. This benefits the visitor economy by improving galleries, museums and London's overall cultural catalogue. Directly, the financial sector brings in more than 2 million visitors a year through conventions, fairs, exhibitions, business visits and meetings.
Much more than meets the eye depends on maintaining London's position as a pre-eminent world financial centre. It is a global player that needs and deserves championing.
Lord de Mauley (Deputy Chief Whip, Whips, Shadow Minister, Trade & Industry; Conservative)
My Lords, I welcome the opportunity presented by my noble friend Lord Brooke of Sutton Mandeville to take part in this debate on such an important subject. I start by declaring an interest, first as a fellow of the Institute of Chartered Accountants in England and Wales, and secondly as a former director of a leading London merchant bank in the early 1990s. I suppose many of us should also, and I do, declare interests one way or another as holders of shares traded on the London stock markets, as holders of pension schemes managed in the City of London, as insurers against risks and as depending for a great many other business activities on the spending power of those who work in the financial services sector in London.
If further proof is needed after what other noble Lords have said, particularly my noble friend Lord Brooke, I shall attempt to demonstrate why London is at least a leading—possibly the leading—financial centre in the world. Here I give credit to some research carried out by Lombard Street Associates for the British Bankers' Association.
The United Kingdom has the largest trade surplus in financial services of any country in the world. In 2003, according to a recent survey, it was $25.3 billion, with Switzerland in second place on $11 billion—less than half ours. The vast majority of Britain's financial services industry is based in London, so that surely puts London in contention for the title.
The British financial services sector has grown consistently since 1991, unlike exports of goods, which have not grown since 2000. Indeed, financial services are growing at over twice the rate of the economy as a whole, and that growth is accelerating. The sector's productivity has risen at over three times the rate of the wider economy. The external assets of United Kingdom-resident banks have grown by 500 per cent since 1986, from £700 million to £4 billion. According to the Office for National Statistics, the gross value added of the financial intermediation sub-sector has grown by over 7,000 per cent since 1974. Perhaps I should say that gross value added is similar to GDP, except that it excludes indirect taxes and subsidies.
A November 2005 survey of top international financial managers conducted by Z/Yen Ltd on behalf of the Corporation of London shows that London and New York lead the international field of financial centres on all key factors of competitiveness. Those factors included the availability of skilled people, the regulatory environment, access to international financial markets and to customers, business infrastructure, fairness, taxes, costs and the availability of office space.
What are the advantages to Britain arising from London holding that position? The financial services sector accounts for almost 5.5 per cent of GDP and employs over 1 million people, who spend their money on goods and services provided by several million more shopkeepers, tradespeople and skilled, semi-skilled and manual workers. Given the poor performance of the United Kingdom's exports of goods, the current account deficit has remained manageable only because of our overseas earnings on financial transactions. And of course the tax take on all this activity, in corporate and personal taxes, VAT, stamp duty, rates, council tax and myriad other taxes, adds up to a huge amount of revenue. In short, it is not too strong to say that London is vital to the economic survival of the United Kingdom.
Why is London so successful in this arena? We are the beneficiaries of a trading culture developed in the 18th and 19th centuries. Britain, and London in particular, has a history of openness and a tradition of welcoming foreign traders. Our stock exchange and insurance markets are among the oldest and best respected in the world. The international prevalence of English as the language of business cannot do us any harm. In recent years our geographical position between the American continent and the Asian time zones has become more important, and an article in today's Daily Telegraph suggests that London's success is partly due to the fact that the United States and Japan have looked at Britain as a good stepping point for investment into Europe. The fact that interest rates are now set by the Bank of England independently of politicians has been positive.
In the area of regulation, as the noble Baroness, Lady Valentine, said, a fine balancing act must be performed. Inadequate regulation would act as a severe disincentive to international financial businesses but, with too much regulation, bureaucracy would have a similar or worse effect. A common complaint from New York is that there are too many regulators demanding too many often contradictory things. Several noble Lords have referred to the horrors of Sarbanes-Oxley, a sledgehammer to crack a nut if ever there was one.
It is helpful that in the FSA we have a single regulator. Its philosophy of publishing principles of regulation with a degree of discretion in interpretation is compared favourably with the more prescriptive system in the United States. The FSA's risk-based approach contributes to that favourable comparison. It is also worth mentioning that non-membership of the euro, according to the Treasury, has had absolutely no adverse effect on the City at all.
So far, so good. But of course a successful history is no guarantee of a successful future, as the British textile industry has shown. There are threats to London's position. The article in today's Telegraph I mentioned indicates that France is fast catching us up as the top European destination for investment. New technology and an improved communications infrastructure have reduced the need to be close to financial markets, and companies are becoming better at managing their operations remotely. As other noble Lords have mentioned, London is an expensive city to operate from. The transport infrastructure is regularly criticised, and terrorism is seen as a significant threat. Uncertainty over the future ownership of our stock exchange cannot help.
I made some relatively favourable comments on regulation earlier, but international financiers are worried about the lack of accountability of, and overburdensome regulation by, the FSA, and are watching carefully the huge amount of regulation that the Government, in their keenness to kowtow to the European Union, persist in burdening us with and gold-plating, for no obvious benefit. The enactment of the Consumer Credit Bill while Europe is independently pursuing a consumer credit directive does not seem from a distance to be the best example of co-ordination.
The international financiers also worry about taxation. While, in the survey I mentioned, taxation comes about half way up the list of factors worrying those who make decisions about whether to do their business here, there is a fine line over which it would be unwise to step. Concerns have been exacerbated by worries about, for example, the effect on the Eurobond market of implementation of the savings tax directive, the unexpected and retrospective threat to tax trusts in the Budget, increased City business rates, and hints at tinkering with corporation tax. My noble friend Lord Trenchard also mentioned the Chancellor's attack on pension funds.
What of the future? While our growth in exports of goods to EU countries has broadly kept pace with international growth since the late 1980s, the country's share of exports to the rest of the world has dropped by over a third since this Government came to power. Our manufacturing industry is simply pointing in the wrong direction. By 2050, according to the WTO, China will be the largest economy in the world, with India not far behind. If we are to maintain our share of world exports, sales to Asia will need to grow strongly. Given the relative strengths of our positions in goods and in services, it is clear that a major role needs to be played by services, particularly financial services.
I shall suggest where our financial businesses might target their efforts. The Asian economies are now in transition from a position where their imports previously focused on capital goods related to early-stage development, with the imperative of building roads, dams, steel mills and electricity generating plants, to one now where rising living standards are producing a growing middle class whose incomes are becoming sufficient to support a rapid growth in consumer markets. This growth will of necessity be associated with an increase in bank deposits, which, for example, in China are forecast to double over the next 10 years. Mortgages and consumer finance will therefore be a major growth area in countries such as China and India, where they are relatively undeveloped. They represent a profit engine for banks over the next five to 10 years, so there are huge opportunities for us there.
Consumer credit is also growing in other Asian countries, notably Korea, where a British bank, Standard Chartered—I declare an interest as I worked for it for half a dozen years, including in Asia, in the mid-1990s—has recently bought a major Korean bank. The UK financial sector is well placed to take advantage of the huge opportunity to manage accumulations of Asian savings as they become available for investment around the world, as well as of securities trading and foreign exchange activities, as exchange controls are relaxed. The potential for the United Kingdom, and for London in particular, to take advantage of these opportunities is reinforced by our legacy in Hong Kong, India and Singapore. The developing countries with the most successful financial systems, corporate governance and stock markets almost all appreciate the benefits they have gained from British law, language and business practices.
A key condition for the United Kingdom's competitive success in international markets in future years is therefore that the country should continue to enjoy a vigorous and profitable financial sector, unimpeded in its efforts by public policies. But if—I echo the quote from the British Bankers' Association mentioned by the noble Lord, Lord McNally—Government hobble the financial sector by unduly onerous taxation or regulatory controls, if Britain's reputation for economic and financial stability is damaged in any way, or if London should lose its attractions relative to other potential international financial centres, the growth prospects of the entire country will be undermined. If the politics of jealousy are given their head through the imposition of further onerous taxation, I fear deeply that the goose that has laid golden eggs, and which is capable of laying even bigger ones, may be slain.
Lord Newby (Spokesperson in the Lords, Treasury; Liberal Democrat)
My Lords, I too thank the noble Lord, Lord Brooke, for introducing this debate, which is important given the importance of the financial services sector to London and more widely.
I strongly agree with the noble Baroness, Lady Valentine, that what is good for London is good for the country as a whole. I speak as someone who was brought up in Leeds. Today, a quarter of the employment in Leeds, and a quarter of the city's GDP, comes from financial and business services. A generation ago the bulk of the employment and wealth of that city was generated by manufacturing, which has nearly entirely collapsed. If it were not for financial services and other business services, the situation in Leeds, other regional cities and Edinburgh and Glasgow would be extremely serious. Much as I would like to think that it was the inherent attractiveness of Leeds as a place to do financial services business that has brought about this transformation, the truth is that Leeds has thrived on the back of London's success and growth as a global financial services partner. When we discuss whether London deserves investment compared to other parts of the country, the role of London as a locomotive for the rest of the country, particularly as regards financial services, needs to be very much borne in mind.
I do not intend to repeat the many statistics on the size of the financial services sector that have been mentioned, but one of the important matters which has been mentioned, and which I wish to stress, is that this sector is not only very significant now but over recent years has shown that it is capable of growing. Despite all the concerns expressed, we can see potential for further growth. At a time when world markets of all kinds have grown rapidly, the fact that the UK's share of world exports of financial services rose in 1995-2002 from 16.6 per cent to 23.7 per cent is a major achievement. I am unsure whether any other significant sector of the economy can match that achievement.
I do not intend to repeat what many other noble Lords have said about London as a place to do business, except to echo the comments of my noble friend Lady Hamwee, who talked about the strengths of London as a place to live, wherever you and your family might have come from originally. The international outlook of London and the fact that it is a world city is a huge advantage. I speak as someone who lives on the edge of the largest Portuguese community in London, where I see Portuguese flags flying on every second car. But, interestingly, possibly every fourth car flies one flag displaying the Cross of St George and one Portuguese flag. For a relatively new community to feel sufficiently integrated that it wishes to support two teams—not, I suspect, from fear of being considered too partisan, or not necessarily simply wanting to hedge its bets—shows that people are made welcome. That is very important at all levels. While I do not wish to underestimate the many problems of managing a diverse society such as we have in London, or to suggest that there are no problems between different communities, London has been remarkably successful in integrating the most extraordinarily diverse group of individuals and communities probably ever assembled in the world.
Concerns have been expressed, some of which I wish to echo under the headings that others have used: regulation, skills, congestion, and the role of government. As regards regulation, as other noble Lords have said, the slogan of the City used to be, "My word is my bond". Unfortunately, that is no longer adequate because that precept was honoured all too often in the breach rather than the observance. We have regulation because some unscrupulous individuals in the City have brought it on themselves. When the horrors of Sarbanes-Oxley are mentioned, it is worth reminding ourselves that, so far as I am aware, it was not introduced by a radical Left-wing legislature but by one of the most business-friendly legislatures in the world in response to some highly criminal activity by members of the business community. That is why regulation is initiated. As many noble Lords have said, the FSA has grappled with a great multitude of tasks and deserves praise for trying to move from what started out as a hugely long rulebook towards a more principles-based approach, particularly in respect of wholesale financial services.
Noble Lords have explained how, over its relatively short life, the FSA has had additional burdens placed on it, but the reason for that is that this place has been looking for a repository for necessary regulation. The FSA's reputation was such, even from the start, that people felt confident giving it additional roles to play, which explains why it costs more. It was slightly ironic, if I may say so, that even the noble Viscount, Lord Trenchard, suggested that the FSA should take on an additional duty to encourage the financial services sector. The FSA has fulfilled its task well.
The other area of regulation which has been much mentioned is that of the EU. Some noble Lords commended Commissioner McCreevy for adopting the pragmatism of the noble Lord, Lord Brennan, in seeking, against the odds, not to regulate more but in some cases, we hope, to move towards a simplification of the regulatory regime.
Some noble Lords talked about the need for the City to have the skills to respond to the growth opportunities that it faces. There seem to be two areas of concern here, and the first relates to internal skills and whether we as a nation are providing enough young people with the skills to go into the City. One of the great failures of London and the London economy is that, while we grow rapidly and our population increases rapidly, we have very high levels of unemployment almost literally within a stone's throw of the City. One of the major challenges for all those involved in managing London, at whatever level, must be to do more to integrate that population in east London, which is largely unemployed and has low educational attainment, but which has the potential to provide a significant, almost new source of employment in the City and across the rest of London. If we can achieve that, we will not need to attract as many workers from the rest of the world, so the pressure on all our services from an increased population may not be as great. I equally agree with a number of noble Lords who have said that we need to make sure that our Immigration Rules do not tighten so that we fail to attract the best and brightest. I know that the Government are trying to get the balance right, and I suspect that they are not very far off it on that front.
The third area that has been much discussed is Crossrail and I, too, echo what noble Lords have said about the need to really get a move on on that. The problem is funding. In discussing this issue with senior colleagues from London from my own party, I have found a bit of a response of, "Well if the City wants it, it should jolly well pay for it". It seems to me, for reasons that I have given earlier, that Crossrail is not just a benefit match for the City; it is a benefit for the whole of London and for the UK as a whole. It is inconceivable that the Government will just put their hands in their pockets and fund the whole thing; I notice those on the Government Benches nodding. Therefore, we need to look at innovative ways of financing it. Equally, it is inconceivable that Crossrail will go ahead without the Government playing a major, significant part in it that goes beyond simply getting a Bill through this Parliament.
Finally, I would like to raise the issue of the role of Government in promoting the City, which has been discussed. A number of us were pleased when the Chancellor in the Budget announced that he was setting up the high-level group, because it showed that he was taking the City and financial services seriously. We know that even more so now because Ed Balls has become the Minister responsible for the City, so the City can rest assured that its interests are being considered very seriously by the Chancellor. I understand that the high-level group has not yet met. When will it meet and how often? Will its minutes be published? How confident are the Government that they have the enhanced role for UKTI right in terms of financial services? As a number of noble Lords have mentioned, it is important that priorities are shifted and that senior staff promoting British business in UKTI and in embassies have a greater understanding of financial services and of those regulatory regimes that are relatively new to us in terms of financial services—China, India, Brazil and elsewhere. Can the Minister give us any indication of what changes are taking place to reflect an increased priority for financial services?
The Government mentioned at the time of the Budget that they were going to produce a five-year strategy for a step change in the Government's drive to market the strengths of the UK economy. Why they have needed to wait almost 10 years to try to effect such a step change is an interesting question. When will such a strategy be published? As I said at the beginning, this is an important debate because this is an important sector. We debate the City infrequently in your Lordships' House, and I hope that it will not be too long before we do so again.
Baroness Noakes (Shadow Minister, Treasury, Shadow Minister, Work & Pensions; Conservative)
My Lords, I join other noble Lords in congratulating my noble friend Lord Brooke of Sutton Mandeville on securing this important debate. It has been a good debate in the House of Lords tradition, with so many contributions from noble Lords who have a real understanding of the importance of London and the City of London as a world financial centre, and that has shone through all of the contributions today. Like the noble Lord, Lord Newby, I will not be repeating the statistics, which have been well covered by many speeches, starting with that of my noble friend Lord Brooke. In particular, I point to the speech made by the noble Baroness, Lady Valentine, which provided a very useful background.
We need to see London against the backdrop of our economy generally. Our exports of traded goods have not been growing strongly and our share of world trade has been declining. We have a high dependence on sluggish European markets. We have compounded that by a lack of success in exporting to economies that have been achieving the most rapid growth, notably India and China. Our exports to Asian economies are lower now than they were 10 years ago. That rather negative position has been rescued by a relatively strong performance in service exports, and within that the financial services sector has consistently recorded a trade surplus, as several noble Lords have already pointed out today. To date, the Asian economies have not been a huge contributor to that, but as those economies mature, consumer markets will come to the fore and bank deposits and savings will start to accumulate. My noble friend Lord De Mauley explained the changes that will take place in those economies and the opportunities that will come from that. A key question is whether London can use its traditional strengths to win in those markets and thereby continue the success that is so important to the overall economic success of the UK.
Fifteen years ago, the consensus was that there were three financial centres; London, New York and Tokyo. In the past 15 years, Tokyo has rather fallen by the wayside and now there are two, which demonstrates if nothing else that financial markets do not stand still. London must fight to keep its pre-eminence in Europe as well as compete against New York. London needs to look to the rapidly developing markets in Asia. Perhaps the biggest danger is the possibility that China will establish its own financial centre in a way that rivals New York and London. It is difficult to see China establishing a centre like London, which is characterised by the presence of foreign players dealing with each other, but we cannot rule that out. The best way to deal with that kind of threat is to preserve and enhance the competitiveness of London in that global market. We need to look carefully at the components of competitiveness to ensure that there are no obstacles in the way of London's continuing success.
I know from today's debate that many noble Lords have seen the report commissioned by the Corporation of London last year on the competitive position of London as a global financial centre. We have been accustomed to believing that our language, culture and quality of life in London are key competitive factors, but those ranked only 11th and 12th in that report. Top of the list was the availability of skilled personnel. This is not just about education and training, as the Treasury's Financial services in London: Global opportunities and challenges paper implied. A fundamental feature, according to the Corporation of London's report, is the flexibility of the UK labour market. International investment banking, for example, can be a volatile business and needs to be able to downsize and upsize fairly rapidly without undue delay and cost in order to respond to market conditions. There have been concerns expressed by those that operate in London about the UK's drift towards greater labour market regulation, which is a consequence of our membership of the EU. That does not affect our competitiveness within Europe but, if we move too far, it could do undoubted harm to London's competitiveness as a global market centre in the future.
The second competitiveness factor was the regulatory environment. As other noble Lords have said, we have a very definite lead at present over the US. Compared with New York, our regulatory system is far less fragmented. Of course, as several noble Lords have pointed out, we have to date avoided—and, indeed, gained competitive advantage from—the US's over-reaction to Enron and WorldCom, as enshrined in the Sarbanes-Oxley Act. That sounds like good news, but we must not be complacent about this if we are to retain a leading global position.
Most of the regulation in the UK emanates from Europe. I agree very much with what the noble Lord, Lord Brennan, said on this subject. It is a constant struggle to keep the UK's principles and risk-based approach against the natural European instinct for rules. Indeed, the appetite in Europe for yet more rules was evident from the White Paper published last December on achieving an integrated financial services market.
It is clear from all the studies that have been done that London is head and shoulders above its EU rivals as the leading financial centre in Europe, and that London in effect represents the interests of Europe on the global financial stage. But it is far from clear that the importance to the EU of London as a global player is appreciated, since so much of the agenda in Europe, such as the financial services action plan, has been inward looking. Paris and Frankfurt, to some extent, still dream of competing with London, and their countries drive the EU regulatory agenda with that very much in mind. But London has to compete globally and has very different needs.
My noble friend Lord Blackwell argued last month in your Lordships' House that the time has come to debate whether the City of London would be better served if the UK opted for a free-trade relationship with the EU, particularly in relation to financial services. In that way, we could set our own regulatory rules, which would enhance rather than impair our competitive position. I share my noble friend's views that this merits a serious debate. But, accepting the status quo for today, I have some questions for the Minister.
Will the Government be resolute in arguing for markets based on competition rather than ever-more elaborate regulation introduced under the banner of integration? Will they make sure that Europe understands the difference between retail and wholesale financial business, with the latter left largely outside consumer-based and activist regulation? Finally, will the Government say what steps they are taking to ensure that the EU focus is on making London great for Europe rather than eliminating differences within Europe?
As a country, we cannot claim that we have always implemented European rules in a way that keeps the cost of regulation to a minimum. For example, the UK implemented the anti-money-laundering regulations with such zeal that costs are much higher in the UK than practically anywhere else. No one doubts the importance of reputation to London as a global financial centre, but the clear view of a study carried out last year was that the cost-benefit balance was completely wrong. My noble friend Lord Hodgson of Astley Abbotts today pointed out the way in which the Takeover Panel implementation has been dangerously gold-plated by the Government, to the possible detriment of London.
The Financial Services Authority, which is in charge of most of the regulatory implementation that affects the City of London, talks a good story on being risk-based and principles-driven in its approach to regulation, but it is not yet clear that it walks the walk. It still has a rule book running to 8,000 pages. As my noble friend Lord Trenchard reminded us, it has no remit to pursue competition and competitiveness, so it is not surprising that it focuses all its energies on regulation. The noble Lord, Lord Newby, said that my noble friend Lord Trenchard was seeking to get the FSA to do more. I think he misunderstands the position: if the FSA were to have competition and competitiveness at its heart, it would do less. That is the whole point.
I have not had time to talk about the importance of infrastructure to London, particularly the transport infrastructure. As we have heard, many in London believe that the construction of the Crossrail link is an essential improvement. As far as I can see, the Government continue to avoid the issues on this, as the noble Lord, Lord Newby, has said. I invite the Government to say when they will give a clear view on the financing of Crossrail; it is the uncertainty that is so damaging to all those who are looking to this improvement in London.
I have not had time to talk about tax issues either. They were very well covered by the noble Lord, Lord Christopher, in his excellent speech, and several other noble Lords also picked up those points.
As believers in markets and market-based solutions, we want London to thrive as it always has—through its own actions, abilities and competitive strengths. London does not need a lot of government intervention or initiatives, whether they emanate from Europe or not. I hope that when the Minister winds up, he will not disappoint us on that score.
Lord McKenzie of Luton (Government Whip (technically a Lord in Waiting, HM Household); Labour)
My Lords, I thank the noble Lord, Lord Brooke of Sutton Mandeville, for initiating this debate and for his very wide-ranging and impressive introduction. I also thank all noble Lords who have contributed today. As ever on these occasions, the debate has been very wide-ranging and it will be difficult to deal in 20 minutes with all the points that have been raised, but I will do my best.
All noble Lords here today know the vital role that the financial sector plays in the modern British economy: financing business investment and expansion; providing a range of products that allows the general public to save and borrow; and allowing companies and individuals to insure against risks to their businesses, homes and other assets.
The financial sector is central to this country's wider prosperity, generating an increasing share of the UK's economic wealth. Since 1997, it has grown at an average of more than 12 per cent a year—more than four times the average rate of growth for the whole economy. By 2004, the financial sector accounted for nearly 7 per cent of UK output—10 per cent if you include related business services such as accounting and legal services. The sector also supports more than 1 million UK jobs, a third of them in London. Indeed, employment in the financial sector has remained stable since the late 1980s, despite technological developments and off-shoring of activities. We will be sharing a whole range of statistics today, which is due in no small measure to the excellent research papers commissioned for the Corporation of London, to which the noble Lord, Lord McNally, referred.
London is the world's leading international financial centre. Building on a rich tradition of international finance that began in the 17th century, London is a major net exporter of financial services and acts as a hub for financial institutions, leading the world in many areas of international activity.
Ten years ago, the UK exported roughly five times the level of insurance services that it imported. By 2004, that multiple had increased to eight, with the value of UK insurance exports roughly doubling over the same period. The noble Lord, Lord Levene, spoke with authority about the role of the insurance sector in our economy and the impact on it of things such as natural disasters. He spoke about the US reinsurance regulatory framework, suggesting that it was unfair. I understand that, following recent discussions between the European Commission and the US authorities, a task force has been established by the US National Association of Insurance Commissioners. It is tasked with making proposals by December on alternatives to the current US framework, including the use of collateral, within the US and abroad.
At the same time as these insurance developments have taken place, total external assets held by UK banks have more than doubled in value, turnover in the UK equity market has increased in value by 50 per cent, and the number of derivatives contracts traded on London exchanges has doubled, while the value of off-exchange derivatives trading has more than tripled.
London now dominates key international markets such as Eurobonds, with 70 per cent of the global secondary bond market in London. Nearly a third of foreign exchange turnover takes place in the City. That is more than New York and Tokyo combined, and six times that of Frankfurt. London also accounts for more than 40 per cent of the world's turnover in foreign equities trading and has the fastest-growing share—currently 20 per cent—of the world's hedge fund assets. Along with other UK financial centres, such as Edinburgh and Leeds, it is also a leading centre for banking, insurance and asset management.
The UK banking sector is the largest in Europe. London has 264 foreign banks, as the noble Lord, Lord Brooke, and others mentioned. Foreign-domiciled companies seeking admission to trading in London are an increasing source of revenue for the London Stock Exchange, with its alternative investment market becoming the world's dominant market for listing small, growing companies and with around 2,000 UK companies and more than 300 foreign companies admitted to trading. In 2005, a record 19 American companies, matched by an additional 19 Chinese companies, were admitted to trading on the AIM. On the basis of those statistics, I disagree with the noble Viscount, Lord Trenchard, that the Stock Exchange is losing its competitive edge.
Of course, London has a number of advantages. Its streamlined regulatory framework for its financial markets, overseen by a single body—the Financial Services Authority—is widely regarded as the best in the world and has been emulated by other advanced economies. The FSA seeks to support a principles-based approach to regulation that supports the innovative spirit and wealth-creating potential of the sector. The noble Lord, Lord Hodgson, queried whether the FSA was delivering value for money. The Chancellor announced in the Pre-Budget Report that the Government would commission a value-for-money review of the FSA, which will be published once completed.
International studies consistently show the UK to be an attractive place to do business, having a relatively low tax burden, an entrepreneurial-friendly business environment, a flexible labour market and some of the most flexible rules on migration and temporary foreign workers in the world. The highly skilled migrant programme enables the UK to compete with the US and other major world economies for the world's "brightest and best".
Building on that great British tradition of openness to foreign capital, companies, individuals and ideas, the UK has a reputation for a fair and non-discriminatory application of rules to foreign companies—an approach that is quite different from that of some other countries. This openness, along with London's natural advantages, such as the English language, its geographical location between north America and Asia, and historical links to both those continents, has enabled London to attract a large share of international financial business, along with the most talented individuals. The noble Lord, Lord De Mauley, in particular, acknowledged that.
All those advantages are helping London to adapt better to the challenges and opportunities presented by globalisation, allowing the City to become a gateway through which the rest of the world can buy and sell financial services. That is no more so than for Europe, where single-market rules facilitate access to the rest of Europe for firms locating to London, so consolidating London's position. Indeed, last year, as has been mentioned, London was named for the 16th successive year the best European city in which to locate a business—a remarkable achievement.
As many noble Lords have noted, over the coming decades we can expect rapid growth in the large emerging economies—in particular, China and India. This is shifting the global balance of economic activity. By 2015, China and India will account for at least 25 per cent of world output. This growth presents new opportunities for London which it is well placed to grasp. At the same time, increasing competition between London, other established centres and new growing centres, linked to the increasing internationalisation of financial markets and technological change, means that future success can never be taken for granted. The noble Baroness, Lady Noakes, referred to the possibility of China offering a city to join that elite group of international financial centres. That is a distinct possibility, and one imagines that it would be Shanghai if it happened.
In his 2006 Budget, the Chancellor committed to establish a high-level group to consider the challenges and opportunities for the City presented by global economic change. This initiative has been warmly welcomed by most speakers today. This group will bring government and business together in the autumn to agree a new co-ordinated strategy to promote London as the leading global financial centre. UK trade and investment will be responsible for ensuring a joined-up approach to delivery of the strategy, working closely with other public and private sector stakeholders. Perhaps this is the push to which the noble Lord, Lord Brennan, referred. The noble Lord, Lord Levene, and others referred to the necessity of rebalancing the budget of UK trade and investment so that it properly reflects the focus needed on financial services. I shall certainly ensure that that matter is taken back.
The strategy will target resources on specific priority overseas markets and sub-sectors that are likely to lead to increased opportunities for UK-based businesses abroad and inward investment. These priorities will be reflected in the overall UK promotional effort, including outward missions led by the Lord Mayor of London and by government Ministers, and inward visits by Ministers, regulators and key decision-makers from overseas. I was astounded at the travel schedule of the current Lord Mayor, to which the noble Lord, Lord Brooke, referred. It is something at which I can only marvel. The noble Lord, Lord Newby, asked when the high-level group was due to meet. I understand that it will be some time in the autumn. Invitations have gone out but replies have not yet been received from everyone.
Through the better regulation initiative, both in the UK and Europe, the Government are cutting red tape and working to ensure that legislation is proportionate and risk-based. The Government are undertaking the most radical and serious systematic reform of Britain's regulatory system in recent history, building on the package of deregulatory reforms that we introduced following the two-year review of the Financial Services and Markets Act.
In December 2005, the FSA published its Better Regulation Action Plan to further move the balance of financial services regulation towards high-level principles rather than detailed rules and guidance. We are seeking to identify all regulations that impose an administrative burden on businesses. We will calculate the cost for each of these and set targets to reduce administrative burdens later this year. I am bound to say that that is the opposite direction of travel to that suggested earlier by some noble Lords.
In today's knowledge-based global economy, the success of the financial sector depends on the skills of the individuals working within it. London's future prosperity as the world's leading international financial centre therefore depends on its ability to keep those who work in it equipped with the best and most up-to-date skills. Indeed, research conducted for the City of London puts the availability of skilled personnel as the most important competitiveness factor. The noble Lord, Lord Newby, in particular, reminded us that this is not just a case of dealing with those who are currently, or potentially, engaged in the financial services business; there is a need to ensure, for the purpose of cohesion, that skills in the deprived communities are also upgraded so that they have a chance to engage. I pay tribute to the work of the Financial Services Skills Council and all other bodies involved in ensuring that financial sector employees have the right skills.
With regard to London being a world city, the noble Baroness, Lady Hamwee, and the noble Lord, Lord Newby, talked about the wider role of culture and sport. That is absolutely right.
The subject of infrastructure featured prominently for a number of speakers—in particular, the noble Lords, Lord Brooke, Lord McNally and Lord Levene, and the noble Baronesses, Lady Valentine and Lady Hamwee. I make it clear that the Government believe that Crossrail is an important project. That is why we are taking forward a hybrid Bill and why the Department for Transport recently provided further funding for cross-London rail links. But difficult decisions have to be taken on how it will be paid for. There will need to be a significant contribution from London business but, as the former Secretary of State made clear at Second Reading last July, it would be inappropriate to make decisions on the balance of funding before Sir Michael Lyons issues his report on local government finance. The Government's current priority is securing a successful package of a complicated hybrid Bill and ensuring that the scheme scope stays manageable.
On other infrastructure issues, Transport for London's total grant will rise to £2.65 billion by 2009-10, compared with £1.8 billion in 2001. The Government have given Transport for London a funding package for the Tube of an average of more than £1 billion a year until at least 2010.
The noble Baroness, Lady Valentine, asked whether migration of highly skilled workers would continue under the new arrangements. The UK policy on migration and temporary foreign workers is designed to allow flexibility for international businesses relocating employees into the UK. Our migration rules are some of the most flexible and fairest in the world, and the new points-based system that is being designed is due to be rolled out in stages from late 2007. The Command Paper published by the Home Office in March indicated the structure of the system, and we believe that it will enable the appropriate migration to continue.
Europe featured prominently in the debate. The Government have championed the liberalisation of financial markets within the European Union. Once the financial services action plan has been fully implemented, EU rules should offer significant opportunities for cross-border financial services trade within the single market, providing financial sector firms with a passport to operate on a cross-border basis in all other EU member states.
Building the single market has of course resulted in regulatory change, attached to which are the inevitable adjustment costs. The Government, in partnership with the financial sector, are continuing to work proactively with the European institutions to ensure that EU rules are as business-friendly as possible and do not unduly hinder innovation or competition. The European Commission's recent White Paper sets out a five-year forward strategy that is essentially a pro-competition, pro-better regulation, minimalist legislation package, representing an excellent outcome for the UK, provided of course that it is put into practice. My noble friend Lord Brennan, the noble Lords, Lord Hodgson and Lord Marshall, and the noble Baroness, Lady Noakes, spoke about that, but it was the noble Lord, Lord Newby, who put down a marker on why regulation is needed in the first place.
The Commission has agreed to review the outcome of the financial services action plan by 2009 and to change measures that are not working. There is agreement that there is no appetite for FSAP2 and that the Commission White Paper reflects very much the position for which the UK has lobbied—particularly regarding any new regulations that will be introduced. MFID, in particular, is welcome because it creates tremendous opportunities for UK financial services and follows better-regulation principles. In particular, there will be a proper cost-benefit analysis along the way. A single regulator is not realistic in the foreseeable future. Uniform legal requirements will be needed throughout the UK.
My noble friend Lord Brennan suggested that the financial services action plan was not sufficiently aimed at the user rather than the producer. I agree that it is important that user views are taken into account. The European Commission has set up a users' group, FIN-USE, and a consumer group for this purpose.
A number of noble Lords referred to taxation issues. I would have been tempted to spend the whole 20 minutes trying to deal with those, but it is not possible. Reference was made to missing out as a result of the location of funds outside the UK. There are obviously advantages for investment funds to be resident in the UK. There are many reasons why a fund manager may choose to locate a fund outside the UK. Despite what has happened, the high-value-added fund management activity continues to be undertaken from the City of London.
My noble friend Lord Christopher and the noble Lord, Lord Hodgson, referred to stamp duty. This debate has gone on for many years, but there is no firm evidence that STRT has any material impact on the City's competitiveness, as recent reports have confirmed. London has many advantages as a financial centre and it is wrong to look at a particular part of the tax system in isolation.
The noble Baroness, Lady Valentine, referred to retrospective tax being disruptive to business. Tackling tax avoidance is not incompatible with maintaining UK competitiveness. It could be argued that avoidance undermines unfair competition. The noble Lord, Lord Marshall, referred to continuing changes in the law, which can be disruptive and can create uncertainty. Tax avoidance undermines the ability of the tax system to deliver its objectives. The Government will continue to tackle avoidance by both closing loopholes and undertaking structural reforms. On the incidence of UK tax, referred to by the noble Baroness, Lady Valentine, the OECD publishes figures on tax and corporate income and employers' social security contributions as a percentage of GDP. They are often used as international comparisons. Latest OECD figures show that tax revenue from corporate income plus employers' social security contributions as a percentage of GDP in the UK in 2003 was 6.5 per cent. That was among the lowest of the EU 15 at that time.
Unfortunately, I do not have time to revisit with the noble Viscount, Lord Trenchard, the issue of withdrawal of ACT. We have done it many times before. If the UK regime is so difficult, why are we leading in foreign inward direct investment? Why has the economy continued to grow for the longest period in its history? Why have we maintained low and stable interest rates?
The Government want a successful and competitive financial sector, which is efficient for users and the wider economy, and which is socially responsible. That includes addressing money laundering, to which the noble Lord, Lord McNally, referred. I have an update but do not have time to mention it now. I shall write to the noble Lord, as the update is quite detailed on that and on the proper payment of taxes. We must ensure that people, especially those on low incomes, have access to mainstream financial products, such as bank accounts and low-cost loans, that the rest of us take for granted. That is a priority for this Government. Along with that comes the need for accessible financial education, to which my noble friend Lord Christopher referred.
In conclusion, the Government's objective is for London to build on its position as the world's leading international financial centre so that it becomes even more successful as the global economy integrates. I remind the noble Viscount, Lord Trenchard, that that commitment is not an illusion. London is in a strong position, but as emerging economies develop their own financial sectors, government and business need to work together to deal effectively with the challenges ahead and deliver the full benefits for Britain of the opportunities presented by globalisation.
Ultimately, however, there is only so much government can do to create an enabling business environment. In truth, it is the unwavering dynamism and innovation within London's financial sector that will ensure that it remains the success that it is today.