Financial Services

Part of the debate – in the House of Lords at 3:56 pm on 21 November 2001.

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Photo of Lord Haskel Lord Haskel Labour 3:56, 21 November 2001

My Lords, it is my privilege to congratulate the noble Lord, Lord Brooke, on a wonderful maiden speech. In spite of his modesty, I think that all noble Lords are aware of his distinguished career in politics. He served his party at both extremes; he was a Whip and then, much later, he was the party chairman. He served the country as a Minister in many departments. He told the House about his time at the Treasury, but he also served in education, heritage, and at the Northern Ireland Office during a very tough time.

Perhaps what is not known is that the noble Lord was also a management consultant for 18 years before entering Parliament. That experience may be the source of the authority with which he speaks on business and other matters. I think I speak for the whole House when I say that I hope that we shall hear from him often.

I recently had the opportunity to attend a talk on schizophrenia. I learnt that schizophrenics have two personalities, one which is kind to people and helpful to society, the other which is a threat to people and a danger to society. What an apt description of the financial services industry here in Britain. On the one hand are flourishing businesses providing valuable and important services to our economy in insurance, banking, trading and financing—and in leasing, as described by my noble friend Lord Mitchell. At the same time, there are practices which are a danger in themselves and which damage the rest of our economy. I only have to mention Lloyd's, Equitable Life and the mis-selling of pensions.

The noble Lord, Lord Levene, told noble Lords about the good side of that split personality. I congratulate him on moving the Motion and on initiating the debate. I certainly agree with his comments about transport. However, for the sake of balance, I believe that I should look at the darker side of the industry's personality.

One symptom of schizophrenia is excess. The excessive fees that City lawyers and accountants, banks and hedge fund managers charge are legendary. They can charge those fees because they have created a kind of closed shop for their specialised services. That is particularly worrying in the field of pensions where high charges together with low levels of information have alienated many savers. Furthermore, underfunding has created many worries. The cost of such excess is passed on to the rest of the economy, reflected in the high price of finance and the high fees charged by our financial services companies to the rest of industry.

I wish that I could accuse the financial services sector of excess when financing new industry, new research, new products and market development. Sadly, I cannot do so. If the financial services industry was doing its job properly, there would be no need for the Government to use taxpayers' money to finance projects such as the loan guarantee scheme, the £54 million innovation fund and all the other national and regional schemes funded by the Government to help companies to expand and to develop their products, new markets and new technologies. I do not mean helping lame ducks, poorly managed companies or declining businesses: the Government do not do that any more. But the Government are helping the entrepreneurial revolution by financing businesses to help them make progress.

The City's preference for dealing with big corporations has not helped the entrepreneurial revolution which is taking place in this country. The venture capital sector has helped, but its preference has been for management buy-outs rather than risking new ventures. If the financial services industry was doing its job properly, it would be doing this work, not the Government.

British manufacturing industry should be well served by a flourishing financial services sector. There should be no lack of investment in mechanical engineering, electrical engineering and chemical engineering. Unfortunately, the City seems most interested in investing in the financial engineering sector in Britain; in engineering share values. We are witnessing that waste now as companies write down billions in assets this year which the financial services sector valued last year. There was an example of that only last week. Last year, Vodafone paid a £10 million bonus to its chief executive for buying a business, against which it had to write off £10 billion last week.

Perhaps this all came about because the financial services sector fell into a trap to which many of us succumb—fashion. The industry tries to follow fashion so as not to miss out on the next fashion hit. I can recall two property fashion booms, the fashion of overseas government bonds, the fashion of commodities, and, of course, the recent dot com fashion. While money was recklessly poured into these fashionable sectors, good businesses in less fashionable sectors were starved of finance.

I come from the textile industry. I know all about fashion and what a poor master it is. How much better it is to have some kind of vision. Sadly, the dedication to personal gain which seems to permeate the financial services industry is a pretty uninspiring vision. At least having a vision instead of following fashion ensures that market prices are more likely to be driven by normal corporate fundamentals.

The dangerous side of the City's character is dedicated to personal gain through the narrow emphasis on shareholder value. That narrow emphasis has let down the remainder of British industry. After all, what is shareholder value? When managers decide, it is usually about their broad overall business—its growth, employment and market prospects—and its fundamental value. But when the financial people define shareholder value, it usually means only the share price, and that is a fairly narrow term.

Other noble Lords have spoken about regulation. The financial services sector tried to regulate itself, but, sadly, it did not work. The rules for insider trading were virtually impossible to enforce. That is why it has been necessary for the FSA to take on swingeing powers at the end of this month, powers that include unlimited fines for market abuse. I am rather sad about this. Instead of being a policeman, the regulator should be the City's conscience, a conscience which encourages good practice, sets high standards of professionalism and lets the customer call the shots. The City depends very much on its reputation, which is very difficult to build up. If it does not react as I have described, I am afraid that the City will decline in importance. The sector needs to cure its own evils.