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The Exchequer Secretary to the Treasury (Sarah McCarthy-Fry): First, I want to congratulate my hon. Friend the Member for Selby (Mr. Grogan) on securing this debate. I would also like to thank him for his very kind remarks to me and I am sure that, when we win the next general election and form the next Government, he will be considered for a starring role.
The impact of the City of London on the UK economy is, of course, a highly topical issue and one that deserves a rich and informed debate. I think that we have had a rich and informed debate today, which has gone much wider than the original title of the debate, and I thank my hon. Friend for changing that original title to enable us to look at some of these wider facets.
We have had contributions from several hon. Members. The hon. Member for Cities of London and Westminster (Mr. Field) concentrated on the hedge funds, because that is an area of expertise for him. The hon. Member for Southport (Dr. Pugh) touched on hedge funds, but he also looked at the wider economy and regulation. The hon. Member for Fareham (Mr. Hoban) touched on hedge funds, bonuses and the wider financial services sector.
The hon. Member for Fareham made an important point when he asked what we are actually talking about when we talk about the City of London. Technically speaking, of course, the square mile and its environs, including the west end and Canary Wharf, form the hub of the major global financial centre, but I think that the term "City of London" is more often used as a metaphor for the wider UK financial services industry. That is what I have taken it to mean in the context of this debate.
As my hon. Friend said, the UK financial services industry plays a vital role in our economy. As I have a bit of time, I will start by laying down some facts and debunking a few myths about the City of London and its position that frequently, and perhaps unhelpfully, circulate.
There is an impression that London is only about financial services. That, in turn, translates into concerns that the UK economy as a whole is unbalanced. It is easy to assume that London's economic output is completely dominated by finance, but the sector generated 17 per cent. of London's GDP in 2006, compared with a UK average contribution of 7.5 per cent. to regional GDP. That is interesting to note, particularly when one thinks of the remarks made by the hon. Member for Southport about the northern regions. Even regions better known for their expertise in advanced engineering and low-carbon technology have financial sector output nearing the national average. That includes Yorkshire and Humberside.
Balance is a relative concept. The UK financial services industry as a whole, depending on the extent to which financial intermediation activity is measured, accounts for between 7.5 and just over 10 per cent. of national output. As a further comparison, the manufacturing sector alone accounts for about 14 per cent. of UK output. Of course we stress the financial services sector's importance to the UK economy, but comments about its dominance need to be considered in context.
Many references were made to the importance of City competitiveness, which assumes that the UK financial services industry is only about London. The hon. Member
for Fareham and I, who have neighbouring constituencies, know that there are many financial services sector industries outside the City. The reality is that London is home to just under one third of overall UK financial services employment; individual regions such as the north-west generate almost 10 per cent. Regions differ by sub-sector. London is strong on broking and fund management, the east of England on life insurance and south-western Scotland on life insurance and pensions.
Our long-term objective-anybody's long-term objective-is fair, efficient, stable financial markets that support economic growth and prosperity. That means that there must be interaction between the financial services industry and the wider economy-another point that has been made-but achieving that optimal interaction is, of course, riddled with tensions and challenges. There is a criticism predating the current crisis about the detachment from the broader economy with which the City-sometimes "the City" is used as a synonym for the higher value-added or exotic elements-is seen to operate. On one level, that has to do with the complexity of the products, but on another, the sense of detachment cuts to the heart of economic morality. I cannot remember who made the point that some see it as encouraging a brain drain from other economically valuable sectors at the expense of local economies.
A second tension is the apparent misalignment between risks borne by taxpayers in allowing the financial sector to grow and the actual benefits gained by those citizens from the sector's basic role in allocating capital and helping society manage risk. A third is the combined gravity of the Government's actions to tackle problems in individual financial institutions and restore system-wide stability. Questions have been raised about whether there is an optimum size for the UK financial sector relative to the wider economy. That, in turn, has generated a debate, mentioned by many hon. Members, about whether individual financial institutions have become too big to fail and, if so, what the appropriate regulatory response is.
Having identified what the tensions are, I will try to answer the questions raised about how we propose to address them. The Banking Act 2009, the Turner review and the Treasury's wide-ranging White Paper "Reforming financial markets" have given us some pointers for where to go: more effective prudential regulation and supervision of firms, greater emphasis on monitoring and managing system-wide risks, greater confidence that the authorities are ready and able to deal with problems involving systemically important institutions and greater protection for the taxpayer when an institution fails.
My hon. Friend mentioned the Glass-Steagall Act. The only point that I would make is that banks of all sizes, not just institutions above a certain size, have encountered difficulties. I am not convinced that a cap on size would necessarily be an effective way of managing risks. I believe that looking at systemically important institutions and managing risks is a better approach.
I absolutely agree with my hon. Friend about mutuals. I would; I am a Labour and Co-operative Member of Parliament. In "Reforming financial markets", we made the point clearly about the importance of the mutual sector, particularly in creating a diversity of institutions. There has been a tendency to concentrate on one type of institution, and diversity balances risk.
Mr. Mark Field: I agree. I hope that Northern Rock goes down the mutual route, and that the mutuality of building societies will come back into vogue. Does the Minister not recognise, however, that ever stronger regulation is an impediment to the diversity to which she refers?
Sarah McCarthy-Fry: It is about getting the balance right and recognising that just because an organisation is managed mutually, that does not mean that the consumer assumes less risk. If consumers invest in an institution, they are entitled to the protection of regulation, whether the institution is a mutual organisation or a plc. It is about getting the balance right.
We talked a little bit about the international level. The fifth point, I think, was a financial transaction tax, or what in my old Co-op days we called a Tobin tax and debated regularly at the annual party conference. I am sure that my hon. Friend will be aware that it cannot be done on its own but would have to be done globally. The Prime Minister said in a recent speech that it was worth considering, and I know that the French are conducting a feasibility study and a working party on it. We will be watching with interest how it develops. It is certainly not something that the UK could do on its own, and there is an awful lot more work to do on it.
I am conscious of the time, and I want to pick up as many points as possible. I turn to corporate governance, because not all risks can be addressed simply through regulation. Sir David Walker is due to report on the governance landscape in the UK banking sector in November.
A number of people mentioned bonuses. We are approaching tackling bonuses with four basic principles: rewards for failure are not appropriate; bonus payments should be based on long-term, sustainable performance; bonuses should be designed to shape future performance and thus subject to appropriate clawback if performance
is not good; the regulator should take bank remuneration into account when supervising a bank.
Moving on to hedge funds in my last two minutes, I think that there is a tendency to cast hedge funds as the villains. We have heard many different aspects of that in this debate. Mention has been made of the total value added by hedge fund managers to the UK economy; a PricewaterhouseCoopers report said that it was £76 billion for 2007. The report further highlighted their value with estimates that hedge funds accounted for 1.3 per cent. of the London work force and 5.9 per cent. of total London earnings.
The UK regulatory regime is among the most rigorous in the world and, in general, has stood up well, but the Government and the Financial Services Authority have identified one aspect that requires strengthening: oversight of the impact that hedge funds' investment position and strategies have on systemically important market sectors. We are looking to strengthen oversight in that area.
On the EU directive, we support the high-level structure and approach of the directive, which is similar in many ways to the current UK regime. However, there are a number of detailed points at which we think the current draft would impose large costs and constraints on fund managers without a commensurate improvement in regulatory protection. If that improvement is not obtained, there is no point doing it. Lord Myners is leading on the issue and we regularly meet with other EU member states. The Swedish presidency is developing a revised draft that we believe will represent a major improvement on the Commission's draft, and the European Parliament has just started work on the dossier and appointed a rapporteur.
The question of the impact of the City of London on the UK economy requires us to consider more broadly how the financial services and the economy interact, the tensions in the interaction and how Government, industry and other market participants can work together. The joint effort requires proper regulation.
Linda Gilroy (Plymouth, Sutton) (Lab/Co-op): Plymouth CityBus, with its cheerful red and white livery, is as much part of our great city's identity as the iconic red and white lighthouse, Smeaton's Tower, that stands on Plymouth Hoe. One of the many things that makes people in Plymouth angry about the proposed sell-off of the bus company by the Conservative council is that a sale to a rival company could rob us of that distinctive part of our city's identity. People have an attachment to and an affection for their bus company. People like the red and white buses because CityBus has a successful track record of providing good, efficient bus services. As Jack Dromey of Unite said just a moment ago, it is one of the finest bus companies in the land. This debate is not about a bus company that has failed and so has to be put into the private sector, but about one of the most successful bus companies in the country.
CityBus was formed in 1986 and is wholly owned by Plymouth city council, making it one of only a dozen or so municipally-owned bus companies left in the United Kingdom. It employs nearly 500 local people, and some of its very fine workers have joined us today. The company has an annual turnover of approximately £17.5 million and although an annual dividend is returned to the council, importantly, profit is continually invested in vehicles and services. Through careful stewardship of resources over the years, the company and the fine people who work for it have come up with a recipe that ought to be seen as an example of what works.
CityBus provides Plymouth with a high level of access to bus services, despite how spread out the city is. More than 95 per cent. of people in Plymouth-I think it is as much as 98 per cent.-are within 200 metres of a bus stop. In similar cities, the distance is 400 metres. I hope the Minister agrees that the service is one that many would envy. We must surely aspire to create more such services if we are to meet the urgent demand of our climate change targets.
The CityBus recipe is sensitive to change. The success of the 60 or more buses that run every hour between Derriford and the city centre allows other less well used routes to survive. It is ironic that the bus war that was prompted by the council's proposal to sell CityBus is attacking the core of the successful recipe for sustainable bus services in Plymouth-that is, the successful routes.
The company works well on prices. For example the dayrider ticket is good value compared with those in other cities. That is possible because CityBus, as a publicly owned company, has used its competitive position to benefit everyone. It currently has 60 per cent. of the competitive market. If CityBus is sold to a rival bus company, an even fiercer price war is likely, as has been seen in other cities. Although that might drive down prices and appear to be good for customers in the short term, in the longer term it would probably lead to the emergence of one dominant company. If such a company was not in public hands, as sure as night follows day, it would end up stifling competition and keeping prices high.
It is ironic that CityBus, which is a successful recipe that delivers good outcomes to all, is being put at risk just as the problem of bus wars leading to dominant
companies has emerged all over the country. There has been a market survey by the Office of Fair Trading and a consultation is ongoing on the matter. If that leads to a full-blown investigation by the Competition Commission, it would be well advised to look at how the sustainable bus services work in Plymouth.
CityBus provides sustainable bus services that are good for older people. I have described the good network with most people living within 200 metres of a bus stop. That is much better than other cities with denser populations, which should make it easier to provide such a service. Goodness knows what would happen to the level of access in our city if the bus service was sold off. It is clear that any loss of access would hit older people, especially older women, hardest as they rely more on bus services.
The issue also matters to younger people. A company that had to serve multiple shareholders rather than the community through the proxy of city council ownership would almost certainly result in a reduction of school buses. At present, CityBus provides an additional 12 buses to provide extra capacity on school runs during peak time. The city council is highly unlikely to be able to support those additional services. If it did, the money would not come from the current subsidy. That is just one aspect that makes the proposal so stupid. The knock-on effect would be that general bus services became more crowded and roads would become more congested as people switched back to cars for school journeys. The school bus service removes more than 4,000 car journeys from the road each week-that is 160,000 journeys in a school year, which all take place at peak times. The proposal would also affect the target to increase bus use from 16 to 20 per cent. Need I say more? This crazy proposal will be bad for young and old alike.
We must rise to the steep challenge of transport playing its part in the immensely stretching targets set out in the Climate Change Act 2008. The silo mentality of the Tory administration in Plymouth will drive a cart and horses through a valuable green asset.
James Duddridge (Rochford and Southend, East) (Con): The Prime Minister is going to put assets such as the Dartford toll crossing into private ownership. Is that not inconsistent with the points that the hon. Lady is making?
The silo mentality of the Tory administration in Plymouth will drive a cart and horses through an incredibly valuable green asset, which has been developed through cross-party stewardship over several decades. CityBus is a green asset that not only provides good access to public transport for a high proportion of the population, but invests its profits to that end. It is not under pressure, as a private company would be, to distribute a higher proportion of its profits to shareholders. That means that all vehicles operate on ultra-low-sulphur diesel fuel and all new vehicles comply with the latest emission levels. It is ahead of the curve in investing in Euro 4.5 and 5 vehicles.
Unlike most other bus companies, CityBus still employs a pool of local engineers, which is a sustainable way of ensuring high-quality maintenance and reliability. A pool of local, skilled employees ensures that engines and parts are maintained to high standards and that an environmentally unsustainable waste of parts and engines is avoided. There is also high-quality performance in terms of emissions. Most companies that might express an interest in taking over from CityBus do not have engineering or coaching as part of their core business, so both activities would be likely to stop if it were sold. That would result in the loss of 10 per cent. of the jobs. The engineering work would have to be done elsewhere and it is unlikely that the win-win balance of engineering and sustainable maintenance practices would be preserved.
"seeking to place a value"
on the company has upset that balance. The early signs of the bus war that has been prompted must surely be depreciating the value of CityBus. That is not exactly degree-level economics. We have seen negligent stewardship not just of an outstanding environmental asset, but of taxpayers' money. There must surely be a case for someone in the Audit Commission investigating whether proper consideration was given to the repercussions of selling the company at a time when market values have plummeted, a bus war was entirely predictable and environmental assets should be most particularly valued and protected. Councillor Tudor Evans, who is Labour's leader on the council, specifically drew attention to that not just once but several times before the decision was taken to proceed.
Of course, Plymouth city council has to raise money in the face of difficult economic circumstances and the likelihood of tighter public spending. However, I say to the Minister that it is a question of priorities and there are other ways of saving money. The capital programme could be engineered differently, or other assets could be sold. It says a lot about Conservative priorities in Plymouth that they have chosen to target CityBus without setting out why it is a priority for disposal over other assets.
The decision to proceed comes from a silo mentality that pays no attention to the consequences for people, whether they are young or old customers, the environment or the service provided. A silo mentality has been compounded by a seemingly cavalier disregard for using up to £962,000 to prompt a bus war, which has made bus users and non-bus users alike angry and worried.
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