Financial Services

HL Deb 21 November 2001 vol 628 cc1136-82

3.14 p.m.

Lord Levene of Portsoken rose to call attention to the place of the financial services industry in the economy of the United Kingdom; and to move for Papers.

The noble Lord said: My Lords, I am grateful for the opportunity to propose this Motion. I should like to declare an interest. I am chairman of IFSL, the old British Invisibles, and vice-chairman of Deutsche Bank in London.

The financial services industry is about managing risk. It is wider in scope than many imagine. The industry now includes not only traditional products such as lending, deposit taking and credit cards, but also investment banking, insurance, securities dealing, fund management, derivatives, maritime services and foreign exchange.

Financial services operate globally and money, in its raw form, is a commodity. We should be very encouraged that the United Kingdom is such an attractive base for the industry. Nearly 500 foreign banks operate from, and provide wealth for, the United Kingdom. The industry is concentrated in London but there are other sizeable centres in Edinburgh—now the sixth largest fund management centre in Europe—Leeds, Manchester, Glasgow, Bristol and Birmingham. The financial services industry, when one includes the legal and accountancy professions, produces 8 per cent of GDP. The industry provides employment for almost 2 million people, which is four times larger than the number of civil servants. In Scotland, the industry employs almost 10 per cent of the workforce. In the most narrow definition of balance of payments, the financial services industry contributed a record £13 billion last year, which helped to offset the shortfall in physical goods of £30 billion. The insurance sector pays out £200 million of benefits every day.

Financial services acts as a driver for other industries, particularly property and telecommunications. In Scotland, financial services account for 25 per cent of the entire Scottish property market, while the bulk of the Canary Wharf development is predominantly filled by financial services firms. The competitiveness and size of the industry provide the ideal breeding ground for IT innovation. For example, LIFFE—the futures exchange—now provides the world's most advanced electronic trading system and is accessible in 25 different countries, far more than any other system.

The financial services industry makes an enormous contribution to the Exchequer. The banking and insurance sector pays over one-third of the entire corporation tax take, amounting to £7 billion as well as £1.25 billion in irrecoverable value added tax. That is the equivalent of three pence off the basic rate of income tax.

Financial services firms also contribute generously to local communities. In the past 12 months over £250 million has been donated directly by the industry to worthwhile local causes over a wide range of activities.

Most of the City's investment banks and securities houses are now in international ownership. This has increased, rather than diluted, the UK's strength. Businesses have consolidated in London, where there is critical mass and not in other European centres. Openness to foreign investment, coupled with favourable tax regimes, is the foundation of the attractiveness of the United Kingdom. "Wimbledonisation", as it is called, where we provide and host the best venue, even when most of the best players are neither British nor British owned, is undoubtedly good for us and good for the economy.

We are certainly enjoying the fruits of success. But we cannot afford to be complacent. One cause for growing concern is regulation. It is increasing, becoming over bureaucratic, tying up considerable amounts of time for little apparent benefit. It could well make us less competitive.

These concerns are not primarily aimed at the main UK regulator, the Financial Services Authority. It is true that there has been some disquiet at the work required for "N2", when the FSA takes over as the "super-regulator" at the end of this month. But if the result is the promised "light touch regulation", properly geared to risk, then it will have been worth the effort.

We welcome the FSA's new obligation to take into account the impact of what it does on the competitiveness of the UK's financial markets and its establishment of a "Practitioners Panel" to monitor that. The FSA should not, therefore, be a problem for the industry. Indeed, we believe that the current regulatory regime is part of the attractiveness of London. Last month, Euronext took over LIFFE, the futures exchange, and promptly announced that it is moving its entire derivatives trading to LIFFE in London, an implicit acceptance perhaps that, for financial firms, life is better in the UK. Certainly that is the view of LIFFE's membership, three-quarters of which are foreign companies and have been attracted to the UK by our international reputation.

However, our real concern is Europe—but not, I hasten to add, the euro. I want to issue a wake-up call. As powers have moved to the European Commission, potentially damaging directives are now issuing. Whatever the intention, there seems to be little consultation and the results are certainly not "light touch". Risk management is too often swapped for risk avoidance, which is neither desirable nor achievable.

Two current directives may serve as examples. The first is the market abuse directive, which is in danger of failing to learn the lessons from recent work on the new UK market abuse regime. It risks inadequately defining the offence. In some countries, criminal sanctions may apply for abusive behaviour where there has been no intent to abuse. Firms could find themselves at the mercy of several national regulators each applying different standards—perhaps for behaviour that is currently perfectly acceptable practice and approved by their regulator here in the UK.

The prospectus directive was originally well intentioned but is threatening to miss the opportunity to streamline the European capital markets. It could instead fragment the market, raise the cost of capital and burden companies, particularly smaller ones, with additional costs of up to £150,000 per year. It is small wonder that 56 senior executives issued their own wake-up call by highlighting these measures in a letter to the Financial Times last week.

We must impress upon the Government the need to keep a very watchful eye open for the potential implications of these directives and then to alert City interests. We can defend ourselves well. The withholding tax was a good example and government support here was outstanding. But we need to be aware of the issues at an early stage. If we are, we can prepare properly. Influencing the debate in Europe is not just a matter of protecting "Fortress UK" but understanding how the proposals will impact on other European markets and what other Europeans are trying to achieve.

Another key area of concern of the institutions is infrastructure, particularly transport. The dire state of public transport in London works against the capital's international position. But this is not just about sorting out the Tube. The London CrossRail link needs to go ahead and it must serve the whole of London's financial services community. The investment also needs to be approved for the light rail network linking Edinburgh city centre with the waterfront development there, its own Canary Wharf. Back in London, do we really have to wait four years for improvements to the Waterloo & City Line? The special bus lanes in Leeds, the trams in Manchester and, more recently, in Croydon, have worked well. We need to draw on these models to bring urgent infrastructure improvements.

Sadly, we are also beginning to have a problem with reputation. There have been many investigations and inquiries into various aspects of the financial services industry in recent years. The cumulative effect of these on London's image and reputation in the eyes of the outside world has been damaging. It is increasingly embarrassing on occasions to commend, as we rightly do, the high quality of our financial regulation procedures to our European friends only to have them retort, briefed as they are by our candid and often aggressive media on the apparent defects and scandals affecting our financial industry, that a market place so unhealthy that it needs constant investigation can scarcely be put forward as a model for others to follow. A more balanced approach by the media would undoubtedly pay considerable dividends.

Money laundering belongs in this context. We all take this very seriously. Yet only the other week the UK was under attack by a French parliamentarian saying that we are a "money launderers' paradise". Let me try to set the record straight.

Money laundering damages the reputation of the City. We therefore have a corporate interest in fighting it. But we know that there are problems; we are certainly not complacent; and we are working very hard at solutions. In the past year the dedicated staffing in the Economic Crime Unit, which leads the fight against money laundering, has increased threefold. A new computer system has been introduced, as have direct links to 37 police forces. This has led to a much higher notification of suspicious transactions, up by 50 per cent this year to 27,000. Since 11th September the daily rate of notifications has increased dramatically from 70 to 200.

Theoretically, if we imposed draconian regulations—such as insisting that all deposits are made through one point coupled with a half-hour interview each time, we could eradicate all money laundering. But if we fell for the total risk avoidance trap, then we would be out of business. The City is very serious about preventing money laundering. It is actively fighting back. But we must bear in mind that with a pool of 500 billion dollars being traded every day on the foreign exchange market alone, there are bound to be some leaks. We do not like them. The Industry is keen to plug them all.

As I outlined earlier, the industry makes a significant contribution to the Exchequer, both from corporate and personal tax where the rates are among the lowest in Europe. In times of economic difficulty it is tempting for government to raise taxes in the short term. But the Government must recognise that employees and their firms, in this industry above all others, are internationally very mobile. Raise the price of doing business and business will move. Tamper at your peril.

In a similar vein, I should like to mention the issue of stamp duty on share transactions. Its continued imposition is a glaring anomaly at odds with the Government's agenda on investment and competitiveness. Independent research commissioned by the Stock Exchange concludes that abolition would reduce the cost of capital of UK companies by 80 basis points from a current average of 12.5 per cent, boost share prices by an average of 10 per cent and investment by around £3 billion per year, and remove the anomaly that the tax discriminates in favour of non-UK companies.

Presentationally I know that this is difficult. The costs of abolition seem huge—almost £4.5 billion. However, research also shows that the net impact would be less because of corporation and income tax gains; and the residual lost revenue which would be completely offset by increased GDP growth. On balance, the advantages of abolition outweigh the disadvantages. In difficult times, abolition would boost UK equity markets and corporate morale.

The financial services industry is a vital contributor to UK plc, but it is more than that. It is one of the engine rooms of our economy and a tremendous success story for the United Kingdom. We are number one in the world as the international centre—a claim that we can make in few other areas. The industry provides well over £8 billion to the Exchequer. 8 per cent of the GDP and employs 8 per cent of the workforce. Financial services firms are the largest corporate benefactors to charities, social causes and the arts. It is a thriving, profitable industry. Therefore it is imperative that we remain vigilant and start t o take steps today on the points I have outlined—European regulation, reputation, transport, taxes and stamp duty—to ensure that the financial services industry retains its competitive advantage and can continue to provide enormous benefits to the UK economy. My Lords, I beg to move for Papers.

3.30 p.m.

Lord Mitchell

My Lords, I am grateful to the noble Lord, Lord Levene of Portsoken, for introducing this debate. To use a capital asset, one does not necessarily have to own it. That is the concept behind a highly successful sector in the financial services industry—a sector which is generally known as equipment leasing but which can also include hire purchase and other related products and services. I declare not only an interest but my livelihood. For most of my adult life I have run companies involved with the leasing of high technology products. My present company, of which I am the chairman, is one of the leaders in the field. We are also members of the Finance and Leasing Association which is the trade association for UK lessors. I should like to give your Lordships a feeling for the scale of the industry.

In the 12-month period to September this year the members of the FLA financed 25.2 per cent of all fixed capital in the UK, excluding property. That percentage translates into an actual amount of £23.3 billion. Of that total, 28 per cent was represented by cars. 12 per cent by commercial vehicles and 18 per cent by plant and machinery. The balance was invested in equipment such as information technology, medical technology and communications networks.

Last year, leasing financed two-thirds of all transport investment in the UK. In the future, with so much government money being invested in transportation, leasing is bound to increase rapidly. It truly is an unsung example of public/private partnership. Leasing owes its popularity to the fact that it enables users of capital equipment to defer the cash impact of an outright capital expenditure. In essence, users pay for their equipment over a period.

Why has leasing become so popular and why do so many organisations use it? The principal reason is that leasing enables organisations to conserve cash. In effect, it takes the pressure off the cash flow of business. A secondary reason is that leasing decisions can be made much more quickly than those for a bank loan and the finance advanced represents 100 per cent of the cost of the equipment. That enables customers to match asset expenditure to income generation. In my area, which is technology, it allows the customer to avoid investing his own cash in rapidly depreciating assets. At the big ticket end, finance for assets such as ships, aircraft and oil pipelines can be made for very long periods—even up to 20 years. By way of contrast, my company will rent a computer for one day. Most typically, leases will be written for a period of between three and five years.

If I have given the impression that equipment leasing is the preserve of the large corporates, let me add that in the year 2000, 53 per cent of business finance provided by the FLA went to small and medium-sized enterprises. During this Government's first term, they produced a degree of economic competence that was simply dazzling. Boom and bust have become relics of a bygone era. Yet the Opposition were meagre in their praise, claiming that we were the beneficiaries of decisions that they took when they were in government. Today the industrial world is in recession, with one notable exception—the UK. Today's headline in The Times, based on an OECD reports, says it all. It states: Britain forecast to buck world recession". However good GDP growth may be, our Achilles' heel as a nation is, as it has always been, productivity. Output per worker lags behind our competitors. Capital equipment is part of what makes the workforce more productive, and so, too, are skills enhancement and good management. It is my firm belief that leasing is a financial tool that oils the wheels of productive growth.

With productivity being so high on the economic agenda, your Lordships might have expected that the Treasury would encourage the leasing industry. But I have to report that in general government recognition of what we do is less than helpful. I wish to give just one example of where the Treasury has tried to make life easier for the small business sector but has ended up making it harder.

In the past few years the Government have announced accelerated capital allowances for small businesses when they acquire capital equipment. In the case of IT equipment, such allowances are even further enhanced to 100 per cent. So far, so good. The problem is that many small businesses are barely profitable and cannot use the benefits of capital allowances. This is particularly true of start-up companies which are in most need of the benefits.

Traditionally, capital allowances have followed the owner of an asset rather than its user. That has meant that a lessor has been able to transfer his tax benefits to the lessee by way of lower costs. Or, even better, the lessor has been able to accept credits that otherwise might have been rejected. For a reason that I cannot fathom, these special SME incentives are precluded from being transferred from user to owner. The effect is that an SME pays more for a lease than would be the case if the allowances were transferable.

We learn this week that the DTI has reported that SMEs in the UK are failing to meet the Government's own targets for trading on-line. That is hardly surprising. Tax policy and the desire to improve productivity need to point in the same direction. Will my noble friend the Minister ask the Treasury yet again to review that anomaly, which is illogical and self-defeating?

The leasing industry helps to keep small business in business. My industry does a good job for this country and the economy. It would be nice if the Government could give us a little more encouragement.

3.36 p.m.

Lord Peyton of Yeovil

My Lords, I, too, thank the noble Lord, Lord Levene, not only for introducing the Motion but for his speech and the knowledge that it contained. I shall take only a few moments of your Lordships' time to draw attention to what I believe is an excessive activity on the part of the Financial Services Authority in curbing the nuisance and menace of money laundering and drug peddling. I have no doubt that those who engage in such activities have need to clean up large sums of money and that they ought to be hampered in their disgraceful conduct.

However, I wonder whether what is contemplated and what is actually happening will deter even the most easily deterred money launderer, or whether that will only be a nuisance to large numbers of people who will be irritated, annoyed and inconvenienced by an unnecessary probe into affairs that they have been accustomed to regard as private.

Today a host of bankers, stockbrokers and other financial institutions are being stirred to approach customers, many of whom they have known for years, with detailed questionnaires. I seriously wonder whether it is sensible or appropriate for an official body to press such institutions into requiring of their customers documentary evidence that they are who they claim to be. Is it justifiable to ask people to tell those whom they have no particular reason to trust what they owe, what they own and where they got it from?

How can the Government guarantee that such information, which in essence is confidential, will be kept confidential by those who receive it? Who will be responsible for assimilating and checking the masses of information that will come from many thousands of sources, and who will have access to it?

I believe that it is going too far not only to require that people should furnish those with whom they have dealt for many years with documentary evidence as to who they are but also to insist that they reveal the very private side of their affairs, without an assurance that the inconvenience that they suffer will make any contribution to hampering the business of money laundering.

Governments traditionally tend to be as inquisitive about others' affairs as they are reticent about their own. I very much hope that before they allow their creatures to go too far with these inquisitorial processes, they will bear in mind what to them is the awkward truth that those who show they trust no one are unlikely to be trusted by anyone. I repeat my gratitude to the noble Lord, Lord Levene.

3.41 p.m.

Lord Taverne

My Lords, we are all immensely indebted to the noble Lord, Lord Levene, for raising this very important topic. I should like to speak about one of the most important issues to be faced by the City of London: the likely effect upon it of the development of the euro, in particular any decision on our part as to whether or not to join. The reasons why the City is preeminent are well known and have been rehearsed and I do not repeat them. I was very glad to hear from the noble Lord that there is no question of complacency. We sometimes have a tendency, not, as many say, to run ourselves down and underestimate our virtues, but towards a certain smugness and complacency to boast as if we are the best and somewhat to underestimate the challenges, particularly competitiveness, that we face.

The first question is: are there any signs that the City's pre-eminence is being eroded? In some areas there seems little doubt that the City has strengthened its position since the euro was introduced. Despite being outside the euro-zone, it has gained market share in the trading of euro-denominated bonds, but in some other areas it appears to be losing ground. In terms of listed companies, market capitalisation, value of share trading and the OTC derivatives market, Paris and, in some cases Frankfurt too, is growing faster.

This year for the first time the BIS triennial survey shows a small drop in our share of the foreign exchange market from 32.5 per cent in 1998 to 31 per cent in 2001. We are still well ahead, but at the same time there was a slight rise in Frankfurt shares. There is a warning sign there. Overall, the figures suggest that the City is doing well but that its lead is narrowing.

I turn to the major changes that the euro will bring about and how they are likely to affect the City. I mention only three of the most important. First, a huge European capital market is beginning to emerge. The equity cult is spreading fast. Corporate finance on the Continent is going through a sea change. There is less government debt on the market. The advent of the euro has led to increased competition, which in turn has produced a great leap in the number of cross-border mergers and takeovers. A gradual shift is taking place towards privately-funded pension schemes. That is true in Sweden where part of the state funds will now be invested in equities or securities; and the Germans have announced a major reform.

All this leads to a huge extra demand for corporate bonds and equities. That demand is growing at a spectacular rate. Are the fund managers and other financial services of the City more likely to be able to exploit these opportunities if we are inside or outside the euro-zone? Banks tend to go where the customers are; they are not likely to up sticks and abandon London overnight, but new movements may well be to the euro-zone. Further, recent research suggests that proximity to the market improves the information available to analysts and enhances profitability. A rational assessment leads to the conclusion that the prospects would be better inside than outside.

Secondly, it will be the euro-zone countries which will increasingly determine the nature of the regulation of the European capital market. That point was adverted to by the noble Lord, Lord Levene. who pointed to the dangers from a number of directives, for example those concerned with market abuse. The Financial Services Action Plan will be completed by 2005. As the noble Lord pointed out, it will affect the City profoundly. It will be decided by qualified majority voting. The fact is that the euro-zone countries will have the required qualified majority. It is noteworthy that the Lamfalussy report, which was concerned with the single market, was discussed separately in the euro group on the ground that its interests might be different from non- members of the euro-zone. It is also significant that when Sweden held the presidency of the European Union it was not allowed to chair the euro group because it was not a member of it. It appears to follow almost inevitably that outside the zone our voice is only too likely to be ignored or, at best, to count for much less than that of zone members, and that will not be good for the City.

Thirdly, the euro is likely to affect foreign direct investment. Changes in its pattern are likely to be gradual and may take time to show. So far foreign investment in this country has stood up well, but there are grounds for concern. First, one must remember that on the whole opinion expects us to join the euro-zone; if not, investment may begin to dry up. Secondly, the exchange rate uncertainties if we stay outside are bound to be a minus factor. Thirdly, we would be very rash to ignore the warnings issued by some of the biggest manufacturers which invest in Britain —for example, Siemens, ABB, Bosch and a number of Japanese companies—about the dangers of staying out. Finally, the most recent survey by Ernst & Young shows that our share of European inward investment has fallen from 28 per cent before the launch of the euro to 21 per cent today.

I do not argue that the City will collapse if we do not join the euro; it is strong enough to prosper even if we stay outside. But I fear that all the signs are that the City's relative position would decline. If, on the other hand, we join it is very possible that the City could become as important to Europe as New York is to the United States. Indeed, backed by the huge potential of the European capital market, it could even rival New York as the leading financial centre of the world.

3.49 p.m.

Lord Brooke of Sutton Mandeville

My Lords. the noble Lord, Lord Taverne, and I periodically join in explaining the British constitution to American students. It is thus a particular pleasure to follow him today, even if I do not do so into controversy.

I owe a particular debt to the noble Lord, Lord Levene, for having initiated this particular debate which affords me the opportunity to make an uncontroversial speech. I hope that I shall not be thought to contravene that intention if I support what the noble Lord said about European regulation in his notable speech. Apart from his own present activities, the financial services industry owes much to the noble Lord not only for having been a most distinguished recent Lord Mayor of London but also for his efforts in an extracurricular capacity in straightening out at least some of the transportation links involving the City and Canary Wharf.

I thank both your Lordships' House and its staff for the warm welcome I have experienced, which has endorsed the pleasure my late parents both took in this place. I realise from the rubric afforded me upon arrival that I should not allude to my parents in terms of my specific relationships with them. In future I shall adhere to a self-imposed code. If needed, I shall call my father my late noble kinsman and my mother my late noble relative.

My qualifications for speaking in the debate are modest but personal. I served in another place as the third-longest-serving Member of Parliament for the City of London since 1283 and I served for another 10 days as chairman of the Building Societies Ombudsman Council. At the end of November, the individual industry ombudsmen will disappear under the Act and become the integrated Financial Ombudsman Service.

I have never myself worked in the City, nor indeed in the financial services industry except for a year's service as a non-executive director of a merchant bank and, indirectly, as an outside Name at Lloyd's, now in run off. When for four years I was a Minister at the Treasury I was, among my seven ministerial colleagues, the only one never to have worked in the City.

My relationship to the industry has been that attributed to Churchill in his wilderness years when, on being introduced at a party gathering as one of the pillars of our party, he replied, "Not so much a central pillar, more a flying buttress. I lend support, but from the outside". Because my links derive from personal roles, I may offend in the same way as the Liberal Peer in the first half of the last century, the publication of whose memoirs was held up for three weeks because the printers had run out of the capital "I".

Because time is as gold dust I shall not rehearse the City's remarkable trading statistics, as did the noble Lord, Lord Levene, save to remark in passing that gold dust is but one of the commodities in which the City provides Europe's dominant market. But I shall endorse what has been said about the industry's wider contribution. At a breakfast briefing in the City in past years, a distinguished economist said that the economy of London had grown for many years less fast than that of the rest of the country until in 1987 "big bang" heralded an explosion of growth in the City, which then fed across into much faster growth in London as well, exceeding the nation's growth. Because around 20 per cent of the employed population of Greater London work in the parliamentary constituency of the Cities of London and Westminster, leaving under 80 per cent of London's employed population for the other 73 parliamentary constituencies, I can understand why that stimulating effect should be so. Indeed, it was an index of the City's centrality that the only joke generated by the Single European Act was the example of how non-tariff barriers created a less than level playing field, in that in the life insurance industry a British actuary could tell you how many people were going to die, whereas a Sicilian actuary could give you their names and addresses.

A number of noble Lords will have heard the radio announcement this morning about the citizens advice bureaux report on inappropriate financial instruments being sold to fellow citizens. I have myself extricated our closest neighbour in Wiltshire, a retired agricultural labourer who left school at 14, from a financial contract where he was still paying interest at more than 20 per cent to a household name financial institution on a loan he took out to buy a second-hand car some 30 years ago.

But my concern today, wearing my "Ombudsmanic" hat, is not so much with mis-selling or mis-buying, as it is with delivery. I recall sitting next to a foreign banker one year at a Stock Exchange lunch who said 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. In an era when electronics will rob us of some of our markets, since there is nothing necessarily unique about our electronics, we shall rely increasingly on our comprehensive experience and individual ingenuity. It is important that some of our human skills go into the management of systems and the training of lower ranks in institutions because I know from experience that, over the years, an ombudsman sees many aberrations in institutions.

My only other footnote on the integration of the ombudsman service under the Financial Services Authority is that ombudsmen should remember, as from next month, that they are ombudsmen and that they should avoid becoming regulators as well.

Overall, however, one's conclusion is admiration for the industry as a British success story in the world league, as was pointed out by the noble Lord, Lord Levene. When I was at the Treasury, there was a saying that that which could not be measured did not exist. It was a saying put to the test some years ago by the Foreign Office when concerns were expressed by the embassy in Brussels as to whether Mr Ernest Bevin, who admittedly was a large man, would be able to pass through the door between the embassy's main spare bedroom and the main spare bathroom. A telegram was sent to London with the request, "Please verify diameter of Secretary of State". From the Foreign Office in London came a telegram in response, which perhaps proved that the officials were more literate than numerate: "Unable verify diameter but circumference is 60 inches". Unmeasurable is the respect we hold for the Cities of London and Edinburgh and, indeed, for the rest of the industry. We are lucky to have them.

3.56 p.m.

Lord Haskel

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 the Government to help companies to expand and to develop their products, new markets and new technologies. I do not mean helping lame ticks, 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 king new ventures. If the financial services industry was doing its job properly, it would he 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.

4.5 p.m.

Baroness O'Cathain

My Lords, this is a welcome debate and the timing is very pertinent. I thank the noble Lord, Lord Levene of Portsoken, for introducing it at this time.

Of one thing I am certain—namely, that there is no disagreement in your Lordships' House that the financial services industry is a most important industry—some claim it to be the most important industry—in the economy of the United Kingdom.

The figures, of course, are impressive. We have heard already that the financial services sector accounts for an enormous percentage of GDP—apparently 6.1 per cent in 1998 for what I would call the "proper" financial services, including banking, securities dealing, insurance and fund management. If one then adds the legal services and accountancy one arrives at a figure of about 8 per cent. The UK financial services industry is a world leader in specific sub-sectors such as foreign exchange, insurance and derivatives, and London is the world's largest fund management centre.

World-wide growth in the provision of financial services is a feature of the global economy. Although this country is one of the biggest centres of financial services at this stage, it does not give anyone the right to be complacent, a point made by the noble Lord, Lord Levene of Portsoken. Even the success in attracting so many foreign-owned banks—more than 500—to the City and to Docklands cannot be viewed in a sanguine manner. It is the easiest thing in the world to change location by moving to other financial centres.

It always seemed to me that London—particularly the City of London—had the edge on other international centres because the motto "my word is my bond" of the Stock Exchange gave everyone a high comfort factor. It was rather good that the City of London motto Domine dirige nos—for the non-classic scholars among us, "Lord direct us"—gave a feeling of security. I am not about to say that those mottoes no longer hold good, but, again, complacency must not creep in.

We spent a long time in this House debating the Financial Services and Markets Bill, when many warnings were given concerning the operation of the FSA. We particularly drew attention to the inconsistency with current corporate governance whereby the posts of chairman and chief executive were not to be vested in two people but in one.

None of us underestimated the size of the task facing the FSA and pointed out the difficulties which could arise if the chairman and chief executive posts were combined. That was not to suggest for one moment that the individual chosen for the task was not of the highest calibre, but rather to express the concern that the job could be too much for one individual.

In addition, we spoke of the well-recognised benefits which derive from the splitting of the posts in other sectors of the economy, whereby the chairman can take the wider strategic view and the chief executive can concentrate on the day-to-day operation of the organisation.

Despite the concerns expressed from these Benches—in my case, they were expressed solely on the basis of personal experience—the Government disregarded our request. I believe that the two major problems which have beset the financial services industry since that time might have been avoided, or at least minimised, if our concerns had been addressed. I should like to ask the Minister whether there are any further thoughts on this issue and whether a timetable could be put on the splitting of the post.

The two issues which have caused a great deal of concern are, of course, Independent Insurance and Equitable Life. I have to declare an interest as a holder of Equitable Life bonds. Therefore I shall not make any comments which could be regarded as special pleading.

It seems to me that in both cases—and I can rely only on media comment plus information gleaned in the course of a few directorship responsibilities—there was a delay by the FSA in getting to grips with the fact that something nasty was happening. The pattern of what I call "neglect of fiduciary responsibility" has been repeated in the Railtrack situation—but not, of course, by the FSA in that case. This will bring disrepute on the whole of the financial services sector because doubts will be cast—and are, indeed, being cast—on its basic integrity.

Those who are close to it know that integrity is highly prized and guarded, but we also know that one rotten apple can spoil the barrel. The FSA was set up to ensure, insofar as is humanly possible, that both the individual customer buying shares, insurance policies, arranging loans or savings, and companies arranging insurance, long-term and short-term financing or other financial instruments, are convinced that "my word is my bond" still pertains.

It would be both wrong and unfair to suggest that our financial services industry is tainted, but it is part of the most competitive of competitive markets worldwide and control cannot be lessened. This is where the FSA comes in and I have no compunction in using the opportunity afforded by this debate to raise again the issue of splitting the job of the chairman and chief executive.

I would now like to turn to the issue of confidence, or lack of it, engendered by the Railtrack débâcle. I fear that the Government have been extremely naïve in asserting that the way in which the Railtrack issue was handled would not have any effect on the Government's ability to raise finance from the private sector. This assertion has been made many times in the past few weeks, not least by the noble Lord, Lord Macdonald of Tradeston, in this House in answer to a question from me. Comments by bankers have shown strong disagreement with this assertion. Indeed the experience of people withdrawing from propositions to lend shows that that is correct. There must have been a serious amount of damage done to the trust built up over many years by successive governments.

Any knock to confidence takes a long time to overcome and in particular when the world's financial markets have been especially jittery. Too many of these jolts to the reputation of the financial services industry of the United Kingdom could have a lasting effect and damage the international competitive position of the industry. That cannot be allowed to occur.

In my own small way I have highlighted two separate issues; the management of the FSA and the importance of government maintaining trust with investors. I hope that we can have some comfort that these issues will be taken on board.

4.11 p.m.

Lord St John of Bletso

My Lords, I join in thanking my noble friend Lord Levene for introducing today's debate. My noble friend has a very distinguished background—notably his tenure as Lord Mayor of London—which qualifies him to espouse the many virtues of the financial services industry in this country. The debate comes at a particularly opportune time following the tragic events of 11th September and the consequential spate of redundancies in the City.

I should declare an interest as a consultant to Merrill Lynch and a number of other financial services companies. It would be simple to espouse the many qualities of London as one of the three major financial services centres in the world and to extol the contribution of the financial services industry to the UK economy, both directly and indirectly. However, in my limited time today, I should like to touch on just two issues. The first is the alarming impact of ongoing job losses in the industry. Indeed, my own company is in the process of shedding more than 10,000 jobs worldwide. Earlier this year it was being predicted that there would be around 20,000 job losses in the UK financial services sector. However, the events of 11th September have led many observers to suggest that the final tally could be much higher, possibly approaching the scale of the economic downturn in the 1990s when 60,000 jobs were lost. My noble friend Lord Levene has already mentioned the indirect financial benefits of those working in the City and the potential impact that could have on the property market and many other sectors.

The question is whether this spate of job losses is a temporary blip or a symptom of a problem altogether more fundamental and devastating. It is easy to be alarmist, but the reality is that in the past three years, with the IPO boom and the technology boom, almost all the financial services companies throughout the United Kingdom have tended to over-man themselves. Now that the markets have stabilised, many companies are substantially downsizing their staff levels and seeking to cut costs by out-sourcing many of their non-core business activities, such as IT. Over the past few years there has been huge consolidation among the major banks. My noble friend Lord Levene comes from Deutsche Bank. There has been a massive amount of consolidation in that bank alone. My prognosis is that the worst is over and that the job market is likely to stabilise next year.

The second issue that I want to raise briefly, which was also raised by my noble friend, is regulation. Among the many attractions for foreign capital and foreign banks coming into the United Kingdom has been the fact that the financial services sector in the United Kingdom is a self-regulatory regime. In this context I refer to the Yellow Book for the Stock Exchange, the Blue Book for the Takeover Panel and of course the banking ombudsman. I could continue.

While I share my noble friend's concern about the potential for over-regulation, I have one concern about the alternative investment market—otherwise known as AIM. That market has boomed in the past four years due in part to the fact that those who are seeking a listing on the alternative investment market go through a far less strenuous scrutiny. Over the past year there has been a dramatic collapse of many companies on the market and that has particularly affected many small investors. My concern is that while companies seeking a full listing are governed by the Financial Services Authority, the prospectuses of those seeking an AIM listing are the responsibility of their nominated advisers and not the FSA. In my opinion small investors in the alternative investment market are entitled to far greater protection and a company seeking an AIM listing should be more tightly regulated.

Finally, on a more positive note, it is important to recognise that London has recently played a pivotal role as a disaster recovery centre, with American banks looking to London for continuity of trading following the devastation suffered in New York on 11th September. We should not underestimate the value of the special relationship between the United States and the United Kingdom, particularly during the current global crisis.

It is obvious that the financial services sector occupies a highly significant place in the British economy. I believe and trust that it is equally evident that the industry's current difficulties will soon be overcome and that growth and prosperity will soon return.

4.18 p.m.

Lord Freeman

My Lords, I congratulate the noble Lord, Lord Levene, on, and agree with, what he said. On behalf of many others in your Lordships' House perhaps I may thank him for heading the recent appeal for those bereaved by the destruction of the World Trade Centre. Perhaps I may also couple the name of the noble Lord, Lord Forsyth, with those thanks. From these Back Benches perhaps I may say how much I welcome the maiden speech of my former ministerial colleague, the noble Lord, Lord Brooke. His erudition will enlighten our proceedings and his sense of humour will lighten them.

I wish briefly to concentrate on pensions partly because of the changes that are under way in their provision and their critical, even major importance, to the financial services industry. I declare an interest as the trustee of a number of pension funds as reported in the Register of Lords' Interests.

Within western Europe, the United Kingdom has an enviable record in the provision in the private sector, and indeed in the former nationalised industries, of self-funded pension schemes. Indeed, we have one of the most developed pensions industries in the world. I very much welcome the Myners report and the Government's acceptance of it in October. I believe that it will help to provide, through greater transparency, the proper provision of pension funds and advice.

Most pensions in this country, certainly numerically, are provided through company schemes on the basis of a proportion of final salary. Four decades of equity investment has allowed—until recently—the value of the funds to rise substantially, including, for example, the House of Commons parliamentary pension fund. The Conservative government introduced personal pensions to take account of the greater mobility of labour. People can take their pension fund with them to a new job. But those are money purchase schemes; there is no employer guarantee, and they are invested largely in equities.

Some dramatic changes have taken place recently. The first has been the fall in the equity market, which is cyclical but severe. There has been perhaps a 25 per cent reduction in the value of the assets of many major pension funds. At the same time, pensioners are living longer. Those two factors, the fall in the equity market and the longer life span of pensioners, are increasing the cost to employers of the guarantee of final salary pension schemes. So it is not surprising that we are moving from defined benefit (final salary schemes) to defined contribution (money purchase schemes)—because they are cheaper.

There is also significant movement from equity investments to debt instruments. It is estimated that 50 per cent of the FTSE 250, the Financial Times share index of the 250 largest companies, will be moving out of equity gradually, possibly into debt provision, for the assets of their pension funds; and some £100 billion may move out of the equity markets over the next five years.

These dramatic changes could cause a severe fall in the income of the financial services industry. But they also present a major challenge. Perhaps I may briefly describe the position and conclude with a question to the Minister. First, the rules relating to personal pensions—under which a person must buy an annuity, and by the age of 75—are causing an unnecessary cap on the amount of savings that many taxpayers are prepared to make through the personal pension provision route, which may be the only route available.

It is calculated that in order to provide through personal pensions, with current actuarial rates, a pension of £40,000 at the age of 65, a person needs to have saved £500,000 during his or her working life. I wonder how many people in their 40s or 50s have even begun to accumulate anything like that sum to provide a decent pension on retirement.

We need greater flexibility in the provision of personal pensions and the rules governing them. We need the flexibility not necessarily to buy an annuity, and the ability to pass part or all of those funds on to our dependants and family. That means that the tax regime may have to change. We may have to limit tax relief on contributions by individuals to, say, the basic rate rather than the marginal rate. We may have to contemplate taxation in the form of inheritance tax for that part of a pension fund that is passed on to the beneficiaries of an estate.

If the financial services industries grasp this challenge—one of the biggest challenges in the past decade—savings rates may rise, and people may feel more inclined to save for their retirement. Are the Government likely to begin consultations over the next few months or years on changes in the annuity rules for those who are saving through personal pensions?

We need greater disinterested advice to be given to younger people in their 30s and 40s, encouraging them at an early stage in their employment to save for retirement—and to save significantly. The relative failure thus far of the stakeholder pension fund initiative sounds a warning note as to how much people are prepared to save.

Finally, I suggest a motto that might be attached to many of the financial documents that are sent out, particularly to those in their 30s and 40s: "Failure to save properly will seriously damage your future financial health".

4.25 p.m.

Lord Fyfe of Fairfield

My Lords, I, too, am grateful to the noble Lord, Lord Levene, for initiating the debate. It provides us with a marvellous opportunity to discuss a feature of economic life which is of crucial importance. Perhaps I may also add my congratulations to the noble Lord, Lord Brooke, on his maiden speech. It was erudite, entertaining and humorous.

I begin by declaring an interest. I served until last year as chairman of the Co-operative Group (CWS) and also as deputy chairman of the Co-operative Bank. I am now chairman of Unity Trust Bank, the trade union bank, owned by the trade unions and the Co-operative Movement. This debate is most welcome.

The financial services industry, as has been stressed by many speakers, plays an increasing part in our nation's prosperity. It is vital that it is properly regulated. It is equally vital that the benefits of a successful and expanding financial services industry are available to all, and that the practical advantages of its prosperity can be translated into prosperity for all.

I want to comment on employee share ownership plans, on credit unions and in general terms on the social economy. ESOPs were introduced by Unity Trust Bank to the UK in 1997. They allow employees to purchase, or be awarded, shares under tax efficient profit sharing schemes. The Chancellor's recent initiative to re-launch ESOPs under the Share Incentive Plan (SIP) permitting employees to obtain up to £7,500 worth of shares is most welcome. This provides motivation and incentive, and encourages the retention of key employees and a participative style of management.

Surprisingly, credit unions are not widely understood or appreciated. They enable members to start the savings habit with small sums and thereafter to borrow at reasonable rates of interest. Credit unions can protect the most vulnerable members of society from the clutches of loan sharks and money lenders. There have been successes—most notably in the trade union sector. The Bakers, Food and Allied Workers Union, the GMB and USDAW have made considerable progress. Indeed, the GMB's credit union has become one of the largest and fastest growing examples in the UK. That is extremely encouraging.

What is also encouraging is that the Department of Health has produced a report on the positive impact that credit unions can have on improving quality of life. It used Tower Hamlets as a case study. The report was formally launched on 8th November.

The expression "the social economy" has only recently entered the business vocabulary. It embraces ESOPs, credit unions and community programmes which among other things support local schools and educational projects, help to organise community sporting events and offer specialist advice to projects and groups, not least to pensioners. The comments on pensions made by the noble Lord, Lord Freeman, struck a chord with me.

I take it that everyone accepts that every citizen should have access to a good pension scheme. There has been a good deal of tinkering with pensions over the years on all sides of the political spectrum. People have become uncertain and are often confused about their entitlement. Frankly, the vagaries of the stock market do little to overcome that. During the 1980s and 1990s, people became accustomed to consistent growth in stock market values. They become totally bewildered when stock markets suddenly show not signs of collapse but clear signs of decline. I appreciate that that varies from time to time. Stakeholder pensions may well be a step forward—I believe that they are—but I contend that they will need to be made compulsory in future.

The Government have shown sympathy with the concept of the social economy, which I welcome. The social economy is no longer regarded as the preserve of somewhat eccentric individuals who operate on the fringes of the financial world. To make Further advances, it is important that we recognise that personal financial management should be part of the educational process. In that regard, an increasing emphasis should be placed on the subject for example, the school curriculum.

We—certainly noble Lords on this side of the House—have talked about, "Education, education, education". That should be expanded to include sensible education in personal financial affairs. The key to further progress in the social economy sector is fiscal encouragement and better education. By definition, the social economy means self-help. self-reliance and self-determination. It would be appreciated if the Minister would confirm that the Government regard the social economy as an important part of the financial services industry and that they are committed to its expansion.

4.32 p.m.

Lord Hunt of Wirral

My Lords, I understand that I am not supposed to pay tribute to my noble friend Lord Brooke of Sutton Mandeville for his outstandingly brilliant maiden speech as the noble Lord, Lord Haskel, has already done so warmly on our behalf. So I confine myself to urging him to make many such contributions in future debates. I also thank the noble Lord, Lord Levene, for giving us this opportunity to debate a vital subject. As he said, the UK financial services industry is the flagship of the UK economy.

I am very proud to be senior partner at one of the leading financial services law firms, Beachcroft Wansbroughs. I know, from my own experience. of the tremendous international significance of this vital part of the economy.

First, however, I want to comment on the retail financial services sector in my capacity as chairman of the Association of Independent Financial Advisers. The recent report undertaken by the eminent consultancy firm Oliver Wyman indicates that a substantial gap exists between what people are saving and what they need to save for retirement. We share the Government's concern that more encouragement should be given to increasing the savings ratio. The retail savings industry has to provide the mechanisms by which that gap is bridged.

We have of course achieved a great deal. The savings gap may seem intimidatingly large but the provision for personal and occupational pensions in the UK is far higher than elsewhere in the European Union. Those who criticise the UK industry should bear in mind the fact that it has already delivered. Advice has played a significant part. All the research shows that advice is needed if consumers are to feel confident enough to purchase financial products. There will always be many consumers who want to discuss their financial futures with someone—preferably face to face—before they make a financial decision. There will always be many who need to be persuaded to defer spending today in the interests of providing for their future.

Nearly half of those who are earning less than £13,500 a year claim that they would not save at all without advice and encouragement. Among the more highly paid, the figure is still more than a quarter. That is why the role of advice—in particular, that of the independent financial adviser—is so crucial. The FSA has embarked on an ambitious and excellent programme of consumer education. That starts in the schools but it will be many years before it feeds through into the market, although I am sure that the result will be better informed consumers asking better informed questions of their independent financial advisers.

The key for policymakers is to ensure that the regulatory requirements that they impose on the giving of advice in the interests of protecting consumers do not become so onerous—many noble Lords have already discussed this—that they deprive those consumers of access to advice altogether. In recent years, the balance has perhaps swung too far in one direction. Bureaucracy and paperwork have grown to a point at which too much time is spent in that process and too little in actually giving advice. I hope that the FSA will consider, in conjunction with the industry, how some of the burdens can be mitigated. In that regard I am encouraged by some recent comments of senior management at the FSA.

Such a review would be of especial importance to small businesses. It is they who feel most acutely the burden of paperwork and bureaucracy. They can play a significant part in bringing advice to those who need it, not least because many businesses are local businesses and are capable of attracting those who are put off by the less personal "mega" financial institutions.

AIFA recently co-sponsored a research project. About 70 per cent of those questioned indicated that they thought it important to receive advice from someone who was independent of a bank or insurance company. That is why it is vital to support a distribution channel and not to over-regulate it out of existence.

Much effort has been put into identifying substitutes for advice, such as decision trees and comparative tables. They have a role to play but the limits of that role should be understood. We should focus on the value of advice. Alternative mechanisms seem to leave many consumers cold.

I know that advisers will rise to that challenge and look for new and different ways of making their services available. They will have to provide a constant demonstration of their professionalism to clients and show that they offer value for money. In particular, the provision of advice through the workplace offers new opportunities for the provision of advice. Sir John Banham, as chairman of the inquiry into financial advice which was sponsored by the Institute and Faculty of Actuaries, highlighted that route. The economics of advice can be transformed if the adviser has access to individuals in their workplace. More individuals can be contacted at the same time and the availability of payroll and other data reduces the time spent collecting that data. It is also a valued employee benefit.

I hope that many more employers will see the benefits of making independent financial advice more available to their workforce.

Of course, the IFA sector is under review—perhaps I should say that it is under many reviews. Ron Sandler is undertaking an exhaustive—and exhausting—review of retail financial services. The FSA is looking at fundamental issues to do with the structure of the market, such as polarisation. All the reviewers must bear in mind that the central objective concerns getting people to save in the right products at the right time. Independent advice is crucial in that process. Constant fiddling with market structures is as likely to interfere with that objective as it is to promote it. Those undertaking the reviews need to have that fact at the forefront of their minds.

I reiterate, as the noble Lord, Lord Levene, pointed out, that we are proud of the UK insurance industry. Last year, UK insurers had more than £1,100 billion invested on behalf of their policyholders. The noble Lord rightly pointed out that companies in London face greater regulatory burdens than their competitors elsewhere. It is vital to have a level playing field for the industry rather than a competitive disadvantage.

I turn to flooding. I hope that the Government will embark on a stronger partnership with the industry. I commend the ABI's report, Flooding: a partnership approach to protecting people. Flood defences need to be improved.

I also want to mention Pool Re. We took that initiative following Irish terrorism. However, it covers only fire and explosion, and it evolved at a time when it was hoped that commercial insurance would take over the risk. Recent tragic events make that most unlikely. However, we need to cover the new risks, whether from an aviation accident or biological and chemical hazards. I hope that the Government will respond quickly and positively to this necessary extension of Pool Re.

4.40 p.m.

Lord Selsdon

My Lords, one of the great advantages of your Lordships' House is that one can receive eminent advice from eminent senior partners without having to go to the great expense that I can no longer afford.

I begin my intervention today by declaring, in accordance with the Williams code, as many interests as I think are relevant—and I am afraid there are many—commencing with the noble Lord, Lord Brooke, who was my Member of Parliament. I canvassed for him for many long nights in Peabody Buildings and others. We were very grateful for his success and I am very grateful that, at last, he has joined us here. The noble Lord's father was extremely kind to me when I was a young Member of your Lordships' House.

The words of the noble Lord, Lord Levene, who made a most excellent presentation of a very positive situation, caused me grave concern. They made me wonder what other pieces of good news there are in the United Kingdom economy. As he eminently pointed out, our manufacturing industry was always judged to be a good winner abroad. We had a positive balance of payments in manufacturing for 78 of the past 100 years, but we are now in deficit because we no longer make anything. We wiped out great companies, including that which my noble friend Lord Prior chaired, because everyone decided that we should not make any more but should outsource and downsizetwo strange words and phrases. That really meant that Hornby trains were no longer made in England but in China, and that everyone made things everywhere else. Was that because we were no good at making them, or were we really a nation of shopkeepers? Let us assume that the manufacturing sector in this country is near dead or dying. One reason we are not facing a recession is that we do not manufacture enough to be worried by those kinds of issues.

I turn to agriculture, which is bogged down in a quagmire of bureaucracy—totally unproductive, uneconomic, not loved, suffering. When I questioned whether there were any other productive areas of the economy, someone said, "Yes, my dear chap, property, which these days is 10 per cent of GDP". I tried to work out how property created added value other than to the owner of the property. So we come to what I suppose was once called the stomach of the country, from which all other organs took the tone. It was Gladstone; that is finance.

Can the finance sector support everything? Does it not have to finance something somewhere in our own country and not necessarily around the world? I have spent most of my career in the financial and banking world. When my young relatives used to be asked to describe what I did, they said, "We think he rings up and orders money from people who do not have it for people who need it desperately". In a way, that is the direction in which we are heading at the moment in the financial services world. I want to start at either the top or the bottom and move through the middle.

The bottom is an area of very great concern to me. It is called debt, more debt and debt compounded. I was no good with computers, I could not even use an abacus, but I used to navigate by guess, by God and by—that wonderful phrase—"the law of 72". If you divide 72 by the prevailing rate of interest, you are told how long you have to double the amount that you have to repay. Since the figure of 24 per cent was quoted earlier, in three years you have to double the amount you repay.

I refer to the example of a young student who happens to be handicapped or illiterate and who receives a credit card offer through a telephone call or the post, which he accepts, but discovers that he cannot afford to fund it, and then gets a succession of other similar offers. Based on that kind of example, one could, before long, find many underprivileged members of our society in debt up to their eyeballs; and those who can use a computer can do it even better because someone else then says, "Are you worried about your debts?"—of course they are—"Take out something else". I therefore request the noble Lord, Lord McIntosh, to ask his colleagues to consider those worrying issues—and they have been raised previously—that affect many members of our society who cannot afford to pay.

It is at the top end that we have a real worry. This is the area of the noble Lord, Lord McIntosh, for whom I have great regard and respect, because he has a major opportunity in front of him. We have to make major investment in a number of areas over which the Government have direct or indirect control. We have the worst and most expensive transport system in Europe, and possibly in the whole of the developed world. We have the worst and most incompetent health service—because it lacks resources—in Europe and probably in the world. We have the worst school system in Europe and possibly in many other areas as well. Those are historic infrastructures which, for one reason or another—I do not blame the Government of today or of yesterday—have left our people deprived. They require the investment of large amounts of money. They require not only large amounts of money but also the resources to build them, to complete them, to fit them out and to manage them.

In that respect, I have in mind the lovely phrase, "It is not me, Jack, it is you, it is PFI, it is someone else". The Government will rely on the private sector to finance this great programme and probably to design and build it, but at one level it has within it party bodies who think that PFI and PPP are wrong and not cost effective. At the other end, we have unions that do not want people to work for a private company. We also have contractors with fairly full order books at the moment, who may not be able to take on the extra work. Finally, we have the European Union, which has decided that there should be a new purchasing policy directive stating that you cannot negotiate and, therefore, you have to go out to wider tender, which is being considered at the moment.

The problem with a PFI project—I declare an interest as a director of one of the contractors that does a good deal of PFI work—is that in the process of bidding everyone has to incur costs amounting to probably 3 per cent of the total cost of the project. That amounts to 9 per cent in the case of three people and to 15 per cent in the case of five people, which adds very substantially to the cost of funding projects. We also have to bear in mind the cost created by a lack of decision making. For example, a modern hospital will cost approximately £200,000 per room, and in the inner London area approximately £400,000 per room—the price of five-star hotels—which is in some cases difficult to finance.

I ask the Government to give very careful consideration to being more open about how they plan to fund their major development programme, which is very welcome. We hear of PUK, or puke as some people call it; we have all the different pneumonics that are introduced; we see the rows that exist between different sectors of society. I merely say that I believe the financial services world would willingly help the Government effectively and quickly, provided they could get their own act in order.

4.47 p.m.

Lord Roll of Ipsden

My Lords, I, too, join in congratulating the noble Lord, Lord Brooke of Sutton Mandeville, on an excellent and deliciously witty maiden speech.

The thanks of the whole House are due to the noble Lord, Lord Levene, for giving us the opportunity of debating a subject which, unfortunately, is not very often discussed in the House at any length. He and many other speakers, including the noble Baroness, Lady O'Cathain, have clearly emphasised the importance of this sector of our economy.

I do not want to add to what has already been said. However, I remind your Lordships of one fact. It was about a century and a half ago that Disraeli warned us that Europe would not long allow England to remain the workshop of the world. It has taken quite a while, but in the end that prophecy has turned out right. Today manufacturing today represents 20 per cent of the gross domestic product. The rest is taken up by the service industries, notably financial services. That, of course, is much to be praised. However, it carries with it a certain danger. We have a very high level of consumption, which very much depends on the imports of consumer and consumer-durable goods. We know the difficulties that our manufactured exports, alongside manufacturing itself, now face in the world markets. How long can we rely on the export of services, notably financial services, to take up that slack? I leave that question with your Lordships.

The other point I want to mention—although I shall not dilate on it, because I fear that I have wearied your Lordships several times in the past—is my view on the euro. I very much agree with what the noble Lord, Lord Taverne, said. Leaving aside whether we should join the euro or what the scene will look like after 1st January, psychologically as well as mechanically, let us consider for a moment the likely world monetary scene in a few years. Will it not be dominated by the dollar, the yen and the euro? What then will be the position of sterling? I readily accept that even if the euro comes into force successfully on 1st January next, sterling and London will hold their own for quite a long time. But for how long?

Finally, I shall say a few words about regulation. After two other careers, I have worked in the Square Mile for 34 years. When I first worked there, regulation was practically non-existent. There was a modicum of gentle self-regulation here and there, partly because the financial services were divided into all kinds of specialisations. The financial services industry of which we speak today hardly existed. That has changed. As so often happens in our society, when we make a change we do not do it by half. We now have the Financial Services and Markets Act 2000, which is a formidable and very weighty document. It would be against parliamentary etiquette for me to display it to your Lordships.

What will the Act do? It gives statutory powers to the Financial Services Authority. I do not think that it is designed—or that it would succeed even if it were—to catch and destroy the myriad petty deceits and frauds of which we hear every day. That is not its main purpose and such a steam hammer could not do it anyway.

Will the provisions be effective on big deals? We can hardly use Equitable Life as an example, because the FSA was barely involved. But we know only too well, even from the experience of the United States, which we have often rather complacently dubbed a lawyer's paradise, that very often such big issues bring to the fore problems of a non-legal character of such weight—financial and otherwise—that they almost inevitably lead to some kind of compromise.

There is a fear in my mind that even in the very big problems of wrongdoing of one kind or another the FSA will not be able to be fully effective, despite the elaborate powers conferred on it by the Act. As has already been pointed out, the FSA will be effective in education and in gradually habituating the greater public, and more particularly the people working in industry and the financial services, to certain standards of conduct that we must hope will eventually come right.

There remains a question mark. The Romans knew a thing or two about this. The question that they used to ask remains relevant: who will guard the guardians?

4.54 p.m.

Lord Hodgson of Astley Abbotts

My Lords, I join other noble Lords in thanking the noble Lord, Lord Levene, for giving us the opportunity to discuss this important topic today. I wish to pick up one of his themes about the regulatory burden, but first I want to explain the extent to which the Government and the Labour Party continue to misunderstand the financial services industry at a strategic level. That was brought home sharply to me a couple of weeks ago, when we debated the prayer of my noble friend Lord Kingsland against the Financial Services and Markets Tribunal Rules.

The problem was not so much that the Government changed their mind on whether the appeals to tribunals should he heard in public—although that is probably serious enough. More important was their failure to appreciate the role of trust and confidence in financial services and how damaging to an individual or a firm a public hearing would be, not over a short period of a week or a month, but perhaps over many years. Those firms or individuals might, on appeal, be found to be innocent of any wrongdoing.

One Labour Peer—or perhaps it was a Liberal Democrat—prayed in aid the example of an elderly lady stealing a loaf of bread, who perforce had to appear in public at a magistrates' court. I find it hard to square that atavistic desire to switch the searchlight of publicity on to firms in the private sector with the Government's secretive behaviour over a number of episodes, particularly Railtrack.

If the Government were a regulated firm under the current regime, they would be found to have broken nearly every one of the nine basic principles of current regulation in the Railtrack example, including principle nine, which requires a regulated firm to keep proper records. Labour Members refer to old ladies stealing a loaf of bread. The Government have not stolen a loaf of bread; they have stolen the bakery.

I am particularly concerned about the heavy burden of regulation. I shall not refer specifically to the City. I fear that the Labour Party does not care much for the City. The remarks of the noble Lord, Lord Haskel, were very much in that vein. There is a fundamental feeling in the Labour Party that the City deserves what it has coming to it. I am more concerned in this context about the building society movement—a part of the financial services industry that the Labour Party finds altogether more cuddly. I declare an interest as the director of a medium-sized mutual building society. We are 17th in the rankings with £1.5 billion of assets and 54 branches in the West Midlands and the Welsh border counties. In many cases, we are the only or the last building society in a particular community or town. In that, we are doing our bit to help the Government avoid financial exclusion.

We are regulated not just by the Financial Services Authority, which, as the noble Lord, Lord Roll, said, has a weighty tome of regulations behind it, but by a mortgage code, a banking code, a general insurance code, the money laundering regulations, the Office of Fair Trading and the Data Protection Act. That does not include all the authorities that are involved in normal commercial life, including the social security authorities, the Inland Revenue, the Companies Act and the health and safety regulations. All those codes spawn their own armies of regulators and investigators and checkers. We now have a Mortgage Code Compliance Board, a Banking Code Standards Board, a General Insurance Standards Council, a Joint Money Laundering Steering Group and the Financial Ombudsman Service.

Let us examine that last body for a moment. What a nice title it has. It conjures up the image of a band of worthy men and women struggling to reconcile disagreements between regulated firms and their clients. The reality is somewhat different. Picking up on a point made by my noble friend Lord Brooke in his splendid maiden speech, they have long since moved on from referring only to individual cases and are beginning to issue general guidance, making ex cathedra statements with no prior consultation. When questioned, they say that these will not be taken as precedents in their future deliberations. Tell that to the Marines.

Taken as a whole, there is a huge burden of cost for all building societies, which has to be paid by the customers, as well as a burden of practicality for smaller societies. All for what? I do not think that any building society saver, investor or borrower has lost money in living memory. If the Government are serious about their desire to increase financial inclusion and to maintain a diverse range of building societies, reflecting the different needs of different parts of the country, they need to make a serious assessment of the regulatory burden that is now being imposed.

In the two minutes remaining to me, I turn to the City. Again, I must declare an interest as the chairman of an investment bank regulated under the present framework. As noble Lords have pointed out, the City is a major success story, but not one that can be taken for granted. I should like to make three points.

First, I echo the point about stamp duty made by the noble Lord, Lord Levene of Portsoken. That is a business issue, not a tax issue. It imposes a burden on British industry that increases the cost of its capital. It therefore puts British industry at a disadvantage compared to its non-British counterparts. It also imposes a disadvantage on the London Stock Exchange, because it affects the competitiveness with which London Stock Exchange members can quote prices compared to continental bourses.

My second point concerns the takeover directive, on which, in the vulgar phrase, the Government do not know whether they are Arthur or Martha. At times, they have argued strongly for a statutory system; at others, they have backed self-regulation. Following the throwing-out of the takeover directive 11 years into its negotiation, I look forward to hearing from the Minister what position the Government now take on future developments in that area. The City needs, and we should have, some certainty about where matters stand.

Thirdly, as the Government stagger out of that mudbath, they stagger towards the next one, which is the prospectus directive. One size cannot fit all. That directive will affect the ability of smaller firms to obtain access to public markets, and therefore increase their cost of capital.

I end as I began. In addition to the blizzard of statutory instruments issuing from the Financial Services Authority, I understand that 18 European financial directives are lined up on the runway. I hope that those employed in the financial services industry during the next few years will be able to find at least some time to do some work for their clients.

5.2 p.m.

Lord Sheldon

My Lords, I must offer my congratulations to the noble Lord, Lord Brooke of Sutton Mandeville. He has brought his dry wit from the House of Commons, where it evoked many chuckles, to this place. I joined him in the journey from that place to this at the same time. I was fortunate to share in his transition.

The noble Lord, Lord Levene of Portsoken, has brought an important matter to the attention of the House. The noble Lord appeared before the Public Accounts Committee many times during my 14 years as its chairman. What impressed the whole of the committee was that, for the first time that any of us could recall someone in charge of defence procurement earned the approbation of the committee. I once went so far as to offer the maximum amount of congratulation that I could as chairman, which was to say that I was satisfied. In fact, on another notable occasion, I went so far as to say that I was very satisfied. We are satisfied with his performance today.

London's financial services were once pre-eminent in Europe; today we have problems with Frankfurt and Paris, to which the noble Lord, Lord Taverne, referred. Of course, they lag behind us, but there is a danger, which did not previously exist. We must be aware of that danger because financial services now occupy such an important role in our country's economy. We should give them more attention in future.

The enormous advantage that we had was our position as a bridge between the United States and Europe: we shared the language of the one and the geography of the other. That was an enormous advantage, but we never made the most of it. We made mistake after mistake, such as not entering the Community and over the European Central Bank. The European Central Bank should obviously have been sited in London; there should never have been any question or discussion about it. We lost it, as we are also losing some of our other advantages.

In the 1960s I spoke at a big weekend conference for German bankers. Their concern was that on entering the European Community, Britain would benefit from the financial strength of the City of London, which would be of enormous help to British industry within the Community. I had to point out that, sad as it may be for British industry, that was not the reality. The advantages of the City were available to all. That led to the great strength of the financial system that we had. Our task now is to retain our pre-eminence in financial services. Even Ken Livingstone, in his role as Mayor of London, must accept their importance. The world's financial centres must continue to be New York, London and Tokyo.

We need both a vigorous savings industry and a vigorous lending industry. We have a vigorous savings industry—pensions, unit trusts, home ownership and so on—but there are gaps. I welcome the FSA, because I think that it will do a good job. It states that its tasks are to maintain efficient, orderly and clean financial markets and to help retail consumers achieve a fair deal. It says that it wants to ensure that consumers are protected. That will be a most important aspect of its work as more people move into the financial sector. The FSA's success in that area will have international repercussions. The more that our financial service industry is made legitimate and seen to be legitimate, the more important it will become.

Like the noble Lord, Lord Selsdon, I am concerned about what is called predatory lending. We must protect naïve borrowers from escalating indebtedness. As I know from my previous constituency work, some suffer real anguish and, on occasion, develop suicidal tendencies because of mounting debt. We must consider whether there should be a further obligation on the lender to instruct and inform borrowers.

I have a few words to say about money laundering. There is an important difference between money laundering for the purpose of financing terrorist activities and that which arises from drug dealing and other criminal activities. Terrorist activities do not require the passage of large sums of money, so they are much more difficult to detect. There are problems, such as those of the spelling of names, which I know from my constituency experience always make it difficult to attach names to the passage of money.

In the absence of supervision, it was easy for terrorists to launder money. However, any further monitoring will lead to more evasion of controls. The best way to deal with terrorist finance is first to use the intelligence services and then to detect the relevant financial movements.

We have not been given a critical assessment of the difficulties in several areas. I hope that the Minister will enlighten us. A conference on money laundering was held in New York in September. It was clear that many of those attending had no intention of doing anything more than strictly necessary. One person said, "My boss just wants me to come up with the cheapest solution, so that we can say that we have complied." Another wanted to target wealthy individuals only because his efforts would then gross up the amount of money investigated. Those are real problems. I hope that the Minister will deal with them in his reply.

5.9 p.m.

Lord Northbrook

My Lords, we are all grateful to the noble Lord, Lord Levene, for initiating this debate. As a distinguished former Lord Mayor it is entirely appropriate that he should focus on the role of the City of London where the major part of our financial services industry is based.

I must declare an interest as a fund manager working in the City. First, I was pleased to see in yesterday's Financial Times that, London's position as Europe's pre-eminent financial centre is unchallenged in spite of the introduction of the euro and growth of Frankfurt as a eurozone financial marketplace- according to a joint Anglo-German study of the rival cities. The article continues: The City has retained its dominant position as Europe's leading centre for banking, capital markets advertising, the law and management consultancy". According to a July 2001study for the Corporation of London by the Centre for Economics and Business Research, the City's GDP was estimated at nearly £22 billion in 2000 and its share of UK GDP was close to 2.7 per cent. City workers contributed a net £8 billion to government revenues which is around 42 to 43 per cent of the national public sector surplus for 1999–2000.

During their first term the Government recognised the important place of the financial services industry in the economy of the United Kingdom. The decision to hand over control of interest rates to the Bank of England was widely welcomed and gave the industry a stable economic environment in which to operate. However, in their second term the Government by their actions on Railtrack have seriously damaged their relationship with an important part of the financial services industry in London. As Jeff Randall, the BBC business editor, stated in an 8th November commentary on the BBC News website, I don't think we can underestimate the bad will in the City now towards Mr Byers in particular and to some extent towards the Government. Gordon Brown and Tony Blair spent a lot of time nursing trust in the City and I think they did a pretty good job but this has become a big hole and many investors—professional investors—will say, 'Hang on a minute, do we really want to put money into anything the Government's going to do if this is the way they act towards shareholders?"' That could have major ramifications for the future cost of raising finance from the private sector and in the area of public/private partnership. Serious damage has been done also to the Government's relationship with overseas investors. US investors have been hard hit by the administration of Railtrack. Franklin Mutual, which has one of the biggest holdings in Railtrack with 4 per cent of the shares, said that Mr Byers' actions indicated that the Labour Party did not believe in privatisation.

David Winters, a portfolio manager for Franklin Mutual, said that Mr Byers', political decision to force the company into liquidation has forever changed our involvement in the British market … It would not have happened this way in the United States. A bigger risk premium is to be attached to investing in UK companies now". He also said that American investors would be wary of any British privatised utility or regulated company.

The state of Wisconsin is also a significant Railtrack shareholder and stands to lose millions of pounds. The evidence that the Government's handling of Railtrack will hit vital investment in infrastructure has been borne out by the collapse of a property deal worth £2 billion to raise funds for improvements to London Underground stations. The chief executive of Land Securities, one of the two bidders shortlisted to manage and develop London Underground's nonoperational property estate, said on 14th November that he had no doubt that the property deal separate to the London Underground public/private partnership had been jeopardised by the bitter row over the Government's role in forcing Railtrack into administration.

Outgoing Strategic Rail Authority chairman, Sir Alastair Morton, said in an interview on "Breakfast with Frost" last Sunday that, The City is annoyed and wondering exactly what the level of regulatory risk is in this industry now". He added that, tremendous damage has been done by the Transport Secretary's action.

A number of commentators and investors have alleged that the Government allowed a false market in Railtrack shares in the days and weeks before the company was put into administration. Under Section 47 of the Financial Services Act 1986, the Department of Trade and Industry has responsibility for pursuing those offences. There is a strong case that Crown immunity does not apply in that situation. I have seen legal advice which states that the Secretary of State for Transport can commit an offence under Section 47 of the Financial Services Act 1986 and that, accordingly, he can be liable under Section 61 of the same Act to compensate investors for losses suffered as a result of misleading statements made outside parliamentary proceedings and, if the facts are proven, of dishonest concealment of relevant facts. The relevant case law here is The Madras Electricity Supply Corporation v Boarland.

In order to reassure the financial services industry, both in the form of professional and private investors, the FSA, whose prime job is to protect investors, should surely be required to investigate whether the Secretary of State has indeed committed any offence under Section 47 by making misleading statements outside Parliament or by dishonestly concealing facts which rendered an earlier statement misleading. In addition, I have seen further legal advice that, following the enactment of the Human Rights Act 1998, there is reason to think that the Crown must he included within the definition of a person under Section 47 of the Financial Services Act 1986. Will the Minister confirm my understanding of the FSA's legal obligations?

The financial services industry must have confidence that the Government will provide a favourable economic and regulatory climate for it to operate in. The Railtrack episode has dented that confidence. The reaction of major investors must serve as a warning that the hard-earned confidence can soon dissipate.

5.16 p.m.

Lord Barnett

My Lords, it appears that I am winding up for the Back Benches, therefore, I assume that I can speak for 10 minutes.

Most noble Lords who have spoken in the debate have declared an interest. I do not have much to declare. However, the noble Lord, Lord St John of Bletso, referred to the kind of plc which I chair and in which I have a major investment. Therefore, I declare that interest. I should have had an interest to declare in Equitable Life, but I am happy to say that I moved my investment elsewhere before the company got into difficulties.

As we know, the noble Lord, Lord Levene, has had a distinguished career, the most important points of which—which he did not mention today, understandably—are the facts that he attended Manchester University and he watches football avidly. I trust that he follows Manchester United and not the other Manchester football team.

In opening the debate, the noble Lord told us all the things about the City that we know. The importance of the City is well recognised; I certainly recognise it. However, I wish to discuss the exceptions to that state of affairs. He mentioned only one; that is, money laundering. I noted with interest that on that score he said that there were bound to be some leaks. I hope that he is right that there are only some. I fear there may be rather more.

I also wish to mention the FSA and Europe. One of the major exceptions which has not been referred to sufficiently is that of Equitable Life—not because of the losses sustained by those who invested in that company, but because of the consequences of that for the industry and the City generally and what it means for others who are trying properly to sell insurance, banking services and investments of all kinds. I refer to the fear that has arisen in that area as a result of what happened at Equitable Life. I refer also to mis-selling and loan interest sharks.

I know that we are not supposed to congratulate maiden speakers in the middle of a speech, but I owe my congratulations specially to the noble Lord, Lord Brooke of Sutton Mandeville. He was my MP— although I did not vote for him—for a long time in the City of Westminster. I heard someone say that they canvassed for him although I cannot think that that would be necessary. He succeeded me as Chief Secretary to the Treasury and as the chair of the Building Societies' Ombudsman Council. I should always be ready to invest in a building society if he was the ombudsman.

Regulation is not always perfect, but the plain fact is that exceptions inevitably occur in a major industry such as the financial services industry and, therefore, it requires a regulatory body. I refer to the Financial Services Authority under the chairmanship of Sir Howard Davies. Last week, Sir Howard gave evidence to the Treasury Select Committee in another place. Now, of course, he is called a "super-regulator". He told the committee that companies are aware that failing to keep the regulator informed is a regulatory breach. I am sure that that is the case. He also said that it was clear that many companies are not keeping the regulator informed or are providing incorrect or inadequate information. I am sure that that is also the case.

Therefore. given the enhanced powers that Sir Howard will have on 1st December, what will happen now? He told us that the FSA currently employs some 2,000 people, of whom 157 are involved in front-line investigation in insurance and supervision. After 1st December the FSA will govern 217,000 authorised financial service personnel and 10,873 firms. I believe that those figures are correct; no doubt the Minister will confirm that that is so.

Sir Howard went on to tell the committee that he did not have enough staff to double-check all the information received. I cannot help wondering whether he has been able to single-check the information received or even to check whether it has been received. That is the problem. If we are to have a regulator, we must have a good one and he must have good authority. I have my doubts, but if Sir Howard approaches the Treasury to ask for more money to enable him to increase the number of his staff, I hope that the Minister can give us an assurance that there will be no cash limits to prevent him having that money.

Finally, I turn to the crucial question of the fourth so-called "test" of the five that the Chancellor has said must be met before we enter the euro. There is an important point to be made about that. The fourth test is: What impact would entry into EMU have on the competitive position of the UK's financial services industry, particularly the City's wholesale markets?". It must be said that if, at this stage, we were to announce that we would never enter the single currency, that would have very serious consequences for the City and for the financial services industry. I was surprised that the noble Lord, Lord Levene, did not feel that it was necessary to say so because it is an important exception to the benefits that we now receive in substantial form from the City and from the financial services industry.

We are told constantly by the Chancellor that not only must the fourth test be seen to be met now but that that must be sustainable. I want the Minister to tell me again—I have asked him previously but have never been totally satisfied with the response; perhaps he will be able to tell me today—how one defines what will be "sustainable" in the foreseeable future. How could one have a sustainable anything, let alone a sustainable convergence for the financial services industry if we were to join the euro?

That is all that I have to say. However, I hope that the Treasury is discussing with Sir Howard the amount of money that he requires and I hope that it will give it to him. I understand that consultation will take place with all kinds of people. I volunteer the noble Lord, Lord Saatchi, to take part in that because he has more time than I have. I hope that not only Sir Howard but a much wider field will be consulted so that the best kind of benefit for the financial services industry will be obtained.

5.24 p.m.

Lord Newby

My Lords, like other noble Lords, I begin by thanking the noble Lord, Lord Levene, for initiating this extremely interesting, important and wide-ranging debate. It has covered issues such as employee share-ownership, pensions, the leasing industry, the euro, and building societies. It has seen a notable and tremendous maiden speech by the noble Lord, Lord Brooke, and a very rare example of a former Chief Secretary saying that the Treasury should open its pockets and give no thought to the financial consequences of further expenditure. That is, indeed, quite a rarity.

Other noble Lords have spoken about the great significance of the financial services sector to the UK economy. They have concentrated necessarily on the City of London. I begin by reiterating a point made by the noble Lord, Lord Levene. Although the City accounts for, I believe, more than one-third of financial services employment and activity in the UK, it is by no means the only significant financial services sector.

The economy of my home town of Leeds has been transformed over the past couple of decades. The fact that that has occurred is due to, more than anything else, the spectacular growth of the financial services industry in that city. Employment numbers in financial and related services have grown over the past decade from 66,000 to 100,000. Another 50,000 new jobs are forecast. It is alleged by the Leeds financial sector that it and its associated employment provides 33 per cent of the city's GDP. That is a phenomenal figure and it demonstrates the strength, vitality and importance of the financial services sector. It is important not only in its own right in providing employment and income but also in providing in the regions, as in London, a motor for growth in all the other sectors of the economy which necessarily require financial services if they are to prosper and grow.

We heard something of the paradox that faces the financial services sector. It is one of the biggest in the country and hugely successful—arguably the most successful in the country. But it is not loved. I believe that polling evidence from the City of London Corporation, which has carried out this type of work in the past, shows that, although the majority of people accept the importance of the City, only a minority have a good word to say for it and for the people who work there.

This afternoon we have heard a number of arguments about the PR problems which face the City and the financial services sector. Of course, money lenders have had a bad press since biblical times, so perhaps we should not be surprised. However, in recent times a number of exemptions, to quote the noble Lord, Lord Levene, as interpreted by the noble Lord, Lord Barnett, have made people suspicious of the financial services sector, and with good cause. In recent years we have had to face up to the problems of pensions mis-selling. More recently, we have experienced the problems of Equitable Life.

We also find that individuals in the City and their exuberant lifestyle often jar pretty harshly with the success of the products that they sell to their investors. I refer this afternoon to one such case simply to demonstrate a problem that the sector has in promoting itself. The major shareholder of an organisation called BFS Investment Group paid himself £2.6 million at a time when the split income-investment trust which the company was promoting was in the process of breaking its banking covenants and postponing payment of a dividend. We have come across that type of mismatch between senior director remuneration and performance in other sectors. However, I would argue that in the financial services sector it is particularly damaging.

The characterisation of the sector—one of innovation, growth and complexity—has led to the type of regulation which we now consider to be necessary under the FSA. We on these Benches supported the creation of the FSA. I believe that we understand the problems that it faces, on the one hand, of being an effective regulator and, on the other, of avoiding being too heavy-handed. This afternoon we have heard many examples both of the need for a light touch and of the problems of being effective. I believe that the FSA is still grappling with that problem. There has been reference to an avalanche of regulation which is currently doing the rounds in the City and which is causing a major problem in terms of both understanding and compliance.

I strongly agree with the comments made by the noble Baroness, Lady O'Cathain, about splitting the job of the chairman and chief executive, an issue that was discussed at great length during the passage of the Bill. The FSA is hugely important to this sector of the economy. At its head it needs a chairman who can act as advocate and overseer, and a chief executive who can manage the many day-to-day activities and priorities, such as staffing, many of which are conflicting matters.

Many of the opportunities that will face the sector in the future lie on the international front and in Europe. We have heard of the problems that the City has faced as the EU has moved towards completing the single market in financial services. The good news is that the lobbying that was undertaken by the City last week on the prospectus directive has persuaded Commissioner Bolkestein to change the proposals in a way that will make them less onerous. That is welcome. One can hope that the Byzantine argument that is currently taking place between the European Parliament, the Commission and the Council, in terms of competences, will mean that the securities committee will be established so that it can move quickly in terms of further legislation.

A number of noble Lords have discussed the euro. Interestingly for this House, so far the debate has not been balanced, although the noble Lord, Lord Saatchi, may help to redress the balance. Every noble Lord who has spoken about the euro has taken the view that, although to date the City and the financial services sector have not been disadvantaged to any significant extent by Britain's exclusion from the euro-zone. In the longer term there will almost certainly be a cost. and possibly a significant one.

I refer to the three areas that my colleague, the noble Lord, Lord Taverne, mentioned, which I believe exemplify the long-term costs that will almost certainly be faced if we remain outside the euro-zone. The first point is that many of our financial institutions are effectively excluded from the growing European capital markets and equity markets by not being within the euro-zone.

Secondly, our exclusion from the euro group means that we have less influence. The discussions on the prospectus directive show that when we exercise our influence we can bring about change in Europe in a manner that we will find helpful. However, if we are not at the table, it will hardly be surprising if the proposals that emanate sometimes do not appear, at first sight, to be at all satisfactory from our point of view.

The third point raised by the noble Lord, Lord Taverne, which must be true, relates to foreign direct investment. If companies invest in a single European market, with a single currency—save for one or two economies—in the future those companies are likely to move towards the countries and regions that arc part of the euro-zone rather than those that are not.

When people are asked what is the major challenge facing the City, amazingly, they do not mention any of those points. Indeed, the Anglo-German Foundation for the Study of Industrial Society found that most people in this country, when questioned about the weaknesses of the City, refer to transport as being a potential major brake—no pun intended—on the growth of the financial services sector. The failure over the years to undertake and to complete the CrossRail project, the farce of funding for the Tube, where in reality nothing is happening other than further chaos and confusion, and the huge delays in relation to planning for transport, have put the City at a disadvantage. The Government must grapple with those matters with greater urgency.

Every noble Lord who has spoken has recognised the importance of the financial services sector to the UK economy. It is one of the few major sectors of the economy in which the UK is a world leader. As has been said, it faces a number of major challenges and it is in all our interests that it meets them successfully.

5.34 p.m.

Lord Saatchi

My Lords, I join other noble Lords in thanking the noble Lord, Lord Levene, for initiating this excellent debate and for reminding us with the many telling facts in his speech of the special contribution that the financial services industry makes to Britain. We should also be grateful to the noble Lord for providing us with the occasion for the maiden speech of my noble friend Lord Brooke, which I and other noble Lords enjoyed. He said that all noble Lords should feel lucky to have the City of London; I say to him that all noble Lords are lucky to have him as a Member of the House.

The noble Lords, Lord Newby and Lord Taverne, said that the financial services sector may fail and I believe that the noble Lord, Lord Haskel, said that it deserved to. Most noble Lords have agreed with the noble Lord, Lord Levene, that we are the best. They are right. If the financial services industry did not exist, the UK would permanently have a balance of payments deficit. That is why we need to heed the wake-up call of the noble Lord, Lord Levene.

I believe that every speaker has mentioned regulation and I too want to speak on that subject. When the Financial Services and Markets Act completed its passage through Parliament it had racked up an astonishing 2,800 amendments. But it is not over. We and the City have to stand by for more amendments to the most amended Bill in history.

I want to introduce your Lordships to the financial services action plan of the European Union. Here are some of the actions in that plan: two directives on company prospectuses; the directive on insider dealing and market manipulation; the directive to upgrade the investment services directive; amendment to the fourth, seventh, tenth and fourteenth company law directives; the implementation settlement directive; the directive on take-over bids; the review of EU corporate governance practices; the two directives on undertakings for collective investment in transferable securities; the directive on the prudential supervision of supplementary pension funds; the directive on the distance marketing of financial services; the amendment of the insurance intermediaries directive; the amendment of the directives governing the capital framework for banks and investment firms; the amendment to the solvency margin requirements in the insurance directives; and the directive on prudential rules for financial conglomerates.

Shall I go on? Many of those topics may sound familiar to your Lordships as they arose during debates on the Financial Services and Markets Bill. The majority of necessary changes to accommodate those directives will be implemented by regulation, either as secondary legislation or by FSA rule book changes. However, there are three areas of the plan—the noble Lord, Lord Levene, mentioned two—that are likely to require further amendment to the Financial Services and Markets Act 2000.

First, the proposed upgrading of the investment services directive is likely to require amendments to Schedule 3 to the Act as it enacts into UK law the provisions of the directive. It is also possible that amendments will be required to Part XVIII of the Act, particularly Sections 285 to 313, which deal with recognised investment exchanges and clearing houses.

Under the Act an operator of an investment exchange has a choice of applying to become a recognised investment exchange under Part XVIII, or becoming an authorised person under Part IV. The proposed directive to upgrade the ISD may make it compulsory for all investment exchanges to apply to be recognised and, in those circumstances, amendments to Part XVIII of the Act would be required.

Secondly, the upgrade of directives on prospectuses, which has met a particularly hostile reaction from the City of London, has been mentioned by several noble Lords. The proposed prospectus directive could require significant change to the Act, particularly to Part VI, Sections 72 to 103. Those sections provide for the FSA to perform the role of competent authority in relation to the admission of securities to the official list. In practice, only securities traded on the London Stock Exchange are now admitted to the so-called official list.

Securities traded on other regulated markets—for example, AIM—are not admitted to the official list. But the prospectus directive would apply to securities admitted to trading on any "regulated market". Accordingly, the role of the FSA as the UK listing authority would change, requiring significant changes to the provisions of Part VI of the Financial Services and Markets Act.

Finally, and perhaps most troubling of all, is the EU directive on insider dealing or market manipulation, known in the Act as "market abuse". It is probable that the scope of the EU proposal will not overlap precisely with the existing provisions of the Act. So the City should expect further amendments to the most sensitive part of the Act—the market abuse regime in Part VIII, Sections 118 to 131.

The EU directive defines market manipulation as, entering into a transaction or dissemination of information, which is likely to give false or misleading signals as to the supply, demand or price of financial instruments". Noble Lords will note that there is no requirement that the abuser intended to commit market abuse. That is familiar territory to many of your Lordships. The statutory offence of market abuse created by the Financial Services and Markets Act also does not require intent to be shown.

Indeed, the Commission states explicitly in an explanatory commentary that market manipulation depends on, the behaviour of its authors and not on their intention or aim". The Government refused to accept the amendments requiring intent proposed by my noble friend Lord Kingsland in the debate in your Lordships' House during the passage of the Bill. The noble Lord, Lord Grabiner, eloquently justified the Government's approach; if intent was necessary, he said, his small son who threw a cricket ball at a glasshouse could argue that he never intended the glass to break and escape punishment, which he said would be wrong.

We disagreed. We looked at the case of a second son who had thrown a cricket ball at the glasshouse with the deliberate intent of breaking the glass. We felt that the same punishment was not appropriate. Since then, I am pleased to say that the FSA has sensibly published a code of market conduct, giving practitioners examples of "abusive" behaviour. They do normally require intent. The FSA code provides safe harbours for Chinese walls and also for similar confidentiality arrangements. So the FSA has in effect correctly narrowed the scope of the market abuse provisions of the Act, which we argued at the time were too all encompassing.

But if the proposed directive is adopted in its present form, the FSA will no longer be allowed this discretion over its own rulebook, which is why considerable concern has been caused in the City, to practitioners and also to financial journalists.

To resolve the discrepancy with the FSA's approach the EU would have to provide safe harbours for Chinese walls, confidentiality arrangements and the other exemptions contained in the code of the FSA itself. Unless it does, many practitioners say the directive will he both unfair and unworkable.

It is touching that the Chancellor of the Exchequer says that he will fight for changes to the proposed prospectus directive and to the market abuse directive. But should we rely on that? I can see the logic of a single European financial services market; why a company trying to raise money should have a "single passport" for capital raising, one EU-wide approved form of prospectus; why market abuse should be defined similarly across the zone; and why in cases like these EU-wide rules may be desirable. But what I cannot see is why so many precious hours and days of debate in your Lordships' House and in another place were spent on an Act which is so quickly being overtaken by events outside our control. Perhaps it is that we have to face up to the fact that our new system of financial regulation, even before it has been implemented—next week—is slowly but relentlessly being overwhelmed by the concept of the single EU market for financial services.

Your Lordships may think that I am being paranoid, but I should like to leave the House with what a spokesman for the Treasury said about—for example—the prospectus directive. He said: This is a directive in its early stages, but we have to accept it will go ahead". Of course we do because the EU Commissioner on tax and internal markets said this week about the EU directives on financial services regulation: The UK must pull its socks up". Mr Lamfalussy, who was mentioned earlier, goes much further than that. He says that if a planned review proposed for 2004, at the latest, showed what he called "lack of progress", he suggested that the EU should, consider a treaty change including the creation of a single EU regulatory authority for financial services generally in the Community". That proposition was strenuously denied during the passage of the Financial Services and Markets Act. I very much look forward to hearing what the Minister has to say now.

5.45 p.m.

Lord McIntosh of Haringey

My Lords, the House is very much in the debt of the noble Lord, Lord Levene, for introducing the subject and attracting so many distinguished and well-informed speakers. It is also much in his debt for encouraging the noble Lord, Lord Brooke, to make his maiden speech. The noble Lord is, after all, a one-man recreation of hereditary peerage in this House. He deserves his distinction. In a well run market economy the speeches of the noble Lord, Lord Brooke, would command very high fees. We are indebted to him for allowing us to hear him without making a charge. We have paid something back. The noble Lord, Lord Saatchi, the master of mixed metaphor, has given him a phrase, "safe harbours for Chinese walls", which I am sure he can incorporate in some future speech very much to his advantage.

I was going to recite the contribution to the UK economy of financial services, because that, after all, is the subject of the debate, but the noble Lord, Lord Levene, has done it. My figures do not coincide with the noble Lord's because he was taking, as he said, the broadest view of the scope of the financial service industry. But that does not matter. The point is that the industry is enormously important to the UK economy and to the position of the United Kingdom, both in Europe and in the world at large.

The UK is one of the world's top three international financial centres along with Tokyo and New York. When my noble friend Lord Sheldon rightly refers to the threat from Frankfurt and Paris, we must remember that the UK has been successful in resisting existing pressures from Europe to take over. I shall come on to some of those issues later in my speech.

Your Lordships will notice that I say "the UK". I have not said "London" because it is not just London; it is Edinburgh and Glasgow in particular—if I may start with them—but also Leeds, Manchester, Bristol and Birmingham and probably other cities in this country as well.

The noble Lord, Lord Roll, asked the pertinent question of how long we can expect to go on maintaining our pre-eminence in financial markets when we are not one of the three largest and most significant currencies in the world. That is a good question. It is a question that was asked 70 years ago by Bernard Shaw in "The Apple Cart". The Member of the Government who sat for North-North-West Birmingham was really worried by the fact that the economy of North-North-West Birmingham was sustained by the export of chocolate creams to West Africa. He wondered how long they could continue getting away with it.

There are reasons why our financial services market deserves to continue. The success of our financial services market relies on the fact that we have a regulatory and competition policy which helped to create an environment that encourages foreign direct investment. We have a history of openness, combining relatively easy access to markets with a tradition of welcoming foreign firms. We have a dedicated and well-educated workforce with a wealth of expertise and experience. Of course the noble Lord, Lord St John, is right about downsizing. I was reassured to hear from the "inside"—so to speak—his view that things will turn around next year. We have office accommodation and an efficient telecommunications infrastructure, to which the noble Lord, Lord Levene, referred.

It is certainly the case that we have major problems with public transport in the capital. I accept all that has been said about the need for us rapidly to improve our public transport. I do not refer only to London Underground but to CrossRail and other major transport projects. However, I cannot accept that the situation has been without cost. My noble friend Lord Haskel referred to the high fees and public failures. The noble Lord, Lord Selsdon, talked about the encouragement of unmanageable debt, a quite significant feature. We cannot allow ourselves uncritical support of failing companies, particularly failing companies such as Railtrack. We must not move away from the fundamental rule that those who invest in equities must expect that it is possible for them to go down as well as up—as we see from the small print rushing across the bottom of the television screen or hear recited at breakneck speed on the radio. The fundamental point of the noble Lord, Lord Levene, was that we are about risk management not risk avoidance. I was sorry not to hear that reflected on the Conservative Benches.

On the subject of Railtrack, the noble Lord, Lord Northbrook, asked what I thought about legal evidence. I shall not answer that. It is clearly a matter for the courts. We are told that somehow grave damage is being done to the City by the fact that the Secretary of State for Transport decided that he could not put up with unlimited demands for more taxpayers' money combined with a holiday from regulation. None of us apologises in any way for what Stephen Byers did. If I am considering damage to the financial community, I am more concerned with issues such as the almost universal mis-selling of pensions and insurance and the continuing stream of rogue traders. We are always told that it is a rogue trader; it is the last; it will not happen again. Then the next month or year it occurs again. I sympathise very much with the remarks of the noble Lord, Lord Newby.

I shall speak about what I see as the Government's role in encouraging financial services, the European Union and then more international issues. We see our role as one in which we help industry and financial services by creating a stable and favourable macroeconomic environment, a modern and effective regulatory system and a strong domestic economy to act as a foundation for international success. I can say that now at a time when international economies are in great turmoil. I add to that the point made by my noble friend Lord Fyfe about our social economy and social policy because that is an essential element of economic and social stability. Companies need low and stable inflation and interest rates. They need the assurance that they will continue in the long term if they are to have the confidence to plan investment and growth; and we have been able to do exactly that.

The noble Lord, Lord Selsdon, asked how we plan to finance investment in the future. Again, it is a subject for the pre-Budget review next week. However, all the indications are that we are within the golden rules which the Chancellor has set for this country.

I confess that I was startled by some of the comments about UK regulation. I had heard the noble Lord, Lord Levene, say in a telling argument that our current regulatory regime is part of the attractiveness of London—and I am sure he means the financial services markets in the UK more generally. What did I hear from the Opposition Benches? I heard a sustained attack on what many—not simply people associated with the Government but those associated with industry and the economy in this country and world-wide—believe is a leading reform in the regulation of financial services. It is a reform which will protect consumers and maintain confidence in markets without creating an unnecessary burden on companies.

It is not for the Government to involve themselves in day-to-day regulation. I should say to my noble friend Lord Barnett that it is not for the Government to pay for it. The independence of the Financial Services Authority is maintained by the fact that it is paid for by a levy on the financial services industry. His startling departure for a former Chief Secretary does not mean very much. It is not much of a concession.

Our aims of minimising the regulatory burden and encouraging competition are clear in the constitution of the FSA. The Act requires the FSA to ensure that the restrictions it imposes on an activity are proportionate to the benefits. In his speech, the noble Lord, Lord Hunt, recognised that to some extent. The noble Lord, Lord Levene, recognised it and answered adequately in advance the points made by the noble Lord, Lord Saatchi. Under those circumstances, I cannot take seriously the renewed demands for the division of roles between chief executive and chairman. The FSA is to come into full force next week. Let us see how it progresses for a while before we divide Howard Davies into two.

It was inevitable that there would be some discussion of Equitable Life. The noble Lord, Lord Roll, rightly said that the FSA was barely involved. But of course government had been involved for a number of years and we must await the judgment of the inquiry on that subject. In establishing the FSA we are putting the old regime, with its complex, overlapping structures and uncertain responsibilities, behind us. It is no consolation for those who invested in Equitable Life but it should be some protection for the future.

I am very keen on the notion of proportionate regulation. In complying with its four statutory objectives, the FSA is required to have regard to the principles of good regulation, including the obligation to regulate proportionately so that there is a balance between the benefit of regulation and the burden it places on a firm or the industry as a whole. The FSA is required to consult when it makes its rules and publish a cost benefit analysis. It can reduce risk and enforce the higher standards but of course it cannot prevent it entirely.

It will be virtually impossible for me to respond in detail to the many points on taxation. Clearly some noble Lords feel strongly about stamp duty. The noble Lord, Lord Levene, described it as presentationally difficult. The sum is £4.4 billion. Anyone who proposes to abolish it will have to say where that money is coming from. I am interested in what the noble Lord, Lord Freeman, said about annuities. As the noble Lord knows, we take the view that the requirement to buy annuities is part of the deal which involves tax relief. If he is prepared to say that we should limit tax relief on payments into pension funds, I think that he should persuade his party of that. I do not think that that is its policy.

I turn to the European Union. I was astonished to read the well-prepared attack by the noble Lord, Lord Saatchi, in the Financial Times and the Daily Telegraph this morning. He does not bother to tell Parliament first, but I am even more astonished when I hear his views in detail.

We are engaged with our partners in the EU, the European Parliament and the Commission to complete the single market in financial services and to complete an integrated and efficient single capital market. At Stockholm we agreed to complete an integrated market by 2005. That means focusing on mutual recognition of core standards and greater regulatory co-operation; prioritising measures in the financial services action plan and concentrating on the measures that businesses have told us matter, and which we know deliver economic benefits to consumers; and producing legislation that is proportionate, flexible and responsive to market developments. In particular, we need to ensure that the prospectus directive has the effect of lowering the costs of cross-border capital. Those are the objectives that we set ourselves at Stockholm and which we aim to achieve at Barcelona and beyond.

Coming from a party that yesterday in this Chamber voted against enlargement of the European Union, we shall not convince our partners that we are serious about a single market for financial services if we take the same view as that of the noble Lord, Lord Saatchi.

Of course there are problems with existing or proposed directives, some of which are serious. The noble Lord, Lord Hodgson, is right that it is sad that the take-over directive fell virtually at the last fence this summer, but we hope that it will be revived. On the market abuse objective, we support the aim to ensure the integrity of the financial markets. That means that there will have to be greater unanimity of view about what market abuse means, but the directive must be effective and fair. It has not yet been agreed, but it is being considered by a Council working group and the European Parliament. There are parts of it that we consider to be unhelpful, and we shall argue for them to be removed, as we have done successfully on many directives in the past four and a half years.

We support the purpose of the prospectus directive, as does the noble Lord, Lord Saatchi. He said that he agreed that it is important to make pan-European capital raising easier and cheaper. But there arc major problems in the present draft, which have been expressed in authoritative letters to the press in recent times. We believe that the present draft could have a negative effect on the European capital market in general and the United Kingdom's market and its participants in particular. We are actively seeking changes to the text and are glad to hear the latest news that the noble Lord, Lord Newby, reported about the view of Commissioner Bolkestein.

If that means changes need to be made to the Financial Services and Markets Act, so be it. It is a small price to pay, to spend a small amount of parliamentary time to bolster the financial services industry in this country and Europe as a whole.

I should say a word about the euro—not that I can add anything. I am certainly not going to add to the theology. The wording is that which we used in October 1997. I shall not define "sustained" or "sustainable". I shall not change the five economic tests, except to observe that one of them was clearly about whether joining was beneficial to the financial services industry in this country. Clearly decisions are being taken without us and there are occasions when we would wish to be involved in those decisions. I leave it to your Lordships to await the outcome of the review of the five economic tests, which will take place within the first two years of this Parliament.

I shall say a final word about the effects of the events of 11th September. Over the next two weeks we shall be debating with horrible intensity the Anti-terrorism, Crime and Security Bill, which includes all the financial measures in Parts 2 and 3. We have already taken firm action in denying funds to terrorists, and we are taking firm action in increasing our activities against money laundering. I was glad that the noble Lord, Lord Levene, dealt with that matter in considerable detail. He recognised that we all have a part to play in the fight against financial crime. Of course there are compliance costs, but the Government have tried to ensure that those will not be excessive. We have tried to make it as difficult as possible to launder money through the United Kingdom, to help to maintain London's reputation as a leading financial services centre. That is the tone with which I wish to close my remarks.

6.5 p.m.

Lord Levene of Portsoken

My Lords, I shall first take the opportunity to thank all noble Lords who have taken part in the debate. It is gratifying to hear so much support in the House for an industry that has proved to be so successful in the United Kingdom, and which is continuing to do so much to support and develop our national economy.

I join all those who have congratulated the noble Lord, Lord Brooke of Sutton Mandeville, on his highly pertinent and very amusing maiden speech, and claim the privilege of thanking him here on behalf of the City of London for the tremendous amount of work that he has done and the support that he has given over so many years.

The noble Lord, Lord Haskel, spoke about schizophrenia. I think that he was perhaps trying to illustrate his concerns about the need for the financial services industry to support new technologies. That industry has supported new technologies in the past few years—much to its cost, in many cases. It may have got it wrong, but it did so with the rest of the world, and it has put a hell of a lot of money into it. As the Minister said, we have to take risks. Sometimes we get it right, and sometimes wrong. Before we think that all that money went into other pockets, let us not forget that in the case of Vodafone and others, the Minister will not begrudge the £22 billion that went to the Exchequer through the sale of third generation licences. Much of that money was raised through the help of the financial services industry. Schizophrenia is fairly evident in that case.

Concern was expressed about competition, but of course it exists. Fees are competitive because we live in a competitive world. They are at a level that the market will bear. I remind noble Lords that that is what a market economy is all about. I support the noble Lord, Lord Freeman, in his call for the removal of the actuarial cap on pensions and the need for far greater flexibility in pension schemes. I thank him, too, for his kind words about the World Trade Centre Disaster Fund and its great success in raising a considerable amount of money for people in New York. I was there this weekend to see what was happening. The fund is a true reflection of the close and enduring relationship between the UK and New York.

It gives me great personal pleasure to be debating with the noble Lord, Lord Sheldon, again, albeit on a rather different basis. He mentioned the competition that we might face from Frankfurt and Paris. We certainly do face competition; we are not complacent, as I said. But if there were no competition, we would become complacent. We have to look over our shoulder all the time. The industry is doing a very good job in ensuring that we retain our pre-eminence, and I am sure that it will continue to do so.

The noble Lord, Lord Barnett, spoke about the leaks to which I referred earlier on the question of money laundering. I remind him that we are talking about a pool of some 500 billion dollars a day. It is inevitable that one will have leaks from a pool of that size. One cannot make omelettes without breaking eggs. We have a huge market from which we benefit enormously. The noble Lord referred to Manchester United. Although I do not support that team, I know that it lets in the odd goal. No one is perfect.

As to the euro, we are in a market. I do not take sides in this particular argument. At the time of the introduction of the euro, during my period of office as Lord Mayor, I was very concerned about the effect on the financial services industry of the UK being outside the euro. Happily, we remain at the top and, whether we go into the euro or remain outside, it is our intention to stay in that position. The effect on the rest of the economy is another issue. So far we have maintained our position, and we intend to remain there.

I concur with the observations of both the noble Lord, Lord Newby, and the Minister, particularly when wearing my hat as chairman of IFSI. We go out of our way to ensure that we represent the interests of the whole of the financial services industry of the UK. Of course the City of London is the largest section of that industry, but there are significant and very successful parts of it in Edinburgh and Leeds. We want to do everything to support them as well.

The hour is late and I do not wish to detain noble Lords any longer, save to thank all those who have contributed. As I have no desire to receive any Papers, I beg leave to withdraw the Motion.

Motion for Papers, by leave, withdrawn.