Offshore finance is key to UK economy

Late last year, MPS and peers formed a cross-party group about the UK’S alternative investment industry. We did so in recognition of the fact that parliamentarians have not generally understood this sector of the UK’S finance industry, nor the increasing role it is playing in financing the economy of this country.

The establishment of the all-party parliamentary group (APPG) on alternative investment management has proved particularly timely. The recent publication of the so-called “Paradise Papers” has served as a reminder that the UK’S pensions and other savings vehicles use offshore structures. Alternative investment funds such as hedge funds and private equity funds do too.

We need to understand why they are registered offshore and what impact, if any, this has on our taxes and the real economy. Alternative investment funds are registered offshore to enable capital to be raised from institutional investors – such as local authority pension funds – across multiple countries with different rules.

Many onshore jurisdictions don’t have the fund vehicles, the flexibility or the legal and service infrastructure necessary to do this and subsequently are unable to reinvest globally.

Further, we know from the Exchequer that the sector provides billions in annual tax receipts. AIMA, the global industry’s Londonheadquartered association, estimates that the total receipts from corporation and income taxes are around £4bn – enough for 160,000 junior doctors, nurses, teachers or police officers.

That is just the tax take from the industry – it excludes the many millions of pounds that investors in alternative investment funds pay to HMRC each year. We also know the sector employs approximately 45,000 people in the UK. But we want to go beyond these headline numbers and look under the hood of the world’s second largest alternative investment industry, which represents around 85pc of Europe’s share of the global industry, to better understand what people are investing in and what value they are adding to our economy.

That’s why, in late October, we started a series of visits to alternative investment firms in London. This hands-on experience is arming colleagues with a greater insight into what is a complex and extremely diverse industry.

It is helping us to truly understand what “alternative” investment management means, how it differs from the far larger “traditional” asset management sector, and its corresponding impacts on pension funds, which make up about 25pc of all capital invested in the UK’S alternative investment industry, and UK plc. We came into this programme assuming that hedge funds and other “alternatives” were riskier than more “traditional” investment funds.

But we have learned how institutional investors use alternative investment funds to reduce risk in their overall portfolios, rather than add to it. Some of us may have thought that the industry was unregulated and secretive. Yet the wave of financial services reforms of the past 10 years means the industry is now embedded in multiple layers of regulation and oversight.

We also did not realise that alternative investment managers have such a direct impact on the financing of our economy. We now know that managers have a role in the direct funding of UK businesses and, in some cases, infrastructure projects, both large and small, in an age when traditional institutions like high street banks no longer serve important parts of the market. We were therefore surprised by the role that the industry is playing in catalysing private investment into public projects such as affordable housing, an aspect of alternative investment that often goes unreported.

The work of the APPG is in everybody’s interests. Our ultimate, immodest goal is for the members of the APPG to be true experts who are able to ensure the industry is scrutinised as effectively as possible by the UK Government and our regulatory framework – no matter where the funds are set up.

As we leave the European Union, we must ensure the sector’s regulation is robust and well adapted. This will help ensure that we retain our status as a global hub for alternative investment management, which serves its clients in a fair and transparent manner without endangering financial stability or the public interest.

‘As we leave the EU, we must ensure the sector’s regulation is well adapted’

Chris Evans, Labour MP for Islwyn, and Mark Harper, Conservative MP for the Forest of Dean, are officers of the new all-party parliamentary group on alternative investment management