My speech at the City of London Corporation Dinner, 25th October 2006

  1. My Lords, members of the Corporation, international guests, Parliamentary colleagues, friends – it is an honour to be here tonight.
  2. This is my second visit to meet the Corporation in so many days, following the Lord Mayor’s breakfast yesterday. And having met with the Lady Mayoress on Monday to discuss our review of Life Chances for Disabled Children and their families – and the important work the Lord Mayor and Lady Mayoress is doing to support disabled children at Treloar’s school in Hampshire – and looking forward to tomorrow’s 20th anniversary celebration of the Big Bang in financial services, over at the Mansion House – this has been a busy week for Treasury Corporation relations!
  3. During my short time so far as City Minister over the last five months, it has become abundantly clear to me what an important role the Corporation plays in the success of the City of London. Not just on policy, but with a range of representation activities and through the leadership that you provide.
  4. At yesterday’s breakfast I reported back from the first meeting of the Chancellor’s High Level Group on City competitiveness – a Group on which both the Lord Mayor and your Chairman Michael Snyder play a leadership role.
  5. And so, as we look forward to tomorrow’s reception, I want to start by paying my tribute to those who saw through the liberalisation of the City of London and the opening up of our markets in the mid-1980’s – both in the City and in the Government of the day.
  6. This Big Bang – and the raft of consolidations, takeovers and influx of foreign institutions and talent it involved – was a decisive event in the City’s history.  Following the birth of the Eurobond market in the previous decade, it confirmed that in financial services Britain would choose global integration and openness over protectionism and national ownership, competition and market discipline over discrimination and cartels.
  7. And since 1997 we have built on those reforms. With Bank of England independence, our new independent competition authorities and, of course, the Financial Services and Markets Act which put in place a new regulatory regime based on principles not rigid rules; statutory independence, transparency and a rigorous assessment of cost and benefits.
  8. Today, our system of principles- and risk-based regulation provides our financial services with a huge competitive advantage and is regarded as the best in the world.
  9. And it is this commitment to openness and internationalism, our light-touch and risk-based regulatory approach – combined with the great pool of talent gathered from across the planet – that underpins London’s success as a modern international financial centre.

High Level Group

  1. The City today is widely seen as one of the world’s only two truly global financial centres.  Recent growth has been dramatic but we are not complacent. Reputation takes many years to build but, in today’s fast-moving global economy, mistakes are punished hard and swiftly.
  2. Which is why the High Level Group last week discussed the issues on which we must work together over the coming months to entrench UK financial services globally:
  • strengthening further our principles- and risk based approach to regulation for financial services;
  •  modernising the wholesale insurance industry and examining its business environment;
  • boosting professional financial skills and making London a centre for global regulatory expertise;
  • investing in our infrastructure;
  • cutting regulatory burdens and tax reforms to keep pace with new opportunities, for example in asset management and Islamic finance; and
  • working more closely together to promote the UK based financial sector in overseas markets
  1. This is a rich and important agenda which we will pursue with vigour.
  2. And as you will know, it was widely reported that Michael arrived a little bit late at the meeting – hot-foot from Heathrow. Some uncharitably interpreted that as sign that we must sort out our transport and immigration infrastructure. We must look closely at those issues.
  3. But I drew another conclusion from Michael’s late arrival. No-one was surprised to find that the Head of the City’s policy and resources committee was in New York representing the City in key discussions, alongside James Sassoon, the Chancellor’s Representative for the Promotion of the City.  Indeed, there would have been no surprise if he had flown in from Tokyo, Hong Kong, Dubai or Frankfurt – though I imagine had he come from the City’s Brussels office he might have come by train.
  4. My point is this – increasingly it is negotiations and regulatory decisions being taken at the global and the European levels that have a major bearing on the competitiveness of the City and our financial services industry.
  5. So tonight, I want to highlight what more I think we can do at the global and European levels to ensure we have the best possible environment in which our financial services industry can prosper and create jobs.

The City & Global Regulation

  1. This is a globally integrated industry – and working with the FSA and the City, we must make sure that regulatory decisions taken at the global level are the right ones.
  2. So on prudential capital standards. The UK, working within the EU, has been at the forefront of implementing the international Basle II capital standards – and we need all our international partners to work together to meet that challenge.
  3. And the same goes for Solvency II – we have the opportunity to create a risk-based prudential framework for insurance at the EU level which will help the sector use capital more efficiently and contribute to a deeper Single Market in insurance services.
  4. At the same time, I am determined to protect our domestic regulatory approach from global developments.
  5. That is why I announced last month that the Government would legislate in the coming weeks to enhance the FSA’s powers over recognised investment exchanges and recognised clearing houses.
  6. The legislation will cover all UK recognised investment exchanges and clearing houses, and all the markets they operate or support – and we are currently working hard with many of you to make sure we get the detail right.
  7. It will enable the FSA to veto changes to regulatory provisions proposed by these bodies that would impose an unnecessary or disproportionate obligation or burden, subject to appropriate processes, including for a period during which representations can be made to the FSA about the provision.
  8. And it will not apply to the existing regulatory provisions of the exchanges and clearing houses, nor involve the FSA in micromanaging their rulebooks.
  9. And it is not intended to make overseas ownership of UK exchanges any easier or more difficult than it is at present.
  10. Our interest in this area is specific and clear – to safeguard the risk-based and proportionate regulatory approach that has made London a magnet for international business and new listings from around the world.
  11. But we must put these global regulatory issues in their proper context. Some argue that London’s current success has been based on avoiding some of the mistakes made elsewhere. And we were right to resist a disproportionate response to the Enron and WorldCom scandals. But I do not agree that these recent decisions by others, of themselves, have been decisive for the City’s success  – and we would all benefit from any future reforms.
  12. But equally, when others argue that it is the UK which is making the mistake by allowing an excessively light touch in our regulation – or specifically criticise the regulation of the AIM market  – I also disagree.
  13. Of course, we are always vigilant.  Our regulatory approach is risk-based which allows it to be lighter touch when appropriate.  And the success of the AIM market is fully consistent with that approach. In fact it flows from it: risk-based regulation means tailoring regulation to fit the circumstances, the actual risks and the real needs of investors.
  14. The fact is that London is doing well and attracting business and listings because we have a proportionate, risk-based approach to regulation which is flexible and adapts to change.  That is why 120 international companies were admitted to AIM in 2005 and a further 90 in the first nine months of 2006.
  15. To revert to more heavy-handed, detailed or mechanistic regulation which put process before substance would divert us from proper risk-assessment and stifle innovation.  We do not intend to fall into that trap.

The City and Europe

  1. I said that Michael Snyder could equally have been arriving from Brussels as New York. So let me turn to the City’s relations with Europe.
  2. And I want to start with the big question – do the City and UK financial services really need Europe any more? After all, this is a global industry.  Indeed I have heard some argue recently that if other European financial centres retain their rules and restrictive practices, then London’s competitive advantage is enhanced – in the same way as in the 1970s excessive US regulation drove the Eurobond market to develop in London.
  3. I disagree.  And tonight I want to set out why I believe our membership of the EU is in the interest of our financial services industry and our country.
  4. First because London is now established as Europe’s wholesale financial services gateway to the world, and the world’s financial services gateway to Europe – with key European banks such as Deutsche Bank and Societe Generale now choosing to locate substantial parts of their wholesale operations in London.
  5. Second, because our financial services have a great deal to gain – in terms of jobs and new investment – from an enlarged large, open and competitive retail financial services market across Europe – as do European consumers across the Union.
  6. Of course, to make the most of this opportunity we must implement this single market in the right way. Not through a vast programme of harmonisation – the imposition of a one-size-fits-all approach – but through the removal of barriers to mergers and acquisitions, and with a mutual recognition of each other’s standards wherever possible. The idea that London’s success depends on other European financial centres lagging behind is a defeatist underestimation of this City’s strengths and future opportunity.
  7. And third, by winning arguments for, open markets and open trade within Europe, we strengthen our position on the world stage – ensuring that the EU uses its influence well in multilateral trade negotiations, environmental action or in key bilateral relationships with the US or India and China.
  8. And as I have said, it is the EU which has been pushing hard for progress on Basle II. And we will continue to support the work of the Transatlantic Business Forum to breakdown regulatory barriers in financial services between the USA and Europe.  This is an important opportunity for Europe, working with business, to reduce barriers and strengthen international trade.
  9. With enlargement from 15 to 25 Member States, and a European Commission led by President Barroso, I believe the EU is taking significant strides towards a more open and global view of the world – while entrenching further commitment to peace and to prosperity across our continent which has been such a great achievement in the last sixty years – and unprecedented in past eras.

Global Europe

  1. I believe there are encouraging signs that we are making progress. Since becoming City Minister, I have seen how London is strengthened as a global financial centre because of Britain’s membership of the EU and our willingness both to fight our corner and to reach agreements when they make sense.
  2. A few years ago there were many business people who feared that in not joining the first wave of monetary union, London would be excluded from euro-based financial markets.
  3. There was a fear that regulation coming from Brussels, in the form of the Savings Directive or the Investment Services Directive would lead to inflexible, over-burdensome regulation which would eventually erode London’s international competitiveness
  4. But since the launch of the Euro in 1999, London has established a pre-eminent position in Euro denominated international transactions.
  5. On the Savings Directive we fought and won the argument for a solution to tackling tax avoidance that was workable and took account of global realities.  On the Prospectus Directive we won important changes.  On the Transparency Directive, we fought and won the battle against quarterly reporting.

UK Approach to EU financial services

  1. These outcomes do not come about by chance or accident. They come about through engagement, hard work and patient negotiation.  They demonstrate why, for financial services, we must be at the table, making our voice heard, trying to win the argument.
  2. First, that demands a clear and principled approach – based on recognising the global nature of financial markets – and always starting with these questions when any new European regulation is proposed: is it necessary?  Will it protect and enhance the continued competitiveness of London and other EU markets in the face of global challenges? Will it truly further the integration of the internal market without disproportionate cost?
  3. On financial services, our Global Europe approach means recognising that “one size does not necessarily fit all”. There is a simple logic behind this – differences in legal systems, in regulatory approaches or with the wholesale and retail composition all make a single sized approach difficult.
  4. That is why we strongly believe in alternative, non-legislative instruments – like the current sectoral competition investigations into financial services – or in market-led codes of practice
  5. And we are increasingly seeing the use of non-legislative, market led solutions – in Clearing and Settlement, or with the Single European Payments Area – solution that tackle obstacles and further the integration of financial markets.
  6. At other times, greater co-operation between supervisors through the Lamfalussy arrangements – for example, by delegating tasks or sharing reporting data more efficiently – may be equally effective at solving a problem, dismantling a barrier, or strengthening our financial stability architecture.
  7. This approach will be particularly essential, in the debate about how to further integrate retail markets, where barriers like language, or consumer preferences, may result in a legislative solution being less appropriate, and where integration of markets through consolidation and mergers and acquisitions may provide a more effective way forward.
  8. I would highlight Commissioner McCreevy’s White Paper on financial services policy – which outlines the Commission’s financial services approach for the next five years. This enshrines a globally orientated approach to policy making grounded in better regulation principles.
  9. In addition the financial services sectoral competition investigations announced by Commissioner Neelie Kroes are excellent examples of the Commission seeking to tackle financial services barriers through the application of its competition powers, rather than in pursuing a legislative solution.
  10. It is vital that we in Government and you in the City work with these Commissioners to deliver the outward looking, and globally focussed approach to regulation that we all seek.
  11. It is also is why in mortgages I believe the case for a directive has simply not been made. I certainly support the Commission’s willingness to explore with the industry the potential of market-led initiatives in this area, for example to improve efficiencies in the EU mortgage funding markets.
  12. We believe that all such non-legislative policy solutions should be thoroughly considered, before the Commission resorts to bringing forward a piece of EU legislation.
  13. I hope very strongly that the approach taken by Neelie Kroes and Charlie McCreevy will be taken up in other policy areas, for example with the consumer credit directive.
  14. Second, because there will be times when EU legislation is the appropriate response, we must take a hard-headed approach to any negotiations to ensure that our national interest and the wider EU interest are advanced: protecting the competitiveness of our economy and our principles- and risk-based approach to regulation in the detail of all legislation.
  15. Where the EU does regulate, Europe must regulate better – following better regulation principles. That means ensuring robust cost benefit analysis, competitiveness testing and consultation with industry, not just in the formulation of the relevant high-level directive, but also of the detailed measures needed to implement it.
  16. Just as on the Savings Directive, where the Government has fought to safeguard the City’s interests, on MIFID, we had to fight to reduce massively the impact of the “pre-trade transparency rule” for share dealing by investment banks.  The final outcome on MIFID is balanced and proportionate and protects the City’s interests while opening up significant opportunities for City firms in EU markets more widely. It is a clear advance on the previous legislation, which limited rather than facilitated a single market in investment services, and held us back from exploiting our comparative advantage in financial services.
  17. And third, where EU legislation does materialise it must then be properly implemented. At the EU level that means ensuring legislation is implemented consistently, proportionately and on a timely basis throughout the European Union.
  18. And here in Britain we must ensure that all new regulations are implemented in a sensitive and light touch manner. That means no unnecessary and burdensome gold-plating.
  19. I know only too well from my discussions with industry just what an implementation challenge next year poses to be, with both the Capital Requirements Directive and MiFID entering into force. Nevertheless, I believe that working in co-operation together, the industry, FSA and HM Treasury can rise to this challenge.
  20. Getting implementation right is not always easy.  An example of this is the Transparency Directive, where the requirement to have a liability regime for issuers’ financial disclosures could have far reaching implications – an issue I know you have concerns about.
  21. The Government has already announced that, to ensure that it gets the implementation of this Directive right, it is to conduct a formal review of the liability of issuers.  The Review will address, in particular, liability in damages in respect of damage or loss suffered as a consequence of inaccurate, false or misleading information disclosed by issuers or their managements to financial markets.  I am pleased to announce tonight that Professor Paul Davies QC, the Cassel Professor of Commercial Law at the London School of Economics has agreed to conduct this review.
  22. To achieve each of these objectives requires us all to work hard and closely together – City and Government and with our EU partners, be they other European Governments, firms, trade associations or institutions.
  23. And tonight I want to thank you all for the extensive efforts you go to in representing UK interests in Europe, ensuring the City continues to prosper.
Posted November 26th, 2015 by admin