My speech to the British Bankers’ Association, 11th October 2006
It is an honour to be here tonight. And in thanking the British Bankers Association for inviting me to speak at your annual dinner and welcoming Angela Knight to her new role, let me start by paying tribute to Ian Mullen for his 5 years of service as Chief Executive at the BBA. You have made a real difference – and at the Treasury as across the banking world you have many friends who wish you well.
I have now been the City and financial services minister for five months. And as I have travelled around the city and the UK – indeed around the world – I have seen first-hand the strength and depth of talent and reputation which underpins our truly global financial services industry.
For three hundred years, London’s success has been based on our commitment to the rule of law and the highest professional standards. It has been built on your determination to innovate and always respond to new challenges; your ability to attract talent from across the world; and our long-standing tradition of openness and internationalism.
Some feared that the challenge of globalisation and the emergence of major financial centres and new technologies would threaten London’s place in the global economy.
But the opposite has been true. The City has not stumbled, but prospered.
And looking around this dinner tonight, the diversity of experience represented here is staggering. Together, you reflect the global nature of London, a capital that is not only the world’s leading global trading centre but the world’s leading international banking too.
London today is, with 264 foreign banks and 20% of international bank lending, the largest centre for cross-border banking. We must and we will keep it that way for the long-term.
So tonight I want to recognise the critical work that banks play in the British and global economies. And I want to set out some actions I believe we must take together – at the global, European and domestic level – to support your role.
The City’s future strength and success starts with you all – the people who work here in the City of London and in financial services across our country.
But as I have stressed, government actions and decisions – to act or not to act – have also played important role in this success.
I have highlighted the decisions, in the 1970s, taken in America that drove Eurobond business from New York to London. In the 1980s, liberalisation of the City of London and the opening up of our markets. In the late 1990s, our decision to establish a single regulator for financial services, replacing the fragmented, overlapping and self-regulatory system we inherited with today’s system of increasingly light-touch and risk-based regulation.
And I have reminded you that just four years ago, when the WorldCom accounting scandal broke in the US, we resisted pressures from commentators for a regulatory crackdown. We responded with a measured, proportionate response. History suggests that was the right response.
High Level Group
We are proud of your success. But we are not complacent. With globalisation and the rapid pace of change, we know that this success could reverse very fast if we got things wrong. This is why the Chancellor of the Exchequer announced in the Budget that he would set up a new High-Level Group bringing Government and the City together to develop a coordinated strategy to help ensure our financial services industry’s future success.
The first meeting of the group, including leading figures from the banking sector, will take place next week, to discuss the issues that matter to the health of our City and its global future.
Role of Banking
Maintaining an effective partnership between Government and this industry is key to future success for the banking sector in the UK. Since the decision to give operational independence to the Bank of England, and to form the FSA, the direct relationship between the Treasury and the banking sector has evolved in I believe a positive fashion.
As Minister for the City I have now met almost all of the leading retail and investment banks doing business in the UK. But as I have said to several of you individually, I have been surprised by the agendas for our discussions. Of course, we have discussed many important issues – financial capability, financial inclusion, unclaimed assets, and the location of cash machines. But I have often been surprised that a discussion of what we can do together to enhance the competitiveness of the banking sector and its role in UK and global economies was not top of our agenda.
This social, wider agenda is very important. It reflects the special role of banks in our society – something I will return to later. But my starting point, as a Treasury minister, is this:
What more can I do – can we do together – to support and enhance the critical role that the banking industry plays in our economy?
Let me start by saying that in an open, integrated economy like ours, banks really matter. You play three critical roles.
Banks are largely responsible for the storing and movement of money – from bank accounts to payment systems – vital for all financial and commercial transactions: £175 trillion flowed through the UK payment systems last year, our retail banks provide over 125 million accounts while foreign transactions worth £560 billion are handled each day in London.
Clearly, the efficiency of these systems is fundamental to the efficiency of our economy – not just the British but the EU economy and of the international system too.
On the subject of payment services in particular, let me welcome the constructive and positive engagement of the banking industry within the OFT Payment Systems Task Force. Set up at the request of the Chancellor, the Taskforce has already delivered a good agreement last year together to deliver a faster electronic payments service by November 2007 – good news for bank customers. And I expect further positive announcements in the near future about improvements in cheque clearing services and the governance of the payment systems in the UK.
Second, banks underpin risk pooling within our economy through helping individuals and companies to manage risk – through pooled investments products at the retail end to the securitisation in the wholesale markets and credit derivatives. And as risk is transferred to those better able to manage and price it, risk aversion is replaced by risk management so that businesses can cope better with uncertainties. This, then, allows them to invest and innovate more. The way in which risks are managed is critical to our stability – and again, not just to our stability, but also to that of the global economy.
And third, banks are key players in the investment chain, bringing together savers and borrowers – distributing capital across the economy, allowing financial needs to be managed over time. They can significantly reduce information and transactions costs for saving and borrowing in the economy – whether they are retail banks in the national market offering consumer credit and mortgages, or investment banks providing the skills for firms to access the global financial markets in London.
Today, I want to highlight what more I think we can do at the global, European and domestic levels to ensure we have the best possible environment in which banks can carry out these key functions.
As much of the regulatory environment within which you work is decided at the global or European level, we have a duty to work with our international partners to get these regulations right.
Take prudential capital standards. The UK, working within the EU, has been at the forefront of implementing the international Basle II capital standards. Now on a global scale, we must work to support a consistent implementation of these international standards to ensure a level playing field.
I am aware that the implementation of international measures, such as Basle II, can be tricky. We must strive for consistency across countries in order to deliver truly open markets. That is a higher goal worth fighting for. It will require all our international partners to work together to meet that challenge.
On terrorist financing, the global banking sector plays a vital role in alerting us to suspicious transactions and helping us to freeze the accounts and assets of terrorist suspects. I am grateful for the strong partnership we have with banks in this important area of work.
Yesterday, I updated Parliament on a number of measures we are taking to make our counter-terrorist finance regime more proactive and focused on addressing areas of particular risk covering charities and money service businesses; the Third Money Laundering Directive; and the use of classified intelligence material, balanced by proper judicial and parliamentary oversight.
And let me express my gratitude tonight for the effective partnership between industry and government on the fight against money laundering through the Joint Money Laundering Steering Group.
Our presidency of the FATF next year is a real opportunity to take forward our work on anti-money laundering and counter-terrorist finance globally. The Government will lead the cause, and I want to ask you to continue to play a key role as we do that.
On the Single Market and European regulation, it is also through proportionality and a risk-based approach that we will make best progress. I have said we should apply three tests for any European regulatory decisions.
We must ask whether a new regulation is necessary to further the integration of the internal market without disproportionate cost; take a hard-headed approach to any negotiations – to ensure that our national interest and the wider EU interest are both advanced; and ensure that all new regulations are implemented here in Britain in a sensitive and light touch manner.
When I met Commissioner Charlie McCreevy, recently, I congratulated him on his decision to allow a market-led approach to tackling barriers to greater efficiency in clearing and settlement.
This approach also applies to EU work on mortgages. The Commission has published a Green Paper on mortgages and looks likely to move to a White Paper in Spring 2007. It is essential that any specific action be supported by a rigorous assessment of benefits and costs. At present, we see no case for a Directive on mortgages.
And while I believe we negotiated a successful outcome in the Markets in Financial Instruments Directive, I know there are concerns here that, given its breadth and complexity, MiFID provides a particularly difficult implementation challenge.
Let me pay tribute to the work of the BBA and other trade associations in the MiFID Connect initiative. This provides a coherent focus for industry discussions with the Treasury and the FSA. It provides an important helping hand for individual firms, and it should help the UK to maximise the business benefits from MiFID.
As a result I believe we are ahead of the game in the UK. Considerable time is being put into delivering a pragmatic outcome. Decisions have already been taken – for example to have a common platform to encompass the organisational requirements in the CRD and MiFID. Treasury and the FSA are working closely with the Commission, with finance ministries and with regulators in other member states to try and ensure a common application of the directive.
This is the kind of pragmatic approach to European issues that the City have told me that they want Britain to take – not ideological posturing but seeking a London strengthened as part of a European single market for financial services.
I do not believe we can stand up for City or British interests by leaving the table or withdrawing to the extremes and anti-European fringes of the big European debates. And – with this Government at least – that will not be our approach.
At the same time as arguing for a sensible and light touch approach at the global and EU levels, we must also take what action is needed to protect our domestic regulatory approach.
The Government’s interest in this area is specific and clear – to safeguard the light touch and proportionate regulatory regime that has made London a magnet for international business. That has made London an economic asset for the UK, for Europe, and for countries throughout the world.
That is why I announced last month that the Government would legislate to enhance the FSA’s powers over recognised investment exchanges and recognised clearing houses, building on this regime. Tonight I want to explain in more detail what we have in mind in respect of legislative procedure and substance.
On legislative procedure, having looked hard at the scope of the Companies Bill currently going through parliament, we have decided instead to introduce a short bill of about half a dozen clauses in the next couple of months. The bill will seek to modify Part 18 of the Financial Services and Markets Act, which deals with recognised investment exchanges and clearing houses.
It is our agreed and clear intention as a Government to legislate as early as possible, with a 2nd reading expected before Christmas.
I hope and believe we will have wide support for our approach.
Our aim is to enable the FSA to stop recognised investment exchanges and clearing-houses making changes in their regulatory provisions whose effects are likely to be disproportionate. To this end we expect that the provisions will:
- Cover all of our recognised investment exchanges and clearing houses, including the full range of markets operated by our recognised investment exchanges
- Enable the FSA to veto changes to regulatory provisions introduced by recognised exchanges and clearing houses or those applying for recognition that impose an obligation or burden
- Limit the circumstances in which the veto can be used to those where the relevant requirement is excessive, that is it is disproportionate to the end it seeks to achieve or does not pursue a reasonable regulatory objective
And any exercise of the veto will be subject to appropriate processes. In particular, where the FSA decides to call in a regulatory provision to determine whether it is excessive, it will need to specify a period during which representations can be made to it about the provision.
These provisions are not intended to put into question existing regulatory provisions of investment exchanges and clearing houses. They are not intended to involve the FSA in micromanaging the regulatory provisions of investment exchanges or clearing houses. And they are not intended to make overseas ownership of UK exchanges any easier or more difficult than it is at the moment.
The legislation is simply about providing a back-stop to ensure certainty for stakeholders about the proportionality of the regulatory provisions of investment exchanges.
We will publish draft clauses shortly for consultation, including with the investment exchanges and clearing houses and their stakeholders, about the detail of what we will be proposing.
Openness & Competitiveness
Our third responsibility is to ensure an open and competitive domestic environment. This is, in my view, the best way to allow banks to play their full role in the UK economy and ensure a fair deal for businesses and consumers.
That is why this Government, as well as introducing a world-class financial regulator, has been responsible for the radical reform of our competition arrangements – with greater independence and powers for the OFT and the Competition Commission.
I believe it is right that competition decisions are not in the hands of ministers, but in those of independent experts. And we have equipped them with comprehensive powers to tackle anti-competitive behaviour. The outcome will be a stronger, more resilient economy for the UK. I believe that competitiveness abroad is best based on competitive markets at home – not picking winners or favouring national champions
I understand that this can create challenges for individual firms involved in competition cases. The competition authorities need to work fairly and as efficiently as possible. This reduces uncertainty and costs for companies being investigated.
Of course, British banks must compete on level terms with foreign banks. That’s why we will be supporting moves within Europe to make cross-border mergers and acquisitions of financial institutions easier, just as we committed to during our Presidency of the EU.
Special Nature of Banks
I referred earlier to the special nature of banks. They are fundamental to the working of the economy and are linked-in to all parts of the financial system. Many banks will also be among our biggest companies. There are clear economies of scale in banking and the existence of large competitive banks is natural and healthy.
But the consequence is that if banks fail, the external effects can be extremely large. That is why we have prudential supervision, why we require banks to have minimum capital requirements and effective systems and controls. It is also why we have arrangements in place through the Bank, Treasury and FSA Tripartite arrangements to consider and respond where there are threats to the stability of the financial system.
It is also why we do not view bank profits as undesirable. Profits are essential for any industry to survive let alone invest, grow and innovate. And in banking, profits, which are generally strongest at an advanced stage of the cycle, are an essential part of keeping the sector sound and stable over the whole cycle.
Some have suggested that given their central role in the economy, it would be appropriate to treat banks just like utilities– to subject them to price-setting and onerous rules on how they interact with their customers.
The alternative approach – and the one I favour – is to rely on market forces and competition policy to promote efficiency through open and competitive markets.
But at the same time we must recognise that banks play an integral role in our society and in our lives. Like any company, they operate within society and have social obligations and responsibilities.
We cannot have people or social groupings excluded from our financial life – and holding such an important position in society means that banks should be leaders in corporate social responsibility.
We all recognise the real costs that financial exclusion imposes on individuals and families and take action to tackle it. While by building up financial literacy –increasing financial capability – banks benefit too, as consumers move up the value chain. This is an enabling action that helps society, and that helps business too – a win-win scenario.
So we share with you a goal of halving the number of adults living in households without an account of any kind. And we seek to build on our partnership, for example in the Financial Inclusion Taskforce in which several people from the retail banks participated. Working together to introduce new guidelines on account opening into the Banking Code of Standards is an excellent example.
I welcome the announcement by some banks earlier this year that they will increase the number of free ATMs situated in deprived areas. This is a positive development. And I am looking forward to receiving the recommendations of John McFall’s working group on ATMs later this year, to which the banking industry is fully contributing.
I welcome your work alongside government to develop a scheme to allow unclaimed assets, where they cannot be successfully reunited with their owners, to be used for the benefit of the community. I recognize the close work under way on technical issues, to allow the commitment made by the banking industry in November 2005 to be delivered.
Similarly, I know that the Banking industry already supports financial capability in a number of ways. But we all recognise that this is an issue of growing importance. That is why I propose to publish a 10-year plan for financial capability later this year, and why John Tiner and I are hosting a conference on this important subject on 18th October. By improving financial capability we can develop better informed, educated and more confident citizens, able to take greater responsibility for their financial affairs and able to play a more active role in the market for financial services.
Let me end where I started: by stressing that a strong and healthy banking sector is essential for a strong and healthy economy. I understand that it your success and the strength of our economy that enables you to fulfil your wider social responsibilities.
I strongly welcome the industry’s commitment and in particular the hard work of the BBA and your institutions in working in partnership on the issues I have outlined today. Real progress has been made.
And I look forward to continuing to work with the BBA and your membership to ensure a stable, competitive and innovative future for the banking sector in the UK.
Thank you.Posted November 26th, 2015 by admin