My speech to the IOSCO Conference, 16th November 2006

  1. It is a pleasure to be here today and I would like to begin by thanking you for inviting me to make some remarks at beginning of this very important conference.
  2. It is a pleasure also to share a platform today with Sir Callum McCarthy.  Under the leadership of Sir Callum and John Tiner, the Financial Services Authority has developed what I believe is a globally respected framework for principles-based and risk-based regulation.  I know that the FSA has been a significant contributor to the international debate on financial regulation and I would also like to take this opportunity to congratulate the FSA on hosting this conference.
  3. We are privileged also to have the Chairman of the US SEC Christopher Cox here today. The SEC is a key partner in our aim to further integrate global financial markets, helping to increase sustainable economic growth in Europe and in the US. And we are very much looking forward to hearing Christopher’s views on the important issues we are covering today.
  4. I am delighted also to see so many representatives from the world’s financial community here today.  And I welcome the  opportunity to speak to you about the important challenges  we face in the global regulation of the financial services industry – greater convergence on accounting standards, developing the international regimes for banking and insurance solvency and also how we address issues around hedge funds and private equity – which are as great as they have ever been.
  5. Through your shared objectives of international regulatory co-operation, information sharing and mutual assistance, IOSCO is playing – and will continue to play – a key role in achieving our shared goals of keeping our world financial system strong, stable and efficient.
  6. And in my contribution today, I would like to talk to you about two separate but related issues:
  7. First the importance of global regulatory cooperation in ensuring open, competitive and stable financial markets – striking the right balance between protecting investors and entrenching financial stability on the one hand – without inhibiting innovation and discouraging foreign investment, or damaging market efficiency, on the other.
  8. And second, I want to set out in detail the legislative steps we are taking here in Britain in the coming weeks to entrench our principles- and risk-based approach.
  9. As the global economy goes through a period of radical transformation and integration, increasingly it is negotiations and regulatory decisions at the global level that have a major bearing on the competitiveness and efficiency of our financial markets.
  10. And in this global environment it is vital that we work together in order to get the right decisions and outcomes.
  11. An increasingly globalised world calls for increased cooperation and, where appropriate, convergence  in global standards. There should be no competition between us on the objectives of regulation.
  12. The Basel process – developing international standards on banking solvency requirements – has been a good example of this international co-operation.  The EU has been at the forefront of implementing the Basel II standards through the Capital Requirements Directive.  Now on a global scale, we must work to support a consistent implementation of these international standards to ensure a level playing field and deliver truly open markets and an efficient allocation of capital for the global economy.
  13. International convergence is also a central theme in the prudential regulation of insurance, which lags the development of international approaches to banking and, I am pleased to say here today, securities markets.
  14. The European Union is creating a new regulatory framework – Solvency II – which aims to achieve convergence with emerging global standards on key areas, including international accounting standards and frameworks for insurance supervision.
  15. We need a global perspective, because the globalisation of financial services will make efficient supervision of insurance groups and financial conglomerates operating internationally a key challenge for all regulators.  We recently published a consultation document on Solvency II setting out proposals for modernising the rules for European insurers. Insurance groups are increasingly choosing to operate as an integrated economic entity across borders. We must align the regulatory system closely with this business reality.
  16. In the EU, the asset management sector has also seen some of the benefits of international co-operation.  Common rules allow asset managers to market funds across the 25 Member States.  And the European Commission will today publish proposals to make this framework work better.  We are pleased by the way this reform process has been going so far.  Effective co-operation with stakeholders in the UK industry has been very helpful in allowing us to contribute effectively to this debate, and we look forward to this continuing as we move towards implementation.
  17. And global convergence of international accounting standards can also reduce the cost of capital by making cross-border investment more easily comparable. But let me say: Europe was in danger of applying the Transparency and Prospectus Directives in a way which would have made its markets less attractive to non-EU countries, for the sake of an artificial timetable on convergence.
  18. That is why I am pleased that we in Europe took the decision to delay the requirement for foreign firms to disclose information required by EU accounting standards until 2009 – benefiting several hundred non-EU firms listed in European exchanges.
  19. But I believe we all gain in the long-term from greater global cooperation and mutual recognition on accounting standards and on corporate governance too. I know there is a lively debate taking place in the US about the balance of regulation, which we are following closely. I believe we would all benefit from future reforms to the Sarbanes-Oxley regime.
  20. At the same time, London is doing well and attracting business and listings – including on AIM – because we have a principles-based and a risk-based approach to regulation which has proved to be effective, while being flexible and adapting to change.  We are determined to keep it that way.
  21. Let me turn to hedge funds where assets managed stand at around $1.3 trillion globally and have been growing rapidly, although each of the top five global asset management companies manages more than this. Hedge funds assets have increased tenfold since 1996. Funds managed from London have trebled in three years.  This is attracting the attention of Governments and regulators worldwide and is likely to be on the agenda of G7 Finance Ministers during the German Presidency next year.
  22. Hedge funds have brought greater liquidity to financial markets. They also drive financial innovation, and I believe the presence of a substantial hedge fund sector here in London has been positive for the City’s development as a financial centre.
  23. Like other financial vehicles, hedge funds can also pose risks to our common regulatory objectives: both to financial stability and to consumer protection. So here again our regulatory approach is risk based and proportionate.
  24. Hedge funds operate in increasingly sophisticated markets, and have fuelled the rapid growth of derivative markets in recent years. In the long run, this can help banks to spread their risks and promote greater stability. But it is also important both for banks to assess the lending risks they face, and for regulators to know the extent of risk exposures – and the growth of hedge funds, is making these judgements more complicated.
  25. I know that the FSA keeps these risks under review through its centre of hedge fund expertise.  It conducts a regular survey of ‘hedge funds as counterparties’ to improve its understanding of the impact of a major hedge fund failure. It watches market conduct and data from UK hedge fund managers. The FSA also requires hedge fund managers operating in London to be registered.
  26. And to protect retail consumers, the FSA prevents unregulated investment funds – including hedge funds – from selling directly to the retail market without appropriate advice.  Investors who may not fully understand the risks and charges involved in hedge fund investments cannot get access in the same way as other products.
  27. In short, the FSA adopts a proportionate risk-based approach, consistent with its regulatory principles. I believe our regime of supervising hedge fund managers is as effective and probably more demanding than other financial centres. I believe the FSA’s work in this area carries a good deal of weight internationally, and I want Britain to remain at the forefront of international understanding and co-operation on these issues because there are no easy answers. Excessive regulation would bring its own risk that the industry would retreat offshore, an outcome from which none of us benefits. Our task, together, is to decide on the best way to achieve effective regulation of hedge funds to ensure we strike the right balance, both now and in the future.
  28. Let me turn to my second theme: how working within the constraints arising from our international obligations, we can respect the rights of each nation to regulate its own financial services industry and the financial markets that operate in its territory as it thinks best.  I know that this is an issue which you will be discussing at one of this morning’s panels.
  29. The UK has for some years been open to overseas investment in UK exchanges. LIFFE, ICE Futures and virt-x are all owned by overseas companies. NYMEX Europe was established by an overseas company. And EDX London is a joint venture between a UK and an overseas exchange.
  30. But questions have been raised about our approach to exchanges following NASDAQ’s interest in acquiring the London Stock Exchange.
  31. I have discussed this matter widely in recent months and in responding to those questions I have made two points absolutely clear.
  32. First, that the government is neutral with respect to the nationality of the ownership of the LSE.
  33. Second, our interest in the ownership of the LSE is that it should not affect the existing risk-based regulatory regime under which the exchange and its members and issuers operate.
  34. That is why I announced in September that we would be legislating to safeguard our proportionate risk-based approach.
  35. Today I am introducing a Bill into our Parliament  – the Investment Exchanges and Clearing Houses Bill – which will confer a specific power on the Financial Services Authority to veto rule changes by UK recognised investment exchanges and recognised clearing houses that would have an excessive regulatory impact, disproportionate to any proper regulatory objective the rules would deliver.
  36. These new powers will not put the existing regulatory provision of the recognised investment exchanges and clearing houses into question.  They will only apply to future changes.
  37. Let me stress also that the Financial Services Authority will not be involved in micromanaging the rulebooks of the exchanges and clearing houses.  It will not tell them what to write.
  38. The Financial Services Authority will not need to vet every single rule change proposed by a recognised investment exchange or clearing house.  The new power is intended to be a back stop.  We will therefore give the Financial Services Authority the right to specify in its rules the kind of regulatory provision it needs to see.  And to specify what it does not want to vet.  A great deal of the ordinary regulatory provision of the exchanges and clearing houses – the large majority of it – will not need to be vetted.  I am confident therefore that this legislation will ensure that we can maintain our approach to financial market regulation without imposing a disproportionate burden on the exchanges and clearing houses themselves.
  39. We shall also give the Financial Services Authority a temporary 12 month power to grant waivers.  This will ensure that the exchanges and clearing houses are not subject to an excessive reporting obligation while the FSA’s new rules are being prepared.
  40. Fundamental to our approach is the principle that we should be blind to ownership of exchanges so long as our regulatory environment is protected.  The new legislation will deliver this.  It will apply to all UK recognised investment exchanges and clearing houses from the outset.  It will not just apply after there has been a change of control and it will not apply only to those exchanges and clearing houses which are in foreign hands.  The new powers will not make foreign ownership of UK exchanges and clearing houses any easier or more difficult than it is at the moment.  And I am confident that they will not deter any potential foreign investor who wants to come to the United Kingdom to benefit from our approach to financial regulation.
  41. Let me end where I started: by stressing that global regulatory co-operation will continue to be key as we work to address the challenges facing the international financial services industry today.  IOSCO clearly has a central role to play in this and I wish you every success for this year’s conference and for your ongoing work. I look forward to the conclusions on this conference, and on hearing your ideas, as we continue to work together on this agenda.
  42. Thank you.
Posted November 26th, 2015 by admin