Much of the economic and political debate of recent years has focussed on the role of financial services in our society; the stability of the sector - or the lack of it - and possible options for reform.
First and foremost, we need to develop a robust regulatory framework at a domestic, European and global level that promotes financial stability and allows London to flourish as the world’s financial services capital.
A stable platform will also ensure that the financial sector is best able to serve the interests of the wider economy, meeting the needs of businesses and households.
So today I want to talk about how financial services can - and must - reconnect with the rest of the economy.
- By this I mean providing the lending that viable businesses need to invest and expand; to capitalise on the opportunities that I know are out there.
- Ensuring that banks never again go cap in hand to the taxpayer.
- And that we have a financial sector that serves its customers, has their trust, and acts in their interests.
Why? Well the answer’s quite simple… growth.
If our financial sector doesn’t tick these boxes then we’ll have an economy that struggles to respond to today’s challenges; a country that doesn’t fulfil its potential; and a recovery that fails to gather momentum.
But I also recognise that the Government has a role to play as well.
That’s why, as part of the Spending Review, we prioritised areas such as capital expenditure; transport, research and skills…
…areas that offer the best economic returns.
Yet the Government can only do so much.
We recognise our own limitations.
The Government can’t create growth - at least not on a sustainable basis
What we can do is create the right conditions for growth, establishing the conditions that foster investment, innovation and competition.
And central to all of this will be finance for new and expanding businesses.
Financial Services and Growth
The UK benefits enormously from being global financial centre. We benefit from the wealth and employment opportunity it creates and sustains.
But finance is also the lifeblood of our economy.
If our banking system performs well, our economy performs well.
Without private finance, Brunel would never have been able to build his railways; William Arrol couldn’t have constructed the Forth Bridge; and manufacturers wouldn’t have been able to buy James Watt’s steam engines, and propel Britain into the industrial revolution.
And it isn’t simply manufacturing. Finance has fuelled innovation and growth in the UK’s services sectors too, benefiting both UK households and businesses as consumers of these services, and UK earnings from overseas.
Throughout history, access to finance has been a critical step on the path for new ideas and new investments… creating jobs and prosperity.
But the current environment has thrown up particular challenges as banks have retrenched; weathered the financial storm; and looked to rebuild their balance sheets.
Small and medium-sized enterprises in particular are facing difficulties, as I’m more than well aware.
Access to finance is an important issue; not least in the wake of an economic slowdown and at a time when lenders have - quite correctly, in many cases - been repricing risk and reviewing investment decisions.
New business opportunities tend to carry more risk - financing that uncertainty comes at a premium - and in these instances, even at the best of times, it can be hard to secure finance.
So we’ve been looking at how to create the right incentives to promote responsible, sustainable lending…
…not just to help sustain the companies we have today, but also to promote competition and to invest in the industries of tomorrow.
Whether it’s green technologies, advanced manufacturing, pharmaceuticals, engineering, creative industries, IT professional services - or whatever the future may hold, it will be largely built on the back of private finance.
So while I’m encouraged to see that lending conditions are improving, the Government is not content to focus only on the present.
One dry day doesn’t make a summer.
In our July Green Paper - Financing a Private Sector Recovery - we looked ahead to the future price and availability of business finance in a recovering economy, in particular for creditworthy SMEs.
And as part of our response to this paper we’ve announced a series of measures to increase the flow of resources…
…such as the continuation of the Enterprise Finance Guarantee over the next four years - enabling up to £2 billion of additional lending.
On the other hand, it’s also apparent that many businesses feel shut out from the equity financing market.
Some SMEs may have become over-reliant on bank lending as their primary source of external finance, when other types of funding might be more appropriate to their needs. .
So we’ve announced measures to improve access to equity finance for small businesses.
But as a Government, there’s only so much we can do.
What banks are doing
Banks themselves have to lead this work.
Through lending, investment, trade finance and insurance - our financial sector is very much the oil that keeps UK plc running smoothly.
Yet recent events have damaged the relationship between business and the banks…
…and this has led to general loss of confidence in the industry as whole.
So I’m pleased to see that that the financial sector is taking steps to restore this confidence, and renew this trust.
Through the Business Finance Taskforce, convened by the British Bankers’ Association, the industry itself is taking forward a range of reforms to help better serve its business customers.
As a first step, banks have agreed to a new set of recommendations to increase their transparency and accountability.
This includes a new independent appeals process for businesses who feel they’ve been unfairly refused finance; a new Lending Code for small business; offering access to business mentors or advisors; and the publication of more data on lending to businesses.
This will make the decisions of financial institutions easier for customers to comprehend, but also help uncover any issues that may be unnecessarily constraining lending to viable businesses, and restricting our economy’s success.
And to open up equity markets further, the Taskforce has created the Business Growth Fund - providing £1.5 billion in equity investment for established small businesses with potential to grow.
It’s good to see the financial sector taking steps to reconnect with the economy, with all the wider benefits this brings…
…by extending the range of finance options available to businesses; supporting innovation; and investing in Britain’s future.
If the financial sector is seen to be working for the wider economy, it will help restore the trust between banking and business that I said was so important when I last spoke at the BBA, earlier this year.
Safer financial sector
But while increased lending will help drive growth in the future, we also need a safer financial sector…
…one that will never again calls upon the taxpayer to foot the bill for its own failings.
We’ve just lived through a banking crisis, and one is more than enough for any Minister.
Because as recent events have shown, if the financial heart begins to beat erratically, it’s the rest of the economy that suffers.
Yes, it’s certainly true that the crisis was global in its reach, and in its causes.
But attempting to explain it purely in terms of global trends is to ignore a fundamentally important point - there were significant failings in the UK regulatory framework.
An important lesson from the crisis is that not enough attention was paid to the systemic risks that built up across the financial sector.
In the run up to the events that enveloped the world, economic bubbles, excessive lending and poor risk management had become commonplace.
There was inadequate recognition of how macro economic and financial activities were linked, and no effective action was taken to address the situation.
The Government is therefore putting in place a new regulatory architecture - one that will ensure that responsibility for macro-prudential regulation of the financial system is absolutely clear.
There will be a new Financial Policy Committee of the Bank of England, set up along similar lines to the MPC, to monitor the resilience of the financial system and take action where weaknesses are identified.
To improve the focus of day-to-day supervision of firms, meanwhile, we are transferring responsibility for prudential regulation from the FSA to a new subsidiary of the Bank of England, the Prudential Regulation Authority.
And the new Consumer Protection and Markets Authority will provide greater clarity and ensure that the interests of consumers and financial market participants are placed at the heart of the regulatory system, and given appropriate priority
But action at a domestic level will not be enough.
Financial services are truly a global industry, and new regulation needs to reflect this fact.
Internationally the UK has fought for high international standards across the G20 and Europe.
Through the Basel capital and liquidity reforms, increased clearing of OTC derivatives; and new standards for compensation practices in the banking sector….
…we are looking to strengthen stability and resilience.
And the new Bank levy will help to mitigate systemic risk.
The collapse, or near collapse, of some of the largest banks in the world - including British banks - revealed how far the previous regulatory arrangements fell short of the standards required.
Taxpayers took the hit, and this should never happen again.
We need a strong financial sector; one that works in the long-term interests of the whole economy; and supports growth through a more sensible portfolio of investments…
… a stable financial sector that helps underpin a more stable economy, and gives businesses the confidence and certainty needed to invest wisely in the future.
Financial sector that works for consumers
But alongside improved access to finance, and a more secure regulatory base, we need a financial sector that works in the interests of consumers - one that earns their confidence, competes for their services and keeps them properly informed.
The new Consumer Protection and Markets Authority will have the primary objective of “ensuring confidence in financial services”.
The CPMA will have new tools and a greater appetite to intervene, and to intervene earlier.
This will require both a greater use of regulatory judgement - to identify problems early - but also a new supervisory approach…
…moving away from the one-size fits all strategy that ticked a lot of boxes, but failed to offer adequate consumer protection.
We want to foster diversity in financial services, and this is why we’ve set up an Independent Commission to examine the structure of UK banking - including the links between size, risk and competition.
We recognise the powerful role that competition plays in ensuring a fair deal for consumers - helping to drive down prices, stimulate innovation and extend the range of products on offer.
We want to improve the options available to savers, and ensure that everyone can find a solution that’s tailored to their specific needs.
So we’re offering greater support through the Annual Financial Health-Check, and ending the outdated requirement to purchase an annuity at 75.
And to offer further protection to consumers, the Financial Services Compensation Scheme limit is planned to rise from the current £50,000 to £85,000 from the 31st December - covering around 99% of all savers.
The new level of cover, along with the bank resolution tools that now exist, will help ensure greater depositor protection and financial stability
Because if customers and investors have greater protection, they will have greater trust in financial services.
They’ll have the confidence to invest in a wider range of products and this will feed through to the rest of the economy.
Money in a cash ISA could support lending to businesses and families; money in equity ISAs or pensions may support investment across the whole economy.
A customer who buys a corporate bond could be providing the finance needed to support innovation.
And one person’s savings may be used to finance another person’s investment.
Working in the interests of customers is working in the interests of the whole economy.
It supports lending, increases capital reserves, but most importantly helps drive growth and prosperity.
A strong economy needs a flourishing and competitive financial sector.
The UK benefits from the wealth created by our global financial services centre.
But I also believe that we need a strong financial services sector that serves the needs of businesses and families here in Britain.
At the start of today’s speech I said that the financial sector needs to reconnect with the rest of the UK economy.
To provide the lending that’s essential for investment.
To provide greater stability and avoid a repeat performance of the crisis.
And to work in the interests of consumers, promoting both responsible saving and increased investment.
This is our ambition, and we’ve come a long way in just a few short months.
But there’s still more be done.
Yes, the economy is growing.
Investment is on the rise.
And confidence is returning to our economy.
But we can’t afford to be complacent.
So we’ll continue to look at options to improve our financial services.
To secure the recovery.
And ensure that a strong financial sector underpins a strong UK economy.