Speech by the Financial Secretary to the Treasury.
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Since building work began on the Mansion House in 1739, Monarchs, Prime Ministers and even Lord Mayors have come and gone, but this building still stands in the heart of the world’s global financial centre.
Many have contested London’s claim to be the global financial centre, but none have been successful. London and the UK’s continued pre-eminence has not been through luck or through entitlement, but has been a consequence of the ability of the financial services sector to exploit new opportunities, new markets, new products- meeting the needs of investor, firms and consumers as they arise. It is innovation and adaptation and not luck nor fate that lies at the heart of our prominent position.
Our challenge today is how to make sure that the UK and particularly the asset management sector adapts and innovates to remain a world leader.
Fund management accounted for almost 1% of UK GDP in 2009, provided employment for over 50,000 people, and over a half of all UK households’ investments and pensions are looked after by the fund management industry.
By international comparison, the UK is one of the largest markets in the world for fund management. Assets managed by the UK fund management industry total over £4 trillion. Only the US surpasses this figure.
The UK remains a premier centre for fund management because of our proportionate regulatory framework, our range of efficient fund structures, and our highly skilled and highly professional workforce.
The Government’s plan for growth, announced in March 2011, seeks to build on these strong foundations. We are removing the barriers to enterprise, we are creating the most competitive tax system in the G20, and we are creating a more educated workforce. These changes are the bedrock for economic growth, and a springboard for our financial services.
We cannot be complacent. Our history does not give us an entitlement to remain a successful global financial centre.
It takes innovation and adaptation to stay ahead of the game. There was a time when we had jobbers and brokers literally running from one another to execute trades. Competition would revolve around who could be closest to telegraph machines to get the latest news on developments on South African goldmines or American railways and use this knowledge to make a profit before news spread
Technology has changed.
Today, it takes a split second to execute a trade, as we increasingly shift to a world of automated and computerised trading.
Where High Frequency Traders jostle to be the closest to servers to use a nanosecond’s advantage to make a profit before information spreads widely.
But if London is to remain the best place to do business, then as markets, products and services evolve, regulation must evolve too.
To ensure that we maintain our competitive edge to protect the integrity of markets and to ensure we are secure against new risks.
Financial crisis and reg reform
Indeed, we are still emerging from the shadow of the biggest financial crisis in almost 100 years. A crisis that necessitated unprecedented Government intervention to save the system from itself….and from total collapse.
But this is a situation that we cannot afford to repeat.
We are pursuing an ambitious agenda of regulatory and market reforms to ensure that is the case.
Markets change and regulation must keep pace.
But herein lies the challenge.
How do we ensure that we implement regulation, that is proportionate and sustainable?
How do we ensure that reforms lead to a more resilient, stable and sustainable financial sector that reinforces rather than undermines economic growth?
We must not succumb to regulation that stifles the competition, innovation, and openness that have made the UK a leading global financial centre.
But consumers must have confidence that when they enter into financial transactions with regulated firms, those firms will conduct themselves appropriately. This is why the Government is creating a new dedicated and specialist conduct regulator, the Financial Conduct Authority.
The FCA will have new powers to protect consumers and enhance confidence, including a new product intervention power. I think with, for example, the growth of structured products, this power will better enable the regulator to tackle problems earlier, before they give rise to widespread consumer detriment, resulting in costly redress payments and reputational damage to the industry.
But product intervention is only a complement to, and not a substitute for, consumer protections around the point of sale. And the FCA must use its new power appropriately and proportionately. The expertise in, and the responsibility for, designing products which meet the needs of consumers and distributing them appropriately ultimately lies with you: the industry.
Of course, action at a domestic level will not be enough. Financial services are a truly global industry and regulation must reflect that fact.
There are already a host of financial services directives being negotiated or implemented in Europe, a feast of acronyms…EMIR, MiFID, UCITS, AIFMD…We also need to make sure that this balance - between openness and opportunity and consumer protection - is also struck at the European level.
And we have already fought this battle on the Alternative Investment Fund Managers Directive.
In just a few short months we successfully negotiated a complete reversal of the Council’s position on the directive, as a result of credible, evidence based arguments, developed through engagement with industry.
We insisted that the Directive must be internationally consistent and non-discriminatory.
As we respond to changing financial markets, we must continue to ensure that regulation is in the best interests of financial consumers and investors, in the best interests of London as a financial centre, and in the best interest of the single market.
This is especially the case in the ongoing MiFID review. Markets have developed significantly since MiFID was originally enacted and it is right to look at how we respond these developments.
The issue of High Frequency Trading and Dark Pools is a prime example. Unfortunately ‘Flash Crash’ has a perfect media ring to it and provides the perfect clarion call for a host of commentators and politicians demanding tighter regulation of those markets.
However, we must be careful not to implement regulation where there is no robust evidence base to the detriment of liquid and efficient markets.
To that end, the Government has established a Foresight project to undertake a detailed assessment of how these markets may evolve and how this will affect financial stability and competition.
Arbitrarily reducing trading options now, will prove more costly in the long run. Through greater use of technology - and proportionate and effective regulation - the Single Market has the potential to become even more integrated.
It’s true that we still remain a long way off realising the full potential of a single capital market. There remain a number of barriers to this goal…but, we have an opportunity to make progress in this area through the proposals for Central Securities Depositories to establish common standards for Settlement Systems, and also through the Securities Law Directive by harmonising investor protections and rights.
But we also have to ensure that we do not erect new barriers in our haste to regulate after the crisis.
In EMIR we believe that the clearing obligation and obligation to report trades must apply to all derivatives, not just OTC. But at the same time, we don’t want to stifle markets or create monopolies in clearing houses. Instead, we have to ensure harmonisation of operational standards of Central Counterparties to facilitate competition, reduce costs, and improve service quality.
If we are to demonstrate that reforms are in Europe’s best interest, we need regulations that are proportionate and founded on evidence, not whims.
We need to drive regulation through the quality of our evidence rather than the quantity of our bluster.
The European debate over corporate governance and stewardship is a case in point. The UK was early in assessing the implications of the crisis and putting this analysis into the public domain. It showed the need to enhance, not replace, the UK’s comply-or-explain based model. But despite this, there are still some in Europe with doubts. More evidence is needed.
But I recognise that the Government cannot build this evidence, nor win the argument, by working in isolation - we need your help, your advice and your evidence to drive change forward. We need the help and support of the buy side because you are uniquely placed to tell us how much these reforms will cost our pension funds and our equity ISAs.
The buy side can be a powerful voice in establishing the link between market reform and consumers, as well as making sure that proposed interventions are robustly justified by evidence. I would encourage you to continue to collectively engage in Europe and work with European partners where it is most effective to do so.
Ultimately, we are at our most effective when Government, the industry, and its customers share the same goals and approach.
That’s why, we have already convened several industry expert groups to ensure that we have a full understanding of the potential impacts of various Commission proposals on regulation, and also how we can bolster UK competitiveness through tax and regulation.
Officials in the Treasury have already met with over 100 firms from the buy and sell side to discuss the major directives.
UCITS and tax transparent funds
It is as a direct consequence of our work together that we are driving through a number of changes to maintain the UK’s lead as a centre for asset management.
We are already working with the industry to make sure that the tax treatment of offshore funds, investment trusts and OEICS are updated so that UK fund management can remain competitive with other jurisdictions.
At the European level, we have already seen proactive and concerted engagement bear fruit with respect to the UCITS directive.
As you are aware, UCITS IV introduces new opportunities, particularly with the Management Company Passport and Master Feeder structures.
It is as a result of your input and suggestions that we are introducing changes to enable the UK industry to take advantage of these opportunities.
We are amending tax law to accommodate the conditions introduced by the Management Company Passport. Removing any risk that a foreign UCITS fund may become taxable in the UK as a result of having a manager resident in this country.
Without this change UK resident managers would be placed at a competitive disadvantage compared to their overseas counterparts both in expanding their business and in retaining current business where management is consolidated.
The Government also wants the UK to be the home for Master funds, and to do this we want to develop the most suitable vehicle working with industry to meet the real demand for a tax-transparent vehicle in Britain.
This year’s Budget announced that the Government will legislate to introduce a Tax Transparent Fund, from 2012.
Since the Budget, the Government has been working with industry to establish the areas for consideration in our forthcoming consultation. We will publish details of our consultation on Tax Transparent Funds tomorrow, but I can announce tonight that in order to allow more time for detailed consultation but also to bring these funds in on schedule, we have decided to bring them by regulation rather than Finance Bill.
This approach will allow for an extended period for consideration with industry - ultimately developing a better regime
As the investment management sector changes, we need to make sure that regulation- both domestic and European- keeps pace. This does require a partnership with the industry: Government and regulators need to understand the challenge you face and you need to understand where there are constraints.
But I am confident that together we can produce better services, better tax and better regulatory frameworks which together will deliver what we are all here to do- secure better returns for investors.