Speech by the Financial Secretary to the Treasury.
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Good afternoon. It’s a pleasure to be here in Helsinki.
My visit to Helsinki and Copenhagen gives me an incredibly useful opportunity to speak with and listen to so many leading policy makers at a time of continued and extreme market volatility.
As everyone here knows, the instability in the Eurozone continues to undermine confidence and growth across all our economies. Not just across Europe, but across the world.
The UK economy is not immune to that turbulence. And we are as eager as our Euro area counterparts to see a comprehensive resolution to the crisis.
The sovereign storm is the immediate crisis that we have to deal with and rightly, post crisis, the regulatory focus is on the safety and resilience of financial markets to ensure macro financial stability.
But over the longer term, we have the equally substantial task of financial sector reform to correct the regulatory failures of the last decade.
And as we pursue reform, we can’t lose sight of the opportunities to enhance the single market and to protect the open and competitive markets that will improve consumer outcomes and help drive growth across the EU. These have been long-standing objectives since the Lisbon Agenda.
There are those who would use the current instability as an excuse to pull back from reform. Those that argue that reform would stifle growth at a time of economic recovery.
The UK disagrees entirely. Reform is vital to entrench stability in the financial sector. And stability is itself a vital precondition of sustainable growth.
The financial crisis three years ago vividly exposed how deficient regulation had become in the face of rapidly changing markets…the answer is not to let bygones be bygones. Nor is it to postpone for another day.
We have to see through reforms now, and in full, to increase stability in a turbulent environment.
It is in that spirit that we have taken decisive steps at home to fundamentally reform regulation of our financial services sector.
Abolishing the failed Tripartite system of regulation.
We are creating a permanent Financial Policy Committee within the Bank of England to monitor overall risks in the financial system, identify bubbles as they develop, and we are enhancing the tools available to enable corrective action to be taken.
We are abolishing the Financial Services Authority in its current form, and transferring its significant prudential functions to a new Prudential Regulatory Authority that will also sit in the Bank of England.
And a new Financial Conduct Authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers.
But reform has to extend beyond how we regulate the sector, to how the sector should be structured itself.
Across Europe, financial services will be absolutely critical to economic recovery and growth. We cannot ignore the great strength that we have in the sector across the EU.
But at the same time, we know that financial sector success cannot come at a cost to wider economic stability. The challenge that we each face is how to create a successful, competitive but stable financial services sector?
It’s a challenge that we set the Independent Commission on Banking in the UK.
Its final report recommends ring-fencing retail banking activities, an equity capital surcharge for the ring fenced part of large banks, and statutory powers for bail-in of private investors.
Tools that enhance Recovery and Resolution Plans will enable the orderly resolution of a firm without recourse to public money. Tools and objectives that we want to see supported through European legislation on Crisis Management.
And the report also contains recommendations to improve competition. We agree with the report that competition is essential to driving better consumer outcomes and delivering greater efficiency of pricing.
But of course, effective regulation of financial services has to be done at an international level.
In the last year, we have seen vast progress on the international stage to correct the failures of the last crisis. And Europe, with significant input from the UK, has led the way.
We fully welcome the new European Supervisory Framework. A vital network to fundamentally improve the quality and consistency of supervision, to ensure more effective rule making and enforcement, and better identify risks in the system.
But it is still early days for this new architecture, and the coming months are critical to the credibility of the new ESAs as the Eurozone crisis continues to unfold.
It is vital that the ESAs stand firm to promote common standards of supervision through their participation in Colleges. Ensuring that we establish a single rule book.
The European Commission faces an equally important task as it drives through a hefty agenda for financial sector reform.
It’s in all our interests that the Commission enforces consistent minimum-harmonised, but high regulatory standards for all EU Member States.
It harms us all if we water down regulations to pander to vested interests in each of our markets. Economic difficulty is not a time to raise barriers, to turn inwards or to protect our national interests.
A free and open Single Market has brought huge benefits to the EU, and it is the most powerful tool that we have to foster renewed growth as we recover from the financial crisis.
We have to support the Commission in its duty to protect and promote the Single Market in financial services. Now more than ever, it is critical that Member States are able to have confidence and trust in EU institutions to stand up for the Single Market, not fragment it by geography, currency or firm.
Alongside this support for the Single Market, and as I said at the beginning, our aim must be to boost competitiveness and growth across the EU too. With that in mind, it is worth just reflecting on how these three objectives apply to EU financial directives.
That is why, for example, we support full implementation of Basel III in the EU.
Looking back at the financial crisis, we know that banks lacked the capital and liquidity strength to withstand sudden shocks in the system. And at a time when there is renewed focus on the strength of bank balance sheets, this is not a time to back track on internationally agreed measures to increase bank resilience.
It is vital that CRD 4 embeds high, common and consistently applied standards for capital, liquidity and leverage. It is vital for stability, to reduce fiscal risk, and it is vital to protecting a Single, un-fragmented market.
But jurisdictions must retain the right to apply higher levels of regulation to ensure financial stability.
As the IMF has said, and I quote: “UK financial stability will be weakened (with adverse spillovers) if EU rules constrain UK financial regulations at insufficiently ambitious levels or if they limit the ability to use macro-prudential instruments to address emerging risks”. The European Systemic Risk Board also see Basel III as minimum standards.
That is entirely consistent with the single market and single rulebook given the different fiscal positions of Member States in the EU and different economic circumstances. Indeed one of the biggest distortions to the single market is the persistence in some Member States of the perceived implicit guarantee of financial institutions.
Similarly, when it comes to EMIR, we have been pressing for consistent implementation that protects open competition.
Whilst EMIR imposes an obligation to use clearing houses, it is essential that there is genuine competition.
That’s why the Government pushed for open access requirements in relation to all derivatives in EMIR.
Free and open competition between clearing houses, goes in tandem with non-discrimination between Member States.
We cannot succumb to proposals that would merely fragment European financial services market by currency.
It’s why the UK has pressed for clear recognition of the principle of non-discrimination in the Council position on EMIR, and why we have challenged the ECB’s location policy in the ECJ.
We are also encouraged by the Commission’s proposals in the MiFID review to close loopholes with respect to the clearing obligation and ensure fair and open access with respect to licences in future legislation.
Indeed MiFID offers a huge opportunity to promote competition and the Single Market in financial services.
We have already seen the beneficial impact MiFID has had in lower costs and spurring growth in the equities market, and it is right that we seek to update the directive for the significant changes we’ve seen across the market in recent years.
In particular that means updating it to reflect changes in the commodities market, but not succumbing to populism which will simply increase costs for European citizens. That is why we are sceptical about blanket position limits across all markets - they have a role to play in defined circumstances.
But more often than not, active position management by exchanges and authorities will be much more effective in tackling market abuse and indeed provide a more rigorous approach. It is incorrect to think that blanket limits will enable governments to control prices as some would wish.
It’s a debate which underlines just how important it is to get the evidence base right before embarking on fundamental reform.
The UK has been vocal in the past about the lack of consultation by the Commission on AIFMD and on short selling.
In both instances the Commission has risked succumbing to political need, with unintended consequences for the competitiveness of all our economies, to the detriment of our citizens, and to the benefit of our international competitors.
Because, as well as protecting free and open markets within the EU, we have to ensure that the EU remains a competitive force on the international stage.
That means keeping our borders open to countries outside the EU.
It is vital that the EU adheres to a policy of non-discrimination globally as well as internally. European firms need to be able to enter third country markets, but equally important, third country firms must be able to enter European markets.
The likes of India, China, Brazil to name just a few are all surging ahead with enviable rates of growth, and that means ever increasing potential for inward investment into the EU.
We cannot afford to raise the barriers and turn those opportunities away.
That is why we are concerned by the increasing tendency to implement strict equivalence or reciprocity provisions through EU legislation.
Emerging economies are already taking steps to meet global standards of regulation, but change will take time. We gain nothing by browbeating emerging economies and their most successful firms and sovereign wealth funds with additional and unnecessary burdens.
Not only are we turning away much needed investment in the EU, we merely risk retribution for our firms that are pursuing global growth.
As we embark on fundamental reform of international financial services, on all fronts, the UK has been leading the debate to ensure that reform is consistent, non-discriminatory and supports growth.
We will work with the Commission to deliver on the Single Market, to ensure that Europe remains open for business.
But on all these fronts, it is up to each and every Member State to support the Commission in that task. It is in all our interests to support and promote the Single Market in financial services.
It’s no easy task in the current environment. We all confront uniquely difficult economic times, and we all face pressures from sectors of the market looking to secure special treatment, exemption or favouritism.
But, increasing the safety and resilience of financial markets can go hand in hand with reforms to progress the single market and increase competition and growth. This is not a case of either, or.
We have to work tirelessly to protect the Single Market and resist vested interests that would seek to undermine it.
I look forward to working with colleagues and stakeholders across the EU in the months and years to come