Speech by the Financial Secretary to the Treasury.
Good morning and thank you for inviting me to speak here today. It’s a pleasure to speak to so many leading representatives from the private client industry.
Of course as you all know, we are living through difficult economic times, but yours is an industry growing strength in the UK.
A sector that grew almost 15% last year, and collectively APCIMS members manage in excess of £400 billion for your clients.
It almost goes without saying that APCIMS represents the largest network of its kind in Europe…a familiar story across the UK financial sector where we have established ourselves as the world’s leading centre.
A position that has not come by luck or entitlement, but through the ability of the financial services sector to exploit new opportunities, new markets and new products. Meeting the needs of investors, firms and consumers as quickly as they arise.
You are meeting these needs against the backdrop of the deepest crisis since the 1930s.
Indeed it’s almost three years to the day that the then Government had to take the unprecedented step of recapitalising both RBS and Lloyds Banking Group, with the RBS ultimately requiring the biggest bailout in the world.
And we still live under the shadow of those events as what was once a crisis of banking and private sector debt has transformed into a sovereign debt crisis. A crisis fuelled by the inability of some politicians to take a firm grip of their debt problems.
And the pace has increased in the last two weeks with S&P and Moody’s downgrade of Italy’s credit rating, and the IMF warning that we are entering a “dangerous new phase” for the world economy.
But because we have a credible plan to tackle the deficit and our big four UK banks all have CT1 ratios over 10% and they have almost tripled their holdings of highly liquid assets.
The UK is better placed to withstand the storms around us, But this does not mean we are immune from its effects as recent growth figures show
For some, the current uncertainty is a reason to pull back from reform…concerned that reform would stifle growth at a time of recovery.
But I do not believe that these events diminish the case for financial sector reform.
Stability is itself a vital precondition of growth. But the current volatility means that we have to make extra effort to ensure that reforms are proportionate, effective, and credible, and really do increase stability without arbitrarily undermining growth.
[Engaging on EU regulation]
And I commend APCIMS and its members for their work and engagement to date as we tackle this ambitious agenda of reform.
We have listened to your concerns with respect to the new Investor Compensation Scheme Directive, and proposals for pre-funding a compensation fund.
And we agree with you, the directive would inefficiently lock up capital, pass on costs to consumers, and worse still, risk seriously crippling the private client investment management market.
Whilst we are supportive of updating the Directive to improve EU wide investor protection, we will continue to argue for national discretion in the funding of schemes.
But this is one example of a lengthy reform agenda. Reform that will entrench greater stability and re-build public confidence but without jeopardising the UK’s position as the world’s leading global financial centre.
This is the challenge that we face and that challenge has informed our reforms to correct the failures of the Tripartite system.
Earlier this year we issued our White Paper on regulatory reform which revamps the system of domestic 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, spot dangerous inter-connections and stop excessive levels of leverage before it is too late.
We are also abolishing the Financial Services Authority in its current form, and transferring its significant prudential functions to a new Prudential Regulatory Authority that will sit in the Bank of England.
Together these two bodies will bring judgement and foresight to regulation rather than mere box ticking.
And we are also bringing a new approach to protecting consumers, to ensure that they are at the heart of the financial system.
As all of you here know, financial services, but your services in particular, depend on the trust between customers and investment managers. It’s only on a foundation of trust that clients and consumers can be encouraged to save and invest appropriately for the future.
And safeguarding trust means we need to ensure that we have a financial sector that works for everyone - one that earns consumers’ confidence and keeps us all properly informed.
For that purpose, a new Financial Conduct Authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers. It will be guided by a clear principle: to protect and enhance confidence in the UK’s financial system.
Increasingly, as a reflection of financial services as a global industry, regulation is international too.
But that regulation has to be evidence based and internationally consistent. Only then can we ensure that is proportionate, effective and credible. Regulation should promote competition and growth and not stifle it.
And reform in the EU has to protect and promote the Single Market for financial services bringing down the barriers that increase costs and reduce returns.
It is the most important tool that we have to encourage growth across Europe, to exploit new markets and new opportunities.
And of particular importance for APCIMS and its members is the ongoing MiFID review.
MiFID has been hugely successful in increasing competition in the Single Market to the benefit of businesses and consumers alike.
Since it was introduced, MiFID has shattered the status quo in the equities arena, drastically increasing competition between Central Counterparties, driving down fees for users, and raising the long run level of EU GDP by as much as 0.8%.
But markets have changed since MiFID was introduced… a new lexicon of BCNs, High Frequency Trading and Dark Pools.
Regulation needs to catch up with this to the benefit of markets and their users, and it is right that we update MiFID in that light.
In looking at new developments, we are leading the way through our Foresight project which is undertaking a detailed assessment of how computer trading may evolve and how this will affect market quality and stability.
That said, regulation must be appropriate and proportionate. That means that regulation of the retail market must be very different to the regulation of wholesale markets.
Retail markets are distinctive and fragmented nationally by deeply entrenched social, cultural and linguistic differences rather than by regulatory obstacles.
It’s therefore vital that EU wide legislation in this area takes national characteristics into account, rather than cutting across them.
For example, though we strongly welcome the Commission’s attention to investor protection, we believe the MiFID execution-only regime has worked well and should be retained.
We are pleased that the Commission appears to have moved away from its proposal to abolish the regime, and that non-complex products, for example, shares in companies, can continue to be sold without first having to perform an appropriateness test.
Abolition of the execution only regime would have been disproportionate and severely disruptive for businesses across the UK.
Indeed, the Commission received thousands of letters on the issue, no doubt from some of your clients as well, and it seems the Commission has listened. We will continue to ensure that’s the case as we negotiate on MiFID.
But of course this links to the wider debate on complex products.
We must resist pushing investors away from products that are categorised as ‘complex’ but which could be more suitable to their needs by offering more diversification, and providing lower risks than products which are classed as ‘non-complex’.
Complex does not necessarily equal risky.
It’s not in the interest of investors that we arbitrarily restrict access to products, especially at a time where investors across the board are pursuing all avenues for higher returns.
We must ensure that an appropriate governance framework is in place. We must make sure that the right products get to the right market and that investors have the information they need to take informed decisions.
The FSA is already doing more in this area and working on further guidance on the design and development of structured products.
It’s vital to ensure that there is a high level of transparency and that the risks are made clear.
And it’s especially important that advisers and wealth managers ensure that their advice fully takes into account the risk profiles of their clients and their ability to absorb loss of their capital.
And where regulation is necessary, we have to ensure it is appropriate.
Products like Exchange Traded Funds increase choice for investors and improve market liquidity but also present new risks which need to be understood.
At the moment, concerns around the more complex ETFs have seen the whole industry being tarred with the same brush…
…when in fact many of those concerns have nothing to do with being exchange traded products, but rather the use of derivatives or leverage.
[Retail distribution review]
On the investment advice side, it is clear that the Commission has been following the FSA’s work on its Retail Distribution Review very closely.
We strongly support the requirement for firms providing investment advice to make it clear on what basis that advice is provided.
We are also encouraged by the Commission’s expected departure from plans to require advisers to provide ongoing advice, even where this was not requested by the client.
It should be up to firms to choose the sort of service they want to offer, and up to clients to choose the sort of service they want to buy.
That said we remain concerned with details to only restrict commission payments for independent advisers.
We believe this could distort the market in other Member States if they allow advisers to continue to receive inducements from third parties, in return for simply abandoning the label “independent.”
In the UK, the FSA is tackling this problem through the RDR and we will continue to work with the FSA and the Commission to ensure that MiFID II does not in any way threaten or reduce our standards of consumer protection, the returns for investors, and the opportunities for growth.
[Financial transaction tax]
But just as ill-thought through regulation can reduce returns, so can ill-thought through taxes.
I’m referring to the idea of an EU wide Financial Transaction Tax.
At a time when Europe needs growth and the jobs it creates, it is hard to see why the EU should try and push ahead with this tax, as even the Commission itself notes the significant potential costs from the tax… a reduction in EU GDP of as much as €216 billion.
And whilst we do not object to ongoing discussion on an EU wide financial transaction tax, we have been adamant that we cannot support such a tax if it’s not going to be applied globally.
Without global consistency, those transactions covered by the tax would merely relocate to countries not applying the tax with a potential loss of 500,000 jobs across the EU.
Yes the financial sector should pay its fair share.
That’s why we introduced the bank levy, a levy that reflects the risks that the banking sector poses to the UK economy and is designed to wean banks off short term funding, but a pan-European FTT will weaken not strengthen the economy.
At a time where we face such difficult economic challenges we have to make use of all our strengths, and our private wealth industry is one of them.
Your clients provide vital capital to UK business but it is increasingly clear that it is smaller businesses that need risk capital for growth.
Business Angels and other high net worth individuals are an increasingly important source of early stage finance…estimated to represent over £400m to SMEs in recent years.
That’s why we are reforming the Enterprise Investment Scheme and Venture Capital Trusts Scheme.
We have raised the rate of EIS income tax relief to 30 per cent, and from April 2012 we are increasing the annual EIS investment limit for individual investors to £1 million.
We have announced a dedicated £50 million Business Angel Co-investment Fund to increase the impact of Business Angel investments.
And we have provided £200 million in additional funding for the Enterprise Capital Funds programme whereby private investors amongst others can invest alongside the government in small, innovative companies.
I hope that these schemes alongside more conventional investment will provide the finance that businesses need to grow.
At this challenging time, it is vital that we lay the foundations for long term economic growth.
This means harnessing the strength of our financial services sector but at the same time ensuring that we learn the lessons of the financial crisis.
We need strong, well regulated markets that meet the needs of your clients and the wider economy - I know that’s an ambition we all share and together we can meet it.