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Thank you for inviting me to speak here today a little over a year since we first came to Government.
And a year on from inheriting a rather unenviable economic situation.
The largest peace time deficit on record.
An unbalanced economy still jittering from the crisis.
And a financial sector climbing a steep path to recovery, but hindered by vast regulatory uncertainty.
The last twelve months however have given us cause for cautious optimism.
The budget deficit is falling from its record highs.
Output is growing as we rebalance away from debt-fuelled consumption to investment and export.
Half a million new private sector jobs have been created in the last year - and that includes an extra 25,000 jobs in the Square Mile alone.
And we have set in motion some of the biggest ever changes to regulation of our financial sector to set the foundations of a more stable economy.
But herein lies the challenge. As the Chancellor said in his Mansion House speech two weeks ago, we have to confront the “British dilemma”.
As a global financial centre that generates hundreds of thousands of jobs, a successful banking and financial services industry is clearly in our national economic interests.
But, whilst we strive for global success in financial services, it’s clear that success should not come at the cost of wider economic stability.
We have to answer how we can create a successful, competitive and stable financial services sector.
And added to that we need a financial sector that earns the trust of its consumers.
What is often missed in the account of the financial crisis, is that it was also a crisis of trust between consumers and the financial system.
Before the crisis, consumers fell prey to predatory practices of some banks, such as mis-selling of Payment Protection Insurance; during the crisis consumers lived in fear of losing their lifelong savings; and now consumers often feel that banks are unfairly refusing credit, altering fees, or changing overdraft facilities.
As we emerge from the shadow of the financial crisis, we have an opportunity to tackle this crisis of trust. To reshape financial services for the future. To forge a system that is stable, competitive, and fair for consumers.
And in the last year we have already made significant progress towards that goal.
Independent Commission on Banking
On coming to Government we established the Independent Commission on Banking to consider structural and non-structural reforms to the UK banking sector to promote financial stability and competition. In April it produced its Interim Report. A hugely valuable contribution to the domestic and international debate on regulatory reform.
As the Chancellor said in his Mansion House speech we accept in principle the two key recommendations of the report.
Bail-in instead of bail-out - so that private investors, not taxpayers bear the losses if things go wrong
And a ring fence around better capitalised high street banks to make them safer, and to protect their vital services to the economy if things go wrong.
Of course the Commission will produce its final report in September, and we look forward to its final recommendations.
Domestic regulatory reform: macro - and micro-prudential regulation
In the mean time we have also embarked on fundamental reform of our domestic regulatory system.
It was the failure to foresee and prevent the crisis that has undermined trust in the sector of course, but also in the regulatory authorities. The tripartite system failed spectacularly in its responsibility to monitor and mitigate the systemic risks before the crisis. We are addressing these failures.
We are establishing a permanent Financial Policy Committee inside the Bank of England. Its job will be 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’s too late.
We are also abolishing the Financial Services Authority in its current form, and creating a new Prudential Regulation Authority with a focus on micro-prudential regulation. It will bring judgement to the vital task of regulating the soundness of individual firms that manage risk on their balance sheet. We are ending the tick box culture that dominated the tripartite system of regulation.
Three weeks ago the Interim FPC met for the first time, followed by the publication of the latest Bank of England Financial Stability Report. Both warned of continued sovereign and banking strains stemming from the Euro area and urged banks to use periods of strong earnings to store capital and build resilience against these risks.
These changes to regulatory supervision are essential to ensure that we more effectively monitor and address micro and macro prudential risks. They go a long way to regaining the trust of consumers in banks and the regulators.
Consumer at heart of regulation
But we need to go further. We have to place the consumer at the very heart of the regulatory system. Effective prudential regulation alone is not enough to deliver optimal outcomes for consumers.
In order to deliver the best outcomes for people, businesses and the economy, we need three further things:
- Firstly, a competitive market that delivers efficient prices, a diversity of providers and products, and the innovative provision of new products and services that meet consumer needs
- Secondly, consumers with the capability to engage with the financial system and take responsibility for their actions
- Thirdly, consumers that are supported by robust, fair and proportionate consumer protection measures which build confidence in the financial services industry
Competition. Capability. Confidence.
We are embedding this ethos in the new regulatory framework.
And the new Financial Conduct Authority will be central to this.
As the new conduct regulator, it will have the single strategic objective to protect and enhance confidence in the UK financial system.
It will do this by promoting efficiency and choice, the bedrock of a competitive market….securing appropriate protection for consumers…and protecting and enhancing the integrity of the financial system.
Overlaying this, the FCA will also be under a statutory duty to promote competition, as it exercises its general functions.
Competition is vital to driving better outcomes for consumers and we fully expect that the FCA will be pro-active in executing this duty.
We expect the FCA to pro-actively increase transparency and disclosure across financial markets.
And in the future I would fully expect that the FCA to take the lead when it comes to tackling competition issues that cause consumer detriment.
Taking the example of payment protection insurance (PPI). In this scenario the stronger competition duty and powers we envisage for the FCA would have allowed it to take targeted action to intervene swiftly, and tackle head on the ‘point of sale advantage’ that credit providers had.
In other cases, where the FCA identifies a structural competition issue of concern, we are also providing the FCA with the power to initiate a referral to the OFT. And we are putting a duty on the OFT to set out its response. In this way, we believe the FCA and the OFT’s roles will complement each other in future, improving competition and outcomes for consumers.
But competition alone is not sufficient to deliver better consumer outcomes. We also need consumer capability and confidence.
Taking consumer capability first, it is vital that consumers have the capacity to take positive control of their finances, make educated financial decisions for themselves, take a more active role in managing their financial affairs.
Continued disengagement from the financial world threatens to leave many people unprepared for the unexpected or for later life - but it also risks exposing many customers to unresponsive financial services firms insufficiently focussed on their customers’ needs.
And we are tackling this head on. Only three weeks ago I spoke at the launch of the Money Advice Service, set up by government, which offers free and impartial financial advice to consumers - to help them take charge of their personal finances and play a more proactive role in the market.
It will help many people start to save or invest for the first time, but it will also help people get a better deal as more demanding, better informed customers.
At the same time, we have consulted on developing a new suite of simple financial products. Products that consumers can easily understand and that set the benchmark by which to compare other products and brands in the market. Products that should be aimed at the mass market, that should be available without regulated advice, that help people make sense of the market. And I will be announcing next steps on simple products shortly.
But even with greater competition and greater consumer capability, there will be instances where we need to go further to deliver optimal consumer outcomes.
Competition and consumer capability needs to be buttressed by protection.
As such the FCA will have a clear objective to secure protection for consumers.
To that end the FCA will have a new power to publish the fact that it has taken action against a misleading or inaccurate financial advertisement.
The FCA will also have the power to ban products or to restrict certain product features. Again, looking back at the PPI, in a similar situation, the FCA would have the tools and authority to prohibit the selling of PPI products, such as the single premium PPI, until firms redesigned them and demonstrated that they could sell them safely.
This new power will enable the FCA to intervene more quickly and decisively where it spots a problem by imposing a temporary ban with immediate effect for up to 12 months. It will also enable the FCA to render unenforceable any contracts made in breach of the ban.
And we are also providing the FCA with the power to disclose the fact that it is taking disciplinary action against a firm or individual.
This new approach will act as a significant deterrent to firms and help establish best practice.
We have faced strong resistance from the industry on these proposals, but we will not shift.
These changes are absolutely essential if we are to deliver a real change in the conduct of regulated firms, instil greater confidence in financial products and services, and incentivise financial institutions to think of their consumers first. Of course, however, we are building necessary safeguards on the use of these powers to ensure that they are used appropriately.
We also want to see improvements in the market for consumer credit. In December last year the Treasury and the Department for Business, Innovation and Skills published a joint consultation on transferring responsibility for consumer credit regulation from the Office of Fair Trading to the FCA.
We believe bringing consumer credit into the same regulatory regime as other retail financial services can deliver strong protections for consumers; remove duplication and burdens on business; and improve market oversight.
Looking beyond regulation, both Departments are also carrying out a joint review of consumer credit and personal insolvency to ensure that we have a framework that is fair to consumers and fair to the industry. This review takes a broad scope looking at advertising of consumer credit, store cards, bank charges, and also covers all aspects of the consumer credit lifecycle, from the decision to take out a loan through to its redemption, including what happens when things go wrong.
We will publish summaries of the responses that we have received to both the review and the consumer credit consultation before the end of the month. The Government’s response, and our decision on the most appropriate regime for consumer credit, will follow later in the year.
With such a transformed regulatory environment it is important that the regulatory and advisory bodies work together to protect consumer outcomes. We are putting measures in place to ensure that the FCA will take into account information provided by the Financial Ombudsman Service and the Money Advice Service. And so that the Ombudsman Service can communicate it concerns about a product or service as clearly as necessary, we are also permitting it to publish determinations where it considers it appropriate.
None of these changes however, absolve individual firms of responsibility for the products they offer. The fact that a product has not been banned will not constitute a stamp of approval. Just as we want consumers to be able to take responsibility for their decisions, firms must remain accountable for their actions.
There remains the risk that the FCA won’t be able to prevent all conduct failings. And in those instances we need to ensure that the matter is handled decisively and efficiently by the regulator. We must ensure that we learn the lessons of the years of uncertainty for consumers - as was the case with mis-sold Payment Protection Insurance.
We are entrenching greater clarity and transparency in the redress process to ensure that the FCA really grasps the issue promptly and effectively, and provides consumers with confidence that they will receive swift, fair and consistent redress.
We have come a long way in a year, to answer the British Dilemma that I referred to at the start. We are reforming regulation of the financial sector create a market that:
Underpins a more stable economy.
Supports a wider economic recovery.
Delivers the best outcomes for consumers.
It’s in all our interests to have a safer, more secure and more resilient financial sector motivated by sustainability, stability and consumer welfare.
Last month, we put out our blueprint for reform and draft legislation for further consultation and pre-legislative scrutiny. And this week, we published a consolidated version of the Financial Services and Market Act as amended by our draft legislation.
I look forward to your continued input as we implement our reforms.
The engagement and ideas of those companies and organisations represented in the room tonight is critical to the success of this new framework.
We need to get this right today, to avoid another crisis tomorrow.