From the earliest days of international finance, Britain has profited from our openness to trade and investment. And our strength in financial services has helped support growth over many, many centuries.
In Britain it was the merchant bankers from Lombardy - travelling across the continent from Italy in the 13th century - who first introduced the basic principles of lending, which have made London into the global financial centre that we are today. And the capital they accumulated from lending to each other helped to create more sophisticated money and asset markets.
It is because we have benefited from the free movement of capital and openness to investment that we want to create a truly integrated single European market in financial services. And the single market has - bysupporting competition, promoting transparency and up-holding the principles of non-discrimination - brought substantial gains, driving economic growth across all Member States.
And asset management has a fundamental role to play in London’s vibrant financial sector, and across the single market. Assets bring with them wealth, investment, and underwrite most other forms of financial trading and services. And the UK is Europe’s largest centre for asset management, managing almost £4 trillion.
But our history does not give us an entitlement to remain a successful global financial centre.
Far from it in fact, if recent events have taught us anything it’s that we need to keep our wits about us if we’re to preserve our strengths in financial services.
Importance of choice
Yes, it’s certainly the case that we’re starting from a strong footing.
When London is plotted on a chart against the comparative strengths of financial capitals around the world, we are both the most global and the most diverse. Far more global than Luxembourg. Far more diverse than Shanghai. We offer an incredible variety of financial products, and a strong network of professional services that support such provision
Whilst we want a globally successful asset management business serving a worldwide client base, we also need a sector that meets the needs of British investors.
We want to promote choice and competition, to give people even greater freedom in how they save and invest - tailoring the financial services they consume to meet their individual circumstances and requirements.
We want to give people more flexibility to work, to save, and to plan for retirement by amending the regulations that unnecessarily ties their hands. And of course, we want to see the asset management sector responding with products which meet the needs of a broad range of customers - from a first investment in a junior ISA to a specialist component in a Self-Invested Personal Pension.
In the June Budget we announced a number of measures to help encourage saving and greater personal responsibility; including an end to the outdated requirement to purchase an annuity at 75; the introduction of the Annual Financial Health-Check; and a consultation on scrapping of the Default Retirement Age from April of next year - so that anyone who wishes to work in their old age can do so.
But while it’s clear what we’re trying to achieve through domestic regulation, we can’t afford to lose track of developments that are happening across Europe - and the vast number of directives that are being discussed over the next few months. Or we may see our position in the spectrum of international financial centres be usurped.
European regulatory agenda
I know that before the general election there was a degree of scepticism about the British Government’s desire to play an active role in European debates.
Many questioned whether so-called ‘Conservative Eurosceptics’ would get down to business with our European neighbours - and believed we might be tempted to turn our backs on EU discussions, and let other Member States get on with it.
These doubts have proven unfounded and this morning I’d like to demonstrate how by working together the EU we can create a more stable and more competitive financial sector.
We only need to look to our recent success with the alternative investment fund managers directive.
In the space of only a few short months we negotiated a complete reversal of Council’s position on the directive.
We reached an agreement where managers of hedge funds and private equity providers will be regulated in an internationally consistent and non-discriminatory way.
And rather than seeing third country managers frozen out of EU markets, they too will be able to qualify for a passport. From a UK perspective this was of huge importance.
It will introduce greater competition, open up new markets, and create new investment opportunities.
Most importantly, the EU has signaled that it’s open for business and will not close its borders or restrict the free movement of capital.
I remember that on my first trip to Brussels the passport wasn’t even on the table. But as Christine Lagarde pointed out, the AIFM was a master-class in British diplomacy - starting from a position of 2 against 25 in June to achieving 26 to 1 in support by October.
By working with our partners in Europe we’ve managed to resist proposals that would bring acquisitions of SMEs into scope; that would’ve banned leveraged buyouts; or introduced disproportionate reporting requirements on private equity firms.
We have 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 interests of the single market.
But no-one should be in any doubt that having secured the Directive, we can rest on our laurels. The level 2 discussion will give some the opportunity to reopen the debate. Europe is like an ongoing soap opera, with a complex plot, that’s rewritten on an almost daily basis. If you don’t become an avid viewer, you risk losing the thread entirely.
And you shouldn’t believe that once a story has petered out, it won’t be revisited.
There’s a raft of new Directives just over the horizon that if handled effectively will help bring greater stability to Europe, as well as create new opportunities for London.
But these negotiations come with their own risks; we have to ensure that new EU regulations adhere to the basic principles that have guided our domestic decision-making…
…that new regulation should promote transparency, be non-discriminatory and support competition;
This is the approach we’re applying to discussions on the Packaged Retail Investment Products Directive.
There’s a real opportunity here to create a level playing field across European retail investment products; to open up new markets for competitive firms; and increase standards across Europe.
In Britain both our regulators and the industry have been working together to improve consumer outcomes. We’ve learnt that open distribution, transparent markets and treating customers fairly are good for business…
But I recognise that the Government won’t achieve this resolution by working alone - we need your help, your advice and your evidence to support our claims. In my discussions with the industry, you’ve told me what your priorities are- one of which is PRIPs- but we need you to do more than this.
We’re at our most effective when Government, the industry, and its customers share the same goals and approach.
Yes, I know that both HM Treasury officials and Ministers hold regular meetings with the City and our foreign counterparts, but we must continue to find new ways of engaging. To seek different views and perspectives. And successfully influence thinking across Europe.
We need to engage early and proactively. We have to work together to identify ways in which we can improve the functioning of markets, improve competition, and raise standards and transparency across Europe
This process has already started with the City of London Corporation’s International Regulatory Strategy Group (IRSG), which features representatives from the asset management sector. The IRSG can act as the catalyst to take a more proactive approach, representing the UK and wider EU interests in other EU capitals and Brussels. But collectively, we need to engage better at a pan-European level: with trade organisations, asset managers and foreign governments. I encourage you to work within your national and pan-European industry associations in order to do this.
It is crucial, however, that engagement is supported by a solid evidence base, a clear argument, and a convincing rationale.
Recently, there’s been a huge amount of debate about high frequency trading and its impact on stable markets. The US ‘Flash Crash’ - which saw the Dow Jones fall, and rebound, by several percent in the space of just a few minutes - has helped focus the world’s attention on the issue. But there’s been little evidence to underpin these discussions.
Which is why I’m pleased we announced this morning a new Foresight project on the The Future of Computer Trading. The project will look ahead to developments in financial markets, with a prominent focus on high frequency trading. The idea is to help us anticipate changes and provide us with the knowledge and evidence we need to help shape future directives.
I’ll be sponsoring the project and believe that it will help us to ensure that markets deliver greater efficiency, better market integrity and improve the resilience of the financial sector as a whole. The regulatory environment must keep pace with market developments- and this project will help it to do so.
Through greater use of technology- and proportionate and effective regulation - the Single Market has the potential to be even more integrated - which is in everyone’s interests - and it’s vital that the new European regulatory framework recognises this.
So I’d like to discuss one particular directive that I hope will demonstrate the benefits of effective consultation - the slightly tongue-twisting Undertakings for Collective Investments in Transferable Securities Directive IV - or UCITS IV as it’s more commonly referred to.
In Britain we’ll be launching a consultation before the end of the year on how best to implement this directive. And I’m sure I can expect responses from many of you here today.
One of the key features of this directive, as I’m sure you’re well aware, is the fact that UCITS IV could see the widespread introduction of a master-feeder fund structure across Europe.
However, as things currently stand, it’s unlikely that firms will establish master funds in the UK due to our lack of a suitable tax-transparent vehicle.
I know that other Member States in the EU already have suitable vehicles, and are well-positioned to take advantage of firms wanting to establish master funds.
It’s not often that I have to say that Britain finds itself playing catch-up with the financial sectors- but that’s exactly the position we’re in.
Tax-transparent funds are fast becoming the preferred mechanism for cross-border pooling of pension funds.
And firms operating life insurance funds are also looking for alternative options as we approach final agreement on Solvency II.
From our consultation work it’s become obvious that there’s a real demand for a tax-transparent vehicle in Britain; the industry were vocal about this- and it was underpinned by convincing evidence…
…so today I’m pleased to announce that the UK will launch a new authorised fund regime for a tax transparent vehicle. This will help competitive UK firms take advantage of one of the opportunities that UCITS IV presents.
We’ll be working closely with industry to ensure the new vehicle is fit for purpose…
…that it’s both suitable for the pooling of pensions, and for use within the new UCITS IV master/feeder fund structure.
Because if Britain is to continue to be a global hub for financial services, we need to preserve our competitiveness. And today’s announcements on our project on The Future of Computer Trading and the new tax transparent vehicle will help achieve this ambition.
To finish I’d like to say that the progress Europe has made over the last six months demonstrates the benefits that an EU regulatory agenda has to offer.
But there’s still some way to go.
I’m confident that by working together we can ensure that the long term interests of consumers, asset managers, and the wider European financial sector, remain aligned.
Yes, we’ve learnt some valuable lessons along the way. Such as the need for consistent engagement, a solid evidence base to back up our position; and that both Government and industry need to re-double our efforts if we’re to get our message across.
But over the last six months, the Government has sought to lead the debate in the asset management sector. We’ve looked to secure an appropriate and proportionate regulatory framework in Europe, reduce regulations that unnecessarily ties the hands of the sector and its customers, and promote flexibility and choice amongst consumers.
But as a government, we can’t achieve this alone.
We’ll need your support.
And your ideas for reform.