Speech by the Financial Secretary to the Treasury.
[Check against delivery]
Chairman, My Lords, Aldermen, Ladies and Gentlemen.
It’s a great pleasure to be here tonight, and to have the opportunity to talk to so many prominent figures from the financial sector.
Our challenge is to develop a regulatory framework at a domestic, European and global level that ensures that London remains a global financial services centre and that the financial services sector serves the wider interests of the UK economy: meeting the needs of businesses and families.
Earlier this month, I set out the challenge of reaching a global agreement on regulation and why a level international playing field is vital to maintaining competitiveness. Tonight, after six months of a Coalition Government, I want to set out our achievements in Europe and the future direction of our policy.
I know that prior to the general election, there was some uncertainty about our ability to influence the debate in Europe.
Some questioned whether Conservative Eurosceptics would get down to business with our European neighbours or instead turn our backs on them, and leave them to it.
I want to set out tonight how we have turned the debate in Europe around over the last six months.
It may have surprised some that my first speech on financial regulation was in Brussels.
In that speech, I set out our view that we needed to work with our European partners to complete the single market in financial services, that increased transparency would strengthen European banks and that we needed a settlement on supervision that balanced the importance of national supervision with the creation of a level playing field.
From my perspective, there’s a lot to be said about the success of the single market. It’s supported competition, promoted transparency and up-held the principles of non-discrimination - driving economic growth across the region.
But there’s also the other side of the coin…
…where the EU has the authority over domestic legislation and the ability to tie the hands of Member states in legislative knots.
This is particularly relevant to the financial sector, where our future competitiveness will likely be determined by Europe’s regulatory agenda.
So what have we achieved over the last six months?
As a Government we’ve already achieved a great deal: we’ve protected the national interest, and campaigned vigorously for robust and proportionate regulation of the financial sector.
And for proof, I only need to turn to our accomplishmentsin recent directivenegotiations.
What we’ve achieved - supervisory architecture & AIFM
We scored significant successes with agreements on supervision and the alternative investment fund managers directive.
With regards to supervision, in light of the financial crisis, all Member states recognise the urgent need for reform.
Our experience of the Icelandic banks operating branches in the UK, where the FSA had little or no oversight, demonstrated that there were unacceptable failings in our current cross-border arrangements.
Whilst the diagnosis was clear, the cure was a cause of division.
When we first sat at the negotiating table back in 2009 there was a real risk of losing domestic responsibility for supervision.
It seemed likely that the European Banking Authority would be located in Frankfurt.
And that decisions affectingour fiscal position could be taken in Brussels rather than Westminster.
This wasn’t in our interests, the country’s interests, or the financial sector’s either.
Through good diplomacy and hard work, we turned the game around.
The new agreement preserves our Supervisory autonomy, which was an absolute priority. Day-to-day supervision of British financial institutions will remain our responsibility.
The new settlement brings wider benefits: it will improve cross-border supervision; provide mechanisms to ensure supervisors are complying with their legal obligations, createa level playing field; and improve the quality of national supervisors.
It’s also achieved better co-ordination of supervision, and protected national regulators’ right to manage the interests of their own tax payers.
The agreement represents a good outcome for the UK,and the EU as a whole, and will ensure that the high standards of supervision and regulation apply across Europe.
And it’s a significant boost for the City that the EBA will be based in London -reflecting London’s position as the world’s leading centre for financial services.
But the new Supervisory Architecture is only part of the story.
On the Alternative Investment Fund Managers Directive, as the Chancellor himself said, when we came to power the previous Government had left us with ‘something of a hospital pass when it came to a negotiating position’.
But in the space of only a few short months we negotiated a complete reversal of the Council’s position.
We reached an agreement where hedge funds and private equity managers will be regulated in an internationally consistent and non-discriminatory way.
Rather than seeing third country managers frozen out of EU markets, they too will be able to qualify for the passport. This is of huge significance to the UK, as a leading player in this industry - it will introduce greater competition, open up new markets, and create new investment opportunities. Most importantly, the EU has signaled it is open for business and will not close its borders and restrict free movement of capital.
I remember that onmy 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.
We managed to resist proposals that looked to bring acquisitions of SMEs into scope; ban leveraged buyouts; orintroduce disproportionate reporting requirements on PE firms.
But I recognise that we couldn’t have done this alone.
Industry engagement - UKLA
We are at our most effective- both domestically and internationally - when Government, the industry and its customers share the same goals and engage openly on our priorities.
That’s why, at a domestic level, we’ve consulted on a new approach which will put the Bank of England at the heart of prudential and macro-prudential regulation.
In the consultation we included a question to seek views on whether the UK Listing Authority should be merged with the Financial Reporting Council or become part of the new Consumer Protection and Markets Authority.
There were almost 100 consultation responses which commented on the position of the UKLA. The majority of these favoured retaining the UKLA within the CPMA, but many respondents also wanted reassurance that the new structure will engage effectively with the new European regulatory institutions,and stressed the importance of a strong markets voice within the new regulatory structure.
The new regulatory architecture must meet our domestic needs and achieve the best possible fit with the new European supervisory bodies. We’vetherefore chosen the CPMA as the institutional home of the UKLA, because of the strong case respondents put forward for operational linkages between primary and secondary market regulation and conduct in wholesale markets.
And this option helps to ensure effective UKLA representation in the new European Securities and Markets Authority (ESMA). We will also ensure that the CPMA cooperates effectively with the FRC and other regulators when their issues are on the table in Europe.
But now I feel we need to broaden our horizons: we need to move beyond discussions on domestic regulation and turn our attention to the EU.
We want to work with the sector to identify ways in which we can improve the functioning of European markets, improve competition,and raise standards and transparency to match our own.
Changing the debate in Europe is about more than just lobbying this Government. That process has already started with the support of the City’s International Regulatory Strategy Group. Importantly, we need you to engage at a pan-European level: with trade organisations, companies and governments.
Yet no one should be in any doubt of Europe’s mercurial nature: Europe is 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 don’t believe that once a story has petered out, it won’t be resurrected. Whilst we may think that Peggy Mitchell left Walford for the final time earlier this year, we know from experience that, just as the Queen Vic has been raised from the ashes, so too might Peggy return.
And in Europe, without close attention and consistent engagement, debates that we thought we had won can reappear in many different guises.
Why do you need to be involved? Well the best way to demonstrate the point is to use an example.
If we look at the case of the European Market Infrastructure Regulation, the clearing process of OTC Derivatives is of vital importance to the UK economy. Reform needs to be non-discriminatory, proportionate and consistent with our G20 obligations.
Trying to separate markets by geography or currency zone would be deeply damaging to economic growth.
With the largest OTC derivatives market in Europe and indeed globally, the outcome of this directive will have a significant impact on the UK financial sector.
Yet, when it comes to voting, Member States such as Italy have the same voting rights as we do - even if they have a smaller stake in the game
For this reason, just as we engage with our partners to shape directives, you need to do so too, with your opposite members and with your customers.
To make the case for Britain not just here, but everywhere you can.
We also need your help to compile rigorous evidence for our positions, based on hard and credible data. Too often much of the industry lobbying we receive is based on rhetoric and high-level positions - we need more hard-headed analysis which we can then deploy with our European colleagues.
With this in mind, there are a number of other upcoming directives that will help shape the future of financial services across Europe, and have a profound impact on your future success:
- Such as MiFID: Where the upcoming review needs to avoid so-called “market fragmentation” and the stifling of competition.
- Packaged Retail Investment Products - which could help create a level playing field for retail products across Europe, and improve levels of disclosure, strengthening competition and consumer outcomes.
- CRD 4, where we want to see high common standards to protect financial stability, in line with Basel III.
- And of course there are many other legislative proposals just over the horizon
The progress we have made in the last six months has demonstrated that we can shape the argument in Brussels. That we can gain allies and win the battle. And that we can anticipate plot shifts and respond quickly to ensure that the European soap opera continues to fit with the interests of the UK.
But those of us engaged in this debate know that this only happens through consistent engagement and application by both Government and industry.
As I said at the start, the Single Market has many benefits - it supports greater competition, transparency and adheres to the principles of non-discrimination.
I want to see all future EU regulation support these principles, as I am sure you do as well.
But as a government, we won’t achieve this alone.
We’ll need your support.
And your ideas for reform.