Good morning and thank you for inviting me to speak at the here today. It’s a pleasure to speak to many leading figures from across the financial system, and from across Europe, and do so here at one of the world’s oldest stock exchanges.
From the earliest coffee houses surrounding the Royal Exchange to its formation over two hundred years ago, and through to the global powerhouse that it is today, the London Stock Exchange has always been the beating heart of the city.
The LSE has been critical to the growth of financial markets in the UK that have enabled UK companies to raise £445bn in funds since 2005.
With financial and professional services firms that employ almost 2 million people across the UK, with more than two thirds employed outside of London.
As home to 230 foreign banks, channelling more FDI to the UK than any other sector, but also facilitating a huge amount of foreign investment right across the EU.
And as the Chancellor said on Monday we are committed to working with the Hong Kong Monetary Authority to promote the development of a strong RMB market here in London.
Of course as well as growth, over the last 300 years the stock exchange has also borne witness to a fair few crises, most recently, the financial crisis of 2008.
We still live under the shadow of those events just over four years ago, as what was once a crisis of private and banking debt has transformed into one of sovereign debt.
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.
Resolving the Eurozone sovereign debt storm is the immediate crisis that we all have to deal with, and we are as eager as our Euro area counterparts to see a comprehensive resolution to the crisis.
European regulatory reform - challenge
But over the longer term, we have the equally substantial task of financial sector reform correcting the regulatory failures of the last decade, and ensuring that regulation keeps pace with evolving markets.
In driving forward regulatory reform, we need to learn the lesson of yesterday, but also recognise that today’s markets could trigger tomorrow’s financial crisis.
So in the UK, we are reforming the structure and approach of our regulation, looking ahead as well as behind.
There are those who argue that regulatory reform is the enemy of growth - that we should postpone reform.
But we reject that argument - ineffective regulation and supervision of banking led to a massive contraction in our economy.
A stable and resilient financial system provides sustainable economic growth. But we must understand the impact that reform can have on growth - disproportionate regulation can restrict investment, lead to higher costs for investors and lower returns for business.
Growth is aided by open and competitive markets and we must be aware of those who will use reform to fragment markets - reform must be consistent and non-discriminatory. Reform should not erect barriers either within or around Europe.
To allow that to happen would be to diminish the opportunities available to businesses and investors of all types.
That is why we are vigorously guarding against that retreat. A free and open Single Market has brought huge benefits to the whole of the EU and is the most powerful tool that we have to foster renewed growth as we recover from the financial crisis.
European regulatory reform - principles
We will support the Commission wholeheartedly in its duty to protect and promote the Single Market in financial services even as we embark on vast regulatory reform.
Now more than ever, it is critical that Member States are able to have confidence and trust in EU institutions to see through regulatory reform in full and to stand up for the Single Market.
That means ensuring full and consistent implementation of high minimum regulation standards across the EU, whilst allowing member states to impose higher requirements where needed to ensure financial stability.
It means protecting the integrity of the single market, ensuring that regulation does not fragment the Single Market by currency, geography or firm.
And it means applying one of Europe’s core principles - the free movement of capital - to countries outside Europe’s boundaries and as much as to those within it.
London and Europe thrives because of our freedoms - erecting barriers around Europe impoverishes everyone by denying opportunities for European firms to grow using capital from outside Europe and restricts out opportunity to support growth in Africa and Asia.
It was because of the value we attach to the Single Market, the maintaining and Open Europe and protecting taxpayers and consumers alike by backing tougher regulation and supervision that the Prime Ministers sought safeguards at last month’s European Council.
That approach characterises our robust approach to regulation reform at home and abroad.
In the same way, we cannot afford to impose a Financial Transaction Tax if it is not going to be applied globally.
Without global consistency, those transactions covered by the tax would merely relocate to countries not applying the tax.
As the Commission’s own impact assessment shows, a unilateral European tax could reduce EU GDP by as much as 3.4%, or €422bn.
European regulatory reform - UK leadership
Even as we embark on a period of unprecedented regulatory reform, we rightly have to have to protect European competitiveness globally, and promote the Single Market within.
On the Capital Requirements Directive, we continue to press for full and consistent implementation of Basel III as a minimum not a maximum basis.
High, common and consistently applied minimum standards for capital, liquidity and leverage are vital for stability, reducing fiscal risk and protecting a Single, un-fragmented market.
On EMIR we have worked hard to ensure a clear recognition of the principle of non-discrimination in the Council and it’s why we are challenging the ECB’s location policy in the ECJ.
We have also secured a commitment to close loopholes with respect to the clearing obligation, and to ensure fair and open access in future legislation.
And it’s exactly the same commitment that we are taking on negotiations on MiFID.
The MIFID Review offers a huge opportunity to promote competition and the Single Market in financial services.
We have already seen the beneficial impact that MiFID has had in lowering costs and spurring growth in equities markets, and it is right that we seek to update the directive for the significant changes in the market since its original implementation.
But any reform of MiFID has to be driven by evidence not political whim.
It is vital that the Commission undertakes the necessary analysis and deliberation to understand the impact of reform, and considers any unintended consequences.
For instance, whilst it is clear that greater transparency has had a positive effect in equity markets, it is not necessarily the case that that precisely the same measures are directly transferrable to other market classes.
Both bond and derivative markets are considerably less liquid than equity markets, and extreme care is needed to ensure that transparency requirements are carefully designed to work for each asset class.
For example, the component bonds that make up Markit’s iBoxx bond indices are some of the most actively traded bonds in Europe. But looking at over 9000 of these bonds, only 52% actually traded at least once in a six month sample period in 2010.
It is because of this complexity that the Commission must undertake rigorous impact assessments to fully understand the costs and benefits of increased transparency.
Likewise, the Commission must undertake the same analysis when it comes to updating MiFID to reflect changes in the commodities market.
The Commission cannot succumb to knee jerk reactions which may only serve to increase costs for European citizens.
It is vital to remember that the commodities derivatives market serves a critical economic function in allowing end users to mitigate commercial risk.
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 seem to suggest.
Furthermore the Commission must resist pressure to use MiFID to raise barriers against third countries seeking to trade with the EU.
Across EU dossiers there has been an increasing and worrying tendency to try to implement strict equivalence or reciprocity provisions through EU legislation. It’s an approach that could serve to effectively close EU financial markets to third country firms.
For instance, it seems that no third country would meet the standards as set out under the current MiFID proposal.
From the moment that MiFID is passed and until equivalence decisions are taken, it would close the EU market entirely to any new third country firm.
And barriers would be placed in the way of outward investment flows too, for example restricting access to emerging markets.
At a time when we have to do everything we can to attract ever more investment within but also beyond the EU’s borders, it’s an approach that merely undermines our growth ambitions.
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.
These are all complex debates and underline just how important it is to get the evidence base right to ensure that reform is effective and doesn’t undermine free, competitive and open markets.
In a post-crisis market where we have seen extensive consolidation across the board, we cannot afford to sit back and sacrifice competition and customer welfare.
DG Competition in particular has a fierce reputation for objective and rigorous economic and competition analysis, and a record of upholding their Single Market obligations in the European Treaty.
It is vital that DG Competition lives up to those duties in the weeks and months to come, without political interference.
To protect and promote the Single Market as we implement a vast agenda of reform.
Across the European financial services agenda, the Commission must not let political expediency trump economic evidence.
Responsibility of the European Commission
I fully understand nonetheless that the Commission faces a huge challenge to resist pressure to delay, obfuscate and pander to vested interests in the EU.
We see the Commission as parties in our commitment to protect and promote the Single Market in financial services…to meet its responsibility to secure regulation in the interest of all 27 members of the EU.
Regulatory reform that is ambitious, effective and based on rigorous economic analysis.
Domestic regulation - supervision
It’s exactly the same approach that we have taken in our domestic reforms.
It’s no exaggeration to say that the UK has been leading the way on regulatory and banking reform, taking tough and far reaching decisions to remedy the failures that preceded the crisis.
We are fundamentally reforming our system of financial supervision, remedying the failures of the Tripartite system.
Putting the Bank of England back in charge of prudential regulation;
Creating the Financial Policy Committee to monitor risks across the financial system, whilst also requiring the FPC to take economic growth considerations into account when pursuing financial stability;
And we are creating a Financial Conduct Authority to oversee the conduct and operation of firms and markets, putting the consumer protection at the heart of the financial system.
We have also introduced a permanent bank levy on wholesale funding that is higher in relative terms than any other major European jurisdiction, targeting short term funding in particular.
And we have introduced the toughest and most transparent pay regime of any major financial centre in the world.
Domestic regulation - ICB
But even with such ambitious reforms, there is no room for complacency.
We are also learning the lessons of the crisis to implement radical reform to the structure of the banking system itself on the basis of recommendations from the Independent Commission on Banking.
Recommendations which seek to answer how to create successful but stable financial services sector.
Recommendations that seek to preserve the innovation that fuels the sector’s success without putting the wider economy at risk.
As the Chancellor set out last year, we will separate retail and investment banking through a ring fence, ensuring that services that are vital to families, businesses and the whole economy can continue without resort to taxpayer money.
We will also ensure that banks have bigger cushions to absorb losses without recourse to the taxpayer.
That means requiring ring fenced retail banks hold equity capital of at least 10%, more than required under the Basel III agreement, with minimum loss absorbing capacity for the bigger banks of at least 17%.
Through these proposals on loss absorbency, and through our initiative on Recovery and Resolution Plans, we are tackling the perceived implicit taxpayer guarantee for UK banks.
That perceived guarantee for banks not just in the UK, but across the UK, is one of the greatest distortions to the Single Market.
We are tackling that distortion at home, and we will continue to work with the Commission to reconcile that distortion at the international level through the Crisis Management Framework.
It is the UK that has been at the vanguard of regulatory reform.
Our domestic reforms strengthen regulation of the banking sector, promote competition and protect the interests of the taxpayer.
Our willingness to act on capital and liquidity in delivering the international consensus has strengthened and protected our banking sector at a time of stress in European markets.
It is the UK that has been leading the way to ensure that we implement tough, consistent and non-discriminatory reforms that safeguard the stability, openness and competitiveness of the European financial system.
But on all these fronts, we need the support and the evidence base of the industry. We need to hear your voices not just here in London, not only in Brussels, but right across the EU.
It’s no easy task in the current environment, but we remain committed to working tirelessly to protect the Single Market, and we will continue to press the European Commission to resist vested interests that would seek to undermine it.
It is only by working with the likes of yourselves here today that we can embed reform that is credible, effective, and protects the open competition which has allowed financial services to support growth across all 27 members of the EU.
I look forward to working with you in that task in the months and years to come