8 July 2003
Speech by the Chief secretary to the Treasury, Paul Boateng MP, at the Institute of Chartered Accountants in England and Wales
I am delighted to be with you this morning and I bring the greetings of the Chancellor and the Financial Secretary. We are all grateful for the work of the Institute.
This is an important conference. The roots of the accountancy profession may be ancient, but accountants are at the forefront of the radical changes taking place in the world of international business. In this respect and others, accountancy really is, as Richard Dafforne described it in 1635, “the Merchant’s Mirror.” That is a lovely phrase – it is what you are and what you represent. The strategic business knowledge that accountancy provides is indispensable to the functioning of open economies and open societies.
We all very much appreciate in Government the central role you play in maintaining confidence in our financial institutions and our companies, especially as a force for high standards of corporate governance, and as an important partner in the effort to detect and deter financial crime.
World Economy and Trade
The confidence that you provide has been essential during recent times which I know have been challenging for many of you and indeed for your clients. Since 2001 we have seen the first truly “synchronised” slowdown for thirty years, with Japan, America and much of Europe experiencing recession simultaneously.
In the last few months a hesitant global recovery has been stalled, the oil price has fluctuated widely, world trade growth has been slow and, partly because of political uncertainties, equity markets have been volatile.
This was the context of the Deauville meeting of G8 Finance Ministers in May, where there was much consensus amongst us – both on the economic climate and on the way forward, and especially the need to achieve higher rates of growth. Our assessment is that the world economy is ready to move forward, and that the second half of this year will see the global recovery gathering pace – led by a pick-up in growth in the United States.
A number of the major risks to recovery have receded, including uncertainties over military operations in Iraq and the threat of SARS. This has been accompanied by signs of a recovery in business and consumer confidence and an improving financial picture in a number of the world’s major economies. So with inflation low, geopolitical uncertainties lessening, oil prices on a downward trend and with action over corporate standards, we are seeing some of the chief obstacles to higher growth being removed.
Growth of course depends on sound macroeconomic stability and sound economic management too – but we must also work to capture the benefits on offer from further trade liberalization. It is estimated that if we were to halve protectionism in agriculture and in industrial goods and services we would increase the world’s yearly income by nearly $400 billion dollars: a boost to growth of 1.4 per cent. The WTO Ministerial meeting in Cancun this September will mark a crucial half way point in the current Doha trade Round – if we are to succeed, it is essential that Europe and America take the lead in the talks, and work together.
And in support of the world trade agenda, we are also working to strengthen bilateral economic relationships, in particular the biggest bilateral relationship of all, that between the EU and the United States. The transatlantic economic relationship now accounts for up to $2.5 trillion of commercial transactions each year, including $500 billion of foreign trade, and provides employment now to over 12 million people. And that interdependence is increasing – in one decade direct European investment in the USA has increased more than ten-fold.
So each side has an immense stake in the other’s growth and success, and the potential benefits of greater liberalisation are impressive. A new joint British-Dutch study published in May shows that if we broke down the tariff barriers and the barriers to trade in services between the EU and US, we could increase employment by 1 million in Europe, raise Europe’s growth by up to 2 per cent, and America’s by up to 1 per cent.
To this end, we should aim to deepen the transatlantic marketplace in services – you are all absolutely crucial to that - where the benefits of cooperation across the Atlantic are potentially very great. The Chancellor has written to his fellow European Finance Ministers calling on the EU and US to examine the possibilities for transatlantic financial services liberalisation, including capital market integration.
So the momentum towards a truly global marketplace requires us to be proactive in updating standards of regulation if we are to reap the benefits on offer in the world economy. In this, of course, accountancy is no exception. Globalisation requires accounting standards that are recognised across national boundaries, and at least are comparable in aims, quality and enforcement so as to give the companies who are your clients real freedom of establishment and capital raising.
This is a goal that now commands widespread support - reaffirmed at the G8 Finance Ministers’ meeting in Deauville. And a great deal of work is going ahead on the building blocks of convergence.
The adoption of IFRS in the consolidated accounts of EU listed firms in 2005 is a landmark in progress towards the ultimate aim of globally agreed standards. I appreciate that this represents a major change agenda for business, and we are particularly grateful for the lead that the Institute of Chartered Accountants, in particular David Illingworth and Peter Wyman, is giving to raising awareness of the 2005 deadline and the need for UK business to prepare. Their role as President and former President has been vital and I do want to say a big thank you on behalf of the Chancellor for all you have done.
Another crucial building block of global convergence is achieving a coming together of the IFRS and the United States Generally Accepted Accounting Principles.
Accordingly, there is good evidence that we are moving in the right direction here – but complacency, even in small doses, is not an option. There are still real difficulties to overcome, in particular the controversies inside the EU now over standards for financial instruments, and, more widely, the complex issues around proposals from the IASB and the FASB to account for the cost of stock options.
So the challenges are formidable, and there are no shortcuts - you know that more than many others. But the benefits on offer from greater convergence are substantial. Integrated and competitive markets mean greater opportunities for enterprise and innovation, reduced cost of capital, better value for consumers, and higher, sustainable rates of economic growth and prosperity for all.
Corporate Governance Agenda
On the wider agenda of developing corporate governance and accounting practice, our approach has been to work together with business representatives and the financial services sector, including, of course, the ICAEW, to put in place a coherent and proportionate package of measures, reinforcing the existing strengths of the corporate governance regime, and I am very glad that Derek Higgs was able to come and speak to you this morning about his important work in this area.
Because the real benefits that flow from having a sound system of financial reporting in the UK are clear – as of course is the potential damage the UK economy could suffer as a result of failures within the companies in whom we place our investments and our trust.
The mainstay of the Government’s approach is that the market, and shareholder activism, are the strongest and most responsive forces for high standards. This is consistent with the general approach that the UK has taken in the past, which has not been to use detailed rules and regulations to tell boardrooms how they should be run, but rather to set out principles, often in open and voluntary guidelines, and to rely on transparency and disclosure. It is then, of course, for listed companies to decide either to comply or, if not, explain to shareholders why they have not done so, making the market, not Government, the judge.
In that context, we welcome the Company Law Action Plan which the European Commission has published. While recognising that a harmonised corporate governance regime, identical across all 15 and soon to be 25 Member States, is neither practical nor desirable, the Action Plan charts a realistic path: promoting convergence, while tightening up standards and augmenting the scope for shareholders to exert influence.
This, we believe, is the way to rebuild investor confidence in financial information and indeed in financial markets, and facilitate mutual recognition of standards with countries outside the EU.
Sarbanes-Oxley
No corporate governance regime can be 100 per cent failsafe – that is a lesson we have surely learnt. But to date the UK’s framework has proved robust and effective, and we do not believe there would be any advantage to the UK in the kind of radical response we have seen in the United States with the adoption of the Sarbanes-Oxley Act.
While we sympathise with the motivation for Sarbanes-Oxley, some of its provisions – as you all know - have an extraterritorial overspill that has to be a concern, both in the UK and in the EU generally.
But we are encouraged that the US authorities, the Securities and Exchange Commission and the Public Company Accounting Oversight Board, have been willing to listen and to discuss problems. I know that the Institute is at the forefront of those discussions within the profession globally.
26. Our engagement with US concerns, and in the EU, has confirmed our view that the best way ahead is through a positive agenda, building a strong transatlantic relationship and minimizing excessive burdens of secondary regulation on UK and EU companies that are listed on US markets.
Money Laundering
It is this approach of working with stakeholders to minimize the necessary burdens, whilst ensuring that at the same time regulatory arrangements can respond as the landscape of risk changes, that is the basis of our approach to combating money laundering in the UK. And I know this is an issue relevant and of concern to many members of the Institute and I would just like to say a few words about what we are aiming to achieve.
Money laundering is inextricably linked to the offences which underlie it. Therefore tackling the flow of criminal finances helps to detect and to deter the offenders themselves, and prevents funds from being reinvested in more crime and in undermining legitimate business.
We have a responsibility to play our part in international efforts to strangle the financing of organised crime groups, terrorist networks and corruption.
And I’m bound to share with you - as a Finance Minister now, but also as a former Police Minister – that our global institutions and our very way of life is threatened by the organised crime and terrorist networks of the twenty first Century. No one should be under any illusions about this. You and your profession are in a unique position to address these threats. I know there are concerns, but let us be clear that the action we are jointly taking is essential if we are to do this. It makes us all, as individuals, our families and society, safer.
The UK already has a strong supervisory regime in place, recognised as such by the IMF. The Proceeds of Crime Act, which came into force this year consolidated the legislation on criminal finances, introduced new powers to seize crime related cash, and established the Asset Recovery Agency to recover the proceeds of crime. We are well on course to fulfil our manifesto commitment of confiscating £60 million of criminal assets by 2004-05 – twice the level of a couple of years ago.
One trend which our Law Enforcement professionals and the international community have observed is the growing extent to which professionals and businesses in non-financial sectors are now at risk of becoming involved in money laundering – some intentionally, some unwittingly. We are moving therefore towards a system where the information held by professionals involved in the planning or handling of finance can be reported effectively. The information that accountants and auditors hold is uniquely valuable, and can provide leads for law enforcement that other sources simply cannot offer.
So we welcome the recognition by the EU in its 2nd Directive, and more recently by the Financial Action Task Force, that some sectors not hitherto covered can play a powerful role in combating money laundering.
The Government aims to lay new regulations before Parliament shortly. These will bring auditors, external accountants and tax advisors into the full regulatory framework, including the duty to report where there are reasonable grounds for suspicion of money laundering.
I know as I have said that some professionals have expressed concerns that all transactions, not only those above a certain size need to be reported. We purposely drafted the money laundering legislation in a way which is intended to ensure that all business crime is reported, not only that involving the largest sums or the most dangerous international criminals. Fraud and abuses, even on a relatively small scale, impose costs on the economy and tilt the playing field against legitimate businesses. And the size of a transaction is not necessarily a good indicator of what makes for a helpful report – a transaction involving small amounts can be the tip of an iceberg; an indicator of something far bigger.
Accountants and auditors, alongside financial institutions, are in the front line of the fight against criminal financing – and by letting us know of your suspicions, you can make an important difference to the effectiveness of law enforcement. That is why your role is so very important.
Of course, as we move forward to implement the new Proceeds of Crime Act regime, we need to work together to get the balance right.
Our relationship in the coming months is going to be crucial in this regard and that is why the Home Office is currently consulting with representatives from your Institute, from the Auditing Practices Board, as well as those of the banking, legal and other professions, to make the new legislation work as effectively as possible, and at the minimum expense to all concerned.
Last week my colleague Caroline Flint, the Parliamentary Undersecretary of State at the Home Office announced the setting up of a task force to assess and oversee the recommendations of the KPMG study of the Suspicious Activity Reporting regime. This task force, too, will be a joint public-private sector body.
And as the KPMG study shows, the quality of suspicious transaction reports to the National Criminal Intelligence Service does need to be improved, and we need to ensure that as soon as a report is made it is analysed and, where appropriate, acted on rapidly. The Home Office-led task force will also consider the KMPG recommendation on providing better feedback to the regulated sector.
We want a clear, enforceable and proportionate response to the risks that lie in each sector, and one which does not distort competition between different businesses providing comparable services. And so to this end, the Government has developed a Money Laundering Strategy which we will publish shortly.
We are keen to continue the positive dialogue with stakeholders and experts – you will have a crucial role to play in that. The Money Laundering Advisory Committee brings together government, business, and representatives from gatekeeper professions such as accountancy. It is a forum in which you and other stakeholders can examine the regime and its effectiveness, highlight potential deficiencies and develop possible solutions.
The forthcoming strategy document is the result of a thorough consultation through the Money Laundering Advisory Committee, and I am enormously grateful for the contributions the ICAEW has made to consolidating and refining the UK’s approach.
It is only through maintaining controls that are as effective as the best international comparators, and indeed through working with our international partners to take account of trends in criminal behaviour and to continue raising the benchmarks, that we can fully prepare the UK’s institutions for the challenges of an increasingly integrated global marketplace.
Conclusion
So the recent adjustments to the corporate governance framework, the EU Action Plan, reducing the potential for criminals to target the UK financial system: it all comes down to the basic priority of guarding and strengthening a regulatory framework that maintains the confidence of capital markets and the public, without intervening unduly or overloading the sector with new requirements. That is how we as a Government see our role. As we move forward with implementing the reforms and meeting the challenges of convergence in 2005, close partnership between the Government, business and the accountancy profession will be vital. And I just want to say a big thank you to you all for making that partnership real. And real partnerships are ones where we talk frankly with each other, but where we have shared principles and a shared vision – a vision of markets well regulated and working effectively for all in a safe and secure society. The coming months and years will be challenging ones, for you in the profession, for us as a Government, for our country and the wider world. The challenges are real – but so are the benefits of a partnership that can realize them to the advantage of us all. And it is our role – together in partnership – to meet these challenges and make those benefits clear.
Thank you very much.