6 November 2006
Remarks by Economic Secretary to the Treasury, Ed Balls MP, at the Chief Regulatory Officers' International Symposium at the Tokyo Stock Exchange
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Introduction
1. Let me start by saying what a privilege it is to be able to be with you at today’s important conference. I would like to thank the Tokyo Stock Exchange and our moderator Mr Nakajima and my fellow panellists for allowing me to make some remarks at this afternoon’s session. I would like to talk to you today about some of the key global financial regulatory and corporate governance issues we face and update you on some of our thinking in Britain and in Europe.
UK/ Japanese financial services
2. The relationship between the UK and Japanese financial sectors is strong and growing – it is a relationship we value greatly. Financial services are the UK’s largest single service export to Japan. They are also the fastest growing, increasing by 33% in 2005.
3. Similarly, Japanese financial services firms such as Nomura International, Mizuho Financial Group and the Bank of Tokyo-Mitsubishi UFJ, have a major presence in London. We value their contribution and their vote of confidence in London and I have been learning of their experiences first hand in the meetings I have had today.
Wider trade relations
4. This partnership in financial services is reflected in the broader UK and Japanese relationship. Japan is the UK’s largest export market outside Europe and the US, with UK exports of goods and services growing by 48% between 1990 and 2004.
5. There is also significant and growing investment by UK companies in Japan outside the financial services sector and the UK is also the largest exporter of pharmaceuticals to Japan, with AstraZeneca and GSK well-established here.
6. The UK today has the largest amount of Japanese Foreign Direct Investment in Europe - over 25% of the total. In 2004 the amount of Japanese direct investment in the UK was £0.9 billion, and there are over 1445 Japanese investors in the UK employing 95,000 people.
7. I know that you have recently stated your intention to double inward Foreign Direct Investment. I want to see Britain's strong economic ties with Japan strengthen still further, as your economic recovery continues to strengthen and becomes more broad based.
8. A few years back, a number of commentators, both in Britain and in Japan, feared for the health of the City and FDI into the UK, when we did not join the first wave of European monetary union. These same fears were raised when our 2003 assessment concluded that it was not in our national economic interest to join – a decision which I believe is now well understood, but which we continue to keep under review.
9. I am pleased to say that these fears have not proved well-founded. The UK has continued to prosper and today Britain has the highest stock of FDI as a percentage of GDP in the G7 with FDI inflows on an upward trend in this decade so far. The OECD still ranks the UK as among the most attractive places for FDI and recently commented that we have the lowest barriers to FDI in the industrialised world.
10. And, far from weakening London’s standing as a financial centre, the establishment of the Euro has seen London extend its position as the global financial centre for trading in Euro-dominated securities. London now accounts for over two thirds of the global markets in international bonds. It is by far the largest market for foreign exchange trading, accounting for one third of all transactions.
11. But there is no room for complacency in today’s fast-paced global economy – and we want to extend the City’s global reach even further and bring more FDI to Britain. This lunchtime, when the Director General of the CBI, Richard Lambert and I met with Japanese financial institutions and business leaders, I emphasised my view that it is our commitment to stability, our flexible and open business environment and our determination to engage effectively with our European partners to entrench principles-based, light touch regulation in Europe that are key to Britain continuing to attract foreign direct investment in the future, including importantly from Japan.
Building on our mutual strength – accounting standards/ corporate governance
12. I believe both our countries have much to gain by working in close partnership – this afternoon I am meeting your Central Bank Governor Mr Toshihiko Fukui and the Minister of Financial Services Mr Yuji Yamamoto, and this evening I am very much looking forward to meeting your new Finance Minister Mr Koji Omi.
13. We welcome the liberalisation of the financial services industry and look forward to seeing the growth of Tokyo as a leading international financial centre and not just Asia’s biggest domestic market. International financial groups are part of that and I know you are clear that to encourage them it will be important to get the regulatory regime right.
14. It is important for all of us to strike the right balance and establish financial stability without inhibiting innovation or discouraging foreign investment. We would like to work with you to resolve these issues and ensure that the benefits are realised by Japan and also the UK economy.
London as a global financial centre – IAS/ GAAP
15. In the UK, our success in recent years has been based on three great strengths – the skills, expertise and flexibility of the workforce; a clear commitment to global, open and competitive markets; and light-touch, principle based regulation.
16. Increasingly, it is negotiations and regulatory decisions being taken at the global level – and for Britain also, the European level – that have a major bearing on the competitiveness of our financial services industries.
17. One area of great importance is our accounting standards. Getting them right is a priority.
18. An increasingly globalised world calls for increased cooperation and, over time, where appropriate, convergence in standards at a global level. There should be no competition between us on the objectives of regulation. We are all interested in protection of consumers, protection of the financial markets, the efficiency of those markets and the importance of financial markets for building and sustaining global growth. These have been our aims in Europe in building the single market in financial services through the ambitious Financial Services Action Plan.
19. But in building the European market, we must be acutely aware of the global context. We have been at the forefront of trying to make sure that what we do in Europe looks outwards and that in creating a single market in Europe we do not create additional barriers in global markets. A prime example of that is the issue of accounting standards equivalence. Europe was in danger of applying rules in a way which would have made our markets less attractive to non-EU countries, including Japan, for the sake of an artificial timetable on convergence. Convergence of accounting standards is a good end – it will reduce the cost of capital by making cross-border investment more easily comparable.
20. That is why I am pleased to tell you today that we have successfully negotiated with the European Commission to delay the requirement for foreign firms to disclose information required by EU accounting standards until 2009 – benefiting several hundred Japanese and American firms listed in London. This two year delay on the application of the equivalency tests in the Transparency and Prospectus Directives will enable convergence to proceed at an appropriate pace, avoiding disruption to markets.
21. This is a good example of our pragmatic pro-European approach. It is increasingly important that in completing the European single market in financial services, European regulators explicitly consider the EU’s competitive position in the wider international financial system.
22. International convergence is also a central theme in the prudential regulation of insurance. The European Union is creating a new regulatory framework - Solvency II - which aims to achieve convergence with emerging global standards on key areas, including international accounting standards and frameworks for insurance supervision. We have been studying your experience with insurance regulation closely.
23. Wherever it is appropriate to do so, Solvency II will also seek to achieve consistency with Basle II, to help ensure that products containing similar risks are regulated in the same way across sectors and to simplify regulation for banking-insurance conglomerates.
24. We need a global perspective, because the globalisation of financial services will make efficient supervision of insurance groups and financial conglomerates operating internationally a key challenge for all regulators. Today, we are publishing a consultation document on Solvency II setting out proposals for modernising the rules for European insurers. Insurance groups are increasingly choosing to operate as an integrated economic entity. We must align the regulatory system closely with this business reality.
25. These proposals will allow insurers to work more efficiently across borders, while aligning our rules with global regulatory standards. We hope our proposals will stimulate debate on supervisory co-operation and convergence.
26. Open financial economies must be the guardians of international security – and I am grateful for the way we have been able to work very closely together on terrorist finance and tackling financial crime.
27. At the same time, we are determined to protect our domestic regulatory approach from global developments. Let me take a moment to update you.
28. I announced last month that the Government would legislate in the coming weeks to enhance the UK Financial Services Authority’s powers over recognised investment exchanges and recognised clearing houses.
29. It will enable the UK FSA to veto changes to regulatory provisions proposed by these bodies that would impose an unnecessary or disproportionate obligation or burden.
30. It will not apply to the existing regulatory provisions of the exchanges and clearing houses, nor involve the FSA in micromanaging their rulebooks. And it is not intended to make overseas ownership of UK exchanges any easier or more difficult than it is at present. Our interest in this area is specific and clear – to safeguard our risk-based and proportionate regulatory approach.
31. But we must put these global regulatory issues in their proper context.
32. Some argue that London’s current success has been based on avoiding some of the mistakes made elsewhere. And we were right to resist a disproportionate response to the Enron and WorldCom scandals. Others argue that Britain’s approach to risks is too light-touch, citing the recent success of the AIM market. I disagree on both counts.
33. I do not agree that US corporate governance standards, of themselves, have been decisive for the City’s success. Nor do I accept that UK regulation is excessively light-touch.
34. London is doing well and attracting business and listings – including on AIM - because we have a principles-based and a risk-based approach to regulation which has proved to be effective, while being flexible and adapting to change. We are determined to keep it that way.
35. I know there is a lively debate taking place in the US about the balance of their regulation, which we are following closely. I welcome their interest in the UK’s integrated regulatory structure. We would all benefit from any future reforms to the Sarbannes-Oxley regime – and also from greater global cooperation and mutual recognition on accounting standards. Proposed reforms of the US corporate governance regime should be – and I believe would be – of benefit to Britian and the world.
Concluding remarks
36. In conclusion, we can only succeed and prosper as leading global financial centres, if we think globally, work together, and are open to competition and new ideas.
37. Let us agree today to work together in a strengthened partnership to ensure that London and Tokyo will grow and prosper together in the years to come.