17 October 2005
Speech by the Economic Secretary, Ivan Lewis at the APCIMS Annual Conference
The Treasury & the City
Opening comments
1. Thank you Angela, and indeed APCIMS, for inviting me to talk with you this morning. It’s certainly my pleasure to be here.
2. As the Economic Secretary to the Treasury, I certainly get to see the full scope of the financial world. A few weeks ago, that meant opening Shariah compliant financial products. A few days ago it meant recognising the work a group of kids had done in volunteering their time and effort for local causes.
3. And today, it’s talking to you all – who represent clients with a combined wealth that is large indeed, and who sit at the top of the financial spectrum.
4. Of course, Britain – London – is a centre of excellence for financial services. Because of it, we have much to celebrate.
5. Indeed, London is one of the world’s top three international financial centres, together with New York and Tokyo. The City is a vital part of our economic life, and of our social institutions.
6. I want there to be no doubt – this Government prizes the wealth of experience, the unrivalled knowledge and the position that the financial heart of London has.
7. And I want to acknowledge the commitment and service you all provide to your clients.
Facing up to globalisation
8. Now part of that service means facing up to the economic trends that are emerging, no more so than with globalisation.
9. This is a huge issue for any service industry in today’s world, with far reaching and fundamental changes in technology and trading patterns transforming the global economy.
10. We see five key trends over the next decade, at least.
11. First, a rapid growth of large emerging economies – in particular China and India. This is shifting the global balance of economic activity – by 2015 China and India will account for at least 25% of world output.
12. Second, greater integration of the world economy and changing investment flows. China is now the world’s second largest receiver of FDI, second only to the US, with an estimated $62 billion of FDI inflows for 2004.
13. Third, economic activities and production of goods and services are increasingly global and dispersed across continents.
14. Fourth, there are considerably greater rewards from innovation as global competition and the speed of technological change increase.
15. Fifth, improving skill levels is ever more vital. Each year China and India together produce more than 4 million graduates compared to 250,000 in the UK.
Treasury & globalisation: economic & social challenges
16. These are very real trends. And meeting the long-term economic challenges and opportunities they present requires sustained effort across a range of policy areas aimed at entrenching macroeconomic stability and promoting an enterprise culture.
17. Indeed, our goals in the Treasury are straightforward. To strengthen innovation. To open up skills to all. To ensure fairness through a flexible and responsive welfare state. And to promote sustainable development, including through effective multilateral action.
18. We also seek to match the UK’s economic success with improved social justice. It is not a simple trade off between one or the other. For the City, this equates to dealing with real issues like financial exclusion – a scar on our society.
19. While exclusion remains a major challenge, so does ensuring that consumers have the necessary skills and understanding to deal with financial products. I am sure that when it comes to dealing in financial assets, all of you here today want to see better informed, better educated, more confident consumers.
20. Building financial capability is also crucial to a third challenge in our pursuit of social justice – tackling the savings gap. Since 1997, we have promoted greater savings and wider asset ownership.
21. This is of course central to the continued vitality of the financial sector, including many of you here today, and, indeed to the country’s prosperity. It is also vital for us as a society, providing the flexibility to respond to unforeseen events and financial security in retirement.
22. We firmly believe that the key to wider asset ownership is encouraging saving from an early age. That’s why products such as the Child Trust Fund, ISAs, and Stakeholder pensions, are crucial components of our wider assets and savings strategy.
23. So both the City and society have much to gain from promoting greater promotion of assets and savings.
The City & globalisation
24. But how should the City – and indeed the Government – respond to increasing globalisation?
25. After all, the City is a hugely important source of wealth and prosperity to the UK. Financial services represent over 5% of the UK’s national output.
26. And, in a world where financial markets are increasingly global, London acts as a hub for financial institutions leading the world in virtually every area of international activity, accounting, for example, for around half of the world’s turnover in foreign equities trading.
27. You are both a beacon of success, parading best practice and contributing to our economic well being – and you are a financial anchor, solidifying achievement in measurable, real – even taxable, results. We respect that and want to support you all to do even better still.
Reasons for Success
28. That success has compound roots. There are many reasons why the City is so successful, including its critical mass of financial markets, an innovative and skilled labour force, and the fact that English is the language of international finance.
29. We do our bit by ensuring a level playing field for foreign firms, with low corporate taxation and a flexible labour market.
30. But perhaps one of the City’s most important advantages is the way in which it is regulated. We streamlined the previously fragmented regulatory framework into a single body, the Financial Services Authority, since replicated by a number of other advanced economies.
31. And that has led to a smarter, more 21st century – and client focused – understanding of the industry by government.
Effective 21st Century Regulation
32. Let me be clear on this. The Treasury seeks, with the FSA, to ensure that regulation is proportionate and based on a compliance culture rather than on over prescriptive rules.
33. UK rules differentiate between wholesale and retail activity to a much larger extent than elsewhere. This was certainly recognised earlier this month when London was named the best European city in which to locate a business for the 16th successive year, as well as in a recent Centre for the Study of Financial Innovation report, which rated London as having a significantly better regulatory environment than New York, Frankfurt and Paris.
34. But we are not complacent. Globalisation has brought with it significant challenges and opportunities for the City, but these depend on your continued competitiveness, as the ease with which some activities can be outsourced has demonstrated.
35. And that’s why we have reviewed the new regulatory framework, and are undertaking further deregulatory reforms to make it quicker, easier, and cheaper to comply with the FSA requirements.
36. It’s why we are also implementing the risk based approach recommended in the Hampton Report, which will bring down administrative costs on business.
City & Europe
37. Let me also mention Europe – an area both the Treasury and the City must deal with on a regular basis.
38. This government, in partnership with the financial sector, aims to take a proactive role in working with European institutions to ensure that EU rules reflect the needs of the City.
39. We certainly do not want European action to hinder innovation or competition. That’s why we’ve ensured that better regulation is not just a theme of the UK Presidency, but of six consecutive EU presidencies, locking in a culture that is more responsive to the financial sector.
40. Better regulation also featured strongly at last Tuesday’s meeting of EU finance ministers, where the approach set out in Commissioner McCreevy’s Green Paper on the EU’s future strategy for financial services was endorsed.
41. The Commission’s approach has much to commend it. Indeed it seems very much in line with what the City has called for repeatedly.
42. In short, it should mean significantly fewer new legislative initiatives, with a strong focus on better regulatory disciplines, implementation and enforcement of existing measures, more use of competition policy, and a reinforced emphasis on the EU’s global competitiveness.
43. I hope that the Commission will also act on its announced intention to remove legislation that is not delivering any benefits.
44. The UK Presidency also managed to broker political agreement at the earliest possible opportunity on the Capital Requirements Directive. I believe this is a significant success for financial services in Europe, and one that will benefit the European economy, financial institutions and consumers.
45. So I would like to express my thanks to APCIMS for its role in providing advice and support to the UK in these negotiations, in particular in helping to secure more appropriate capital requirements for small and medium sized investment firms through close cooperation with its European counterparts.
46. Another Directive which has been of concern to APCIMS, and to the wider City, is the Markets in Financial Instruments Directive: the MiFID. This Directive is crucial in facilitating cross border securities and futures business in the EU. As such it ought to significantly benefit the City as Europe’s dominant centre for such business.
47. Your concern has been that MiFID attaches too high a price to the liberalisation of cross-border business. That market practices and regulations which currently deliver for clients in the UK will be outlawed going forward.
48. Negotiations are yet to be completed. But I am cautiously optimistic that most of your main concerns will be dealt with. There has been an increasing focus in the negotiations on better regulation.
49. And we will make sure that the Directive is implemented in the UK in a proportionate way that takes into account the competitive position of UK firms.
Closing remarks
50. Let me end by reiterating that London has many unique advantages. As financial markets become ever more intertwined, the City is well placed to make the most of the opportunities and challenges ahead for this vital sector of the UK economy.
51. Treasury will do everything in its power to support this –to ensure that the regulatory environment continues to support London's position as the international financial centre of choice.
52. To foster ever greater success. And to let you all get on with your work – providing a first class, world beating service to all your clients.
53. Thank you.