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Newsroom & speeches
137/07
04 December 2007
1. Thank you, Margaret, for that introduction, and let me start by saying that it's a real pleasure to be here today.
2. Firstly, because being at an Economist conference brings back a lot of memories from my time working at the Intelligence Unit.
3. But secondly, and more importantly, because it's good to be part of such an impressive line up of speakers, and to be at a conference discussing such an important question as 'where next?' for London, and for its financial markets.
4. I'm sure that everyone here knows how crucial London, and the financial services industry that's centred here in the City, are to the UK's economy - we're certainly aware of it at the Treasury. Across the UK, the sector supports over a million jobs, and contributes nearly a tenth of our GDP.
5. So, how we ensure that the City remains the world's leading international financial centre - and let me make clear right at the start that I believe it is - is a crucial question for the whole of the UK.
6. My answer is that the City will maintain its position by building on its positive points - proportionate, risk-based regulation; a highly skilled workforce; and the openness and internationalism that have characterised London for hundreds of years.
7. I'll come on to that shortly. But before I talk about the future, I'll say a few words about the events of the recent past, and the market instability that we've seen since the summer.
8. This has, of course, been a testing time for London, and I'm sure for many of you here today - it's been a difficult time for every major economy and financial centre. And it's no secret that it's also been a challenging time for us in Government.
9. In September, in particular, when it became clear that Northern Rock was having severe difficulty in accessing the financing that it needed, we had a difficult choice.
10. We could have chosen to let it go down - but that would certainly have had serious consequences for the banking system and for the British economy.
11. So instead, we chose to authorise the Bank of England to provide support - and I believe that was the right decision.
12. The position now, as you know, is that Northern Rock have announced that they are taking forward discussions with the Virgin consortium on an accelerated basis - but that they aren't ruling out other bidders or alternative options.
13. As for the Government, we're happy to talk to any bidder that satisfied the principles that the Chancellor has set out for proposals for Northern Rock's future - that it must protect the interests of the taxpayer, depositors and wider financial stability.
14. I am of course happy to take questions about what's happened at the end - but for the moment there are two things that I particularly want to say.
15. The first is that it's important to remember that Britain's economy, and Britain's banking sector, remain strong.
16. Our economy is growing faster than any other G7 nation's this year, and it'll continue to grow next year, as we extend our run of 15 years of uninterrupted growth.
17. I know that some people have argued that the City has been damaged by the events of the last few months, and that its reputation has been dented.
18. But my view is that this effect, insofar as it exists, will be short-lived, simply because it's important to remember what a strong position London is in - and some of the amazing attributes that it has.
19. It's the global leader in international bonds, derivatives, foreign equities and foreign exchange. And just a couple of months ago its position as the world's number one financial centre was reinforced by the Global Financial Centres Index, which showed that it had increased its lead over New York.
20. London is home to more foreign banks than anywhere else - banks from America, from Europe, and from Asia, like the Bank of China, which launched a new subsidiary here just a couple of weeks ago.
21. That's one example of the internationalism and openness that have developed with the City, and that have been characteristic of London for centuries. And that internationalism has to remain at London's heart.
22. Of course, London has many other strengths too. It's well positioned to trade with financial centres in both the USA and Asia; it has an established culture of innovation in financial products; it benefits from our language, and from our legal tradition; and I know that one of the major attractions is the highly skilled, and diverse workforce.
23. That was one of the major strengths highlighted by the Financial Centres Index that I mentioned earlier - which put London top for human capital.
24. We've made clear our determination to keep it there, by investing in the skills profile that we need for the future - and by recognising the important role that London's openness and internationalism have played in creating that strong workforce.
25. 30% of jobs here are filled by people born outside the UK, including a quarter of senior managers in financial and business services - and we'll continue to welcome people with the talents and skills that London needs, including through the points-based migration system we're introducing next year.
26. So, we'll build upon London's strengths, including its skilled workforce - and London was also rated highly in the Financial Centres Index, particularly in comparison to New York, for our regulatory system.
27. Our proportionate, risk-based approach to regulation is another strength for us to build on. It puts more responsibility on firms' senior management, but in return it gives firms more flexibility over their business models, and more freedom to innovate - and I'd certainly prefer to see firms' managers using their brains than just spending time ticking boxes.
28. So, it's vital that we maintain our proportionate, risk-based regulatory system - and that brings me onto my second point about the recent events in the markets.
29. I think it's clear to all of us that there are lessons to be learnt from what's happened. The Chancellor has set our proposals for international reform, in response to what has clearly been an international series of events, and we'll continue to work closely with the IMF and the Financial Stability Forum.
30. There are also lessons to learn here at home, particularly about consumer confidence.
31. I think it's pretty clear that the existing Financial Services Compensation Scheme didn't give consumers the confidence they needed in the summer - and we've been asking over the last few months whether further reforms to the scheme are required.
32. We've also been exploring whether there are certain banking functions that are so critical to the modern economy that they should be provided even if a bank fails, and I'd urge you to let us have your views on both of those issues if you haven't already. Our initial discussion period actually closes tomorrow - but we'll be following up with a more detailed consultation in the new year, and we have a slot reserved for legislation if that proves necessary.
33. So, we are responding to what's happened, and we are learning the lessons - but my second point today is that as we do that, it's crucial that we don't overreact.
34. I think that we've got a clear choice before us. I know that there are those who argue that the events of the last few months have found our system of principles-based regulation wanting - and I'm sure that some of them would like to see us retreat into a wave of prescriptive regulation.
35. But I've said a number of times, and I want to repeat here and now, that we absolutely reject that.
36. We had the same choice five and a half years ago, in the wake of the Worldcom and other accounting scandals - and our decision then was the same.
37. Yes, sometimes it's tempting to respond heavy-handedly and to grab easy headlines. But the dangers of over-reacting are demonstrated clearly by the report I've been talking about today, which shows regulation to be New York's most negative feature.
38. And so, just as we did back in 2002, we choose not to overreact, but to respond in a measured, proportionate way.
39. We will learn the lessons, and we will take the action that's needed.
40. But we won't move away from the smart, proportionate, risk-based approach to financial services regulation that has contributed so much to London's strength.
41. We think that the tripartite structure is one of the factors that has contributed to Britain's economic successes over the last ten years - although of course we will look at what lessons there are to learn.
42. And we won't move away from London's internationalism and openness - because like our regulatory approach, this is a strength, not a weakness.
43. Again, there are some who have challenged that, and suggested that a more protectionist approach would have prevented some of the effects of recent events.
44. But open and competitive markets are the best way to achieve sustainable growth. They're good for our businesses, because they drive innovation and productivity; and they're good for our consumers, because they bring more choice, lower prices and drive up quality.
45. And our openness is one of the reasons why Britain attracts more inward investment as a share of our economy than any other major country. That foreign investment is a sign of our success, and hundreds of thousands of jobs are connected to it.
46. And before I finish, I'd like to talk about one specific source of inward investment that I know has received a lot of attention recently, Sovereign Wealth Funds.
47. The first thing to say is that these Funds are nothing new - they've been around since the 1950s.
48. But it is true that they've been growing rapidly over recent years, as emerging economies look for a higher return on the foreign reserves that have built up through global current account imbalances, and particularly recently high oil prices.
49. Sovereign Wealth Funds are now worth between $2 trillion and $3 trillion, and they will continue to grow - perhaps by $800 - 900 billion a year, according to the IMF. And just last week the significance of these Funds as investors was reinforced when the Abu Dhabi Investment Authority invested $7.5 billion in Citigroup.
50. I know that the growth of these Funds has raised concerns - that they may have a negative impact on global stability, and that they may make investments for non-commercial reasons.
51. And of course, all investors need to behave commercially, and be seen to behave commercially, and they have to meet the appropriate standards of governance and transparency - which is why we welcome the IMF and OECD work to establish international guidelines in those areas.
52. But Britain has seen the benefits of investment from these Funds ever since the Kuwait Investment Authority opened its office in London in 1953. Dubai International Capital bought Travelodge last year, for example, and has invested in HSBC - and the holdings of Temasek, one of Singapore's funds, include Standard Chartered.
53. That benefits London, and there are advantages for the Funds, too - the City has a wealth of expertise in managing assets, and using London as a base allows Funds to keep close to the world's financial markets.
54. So we welcome Funds using London in that way and - open and international as it always has been - London will continue to welcome commercial investment from around the world. I want to send a strong message today that Britain is open for business to investors of all nationalities, and that's the message that I will be giving to the Chairman of the China Investment Corporation when I meet him during his visit to London next week.
55. So, in conclusion, it is of course true that the last few months have been difficult. But as I've said today, the British economy remains strong, and the City remains strong - and we won't be threatening that strength by over-reacting to what has happened.
56. Of course, we will learn the lessons. But we know that London's proportionate, and risk-based regulation is one of our strengths - and we won't be abandoning it.
57. We also know that London's openness and internationalism are at the heart of our success - and I believe that they always will be.
58. So, we'll continue to welcome the banks that create jobs and bring liquidity; the workers that provide the skills and talents that the City needs; and the investment that helps to drive our growth and prosperity.
59. And by doing all of that - and of course thanks to the talent dedication, and professionalism of the third of a million people who come to work in the square mile every day - I think that we can answer the question of 'where next?' for London by saying that it will build on its strengths, that it will continue to thrive, and that it will remain the world's leading, and best, international financial centre.
60. Thank you for listening.
