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Newsroom & speeches
19 November 2008
Thank you very much, John for that kind introduction. It’s a pleasure to be with you here this evening at the Merchant Taylor’s Hall.
I understand that this hall dates back to 1347, though over the centuries it has taken a battering from, among other things, the Great Fire of London and Nazi bombs. It’s a splendid room and an encouraging reminder for us all, that London can bounce back from difficult times, stronger and prouder than ever before.
I promise that I will keep my remarks fairly brief, but I’d like to start by setting out my views on the current economic conditions.
Last month the International Monetary Fund said that: “the world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s”. They also noted that the major advanced economies are already “in - or close to – recession”.
We’ve already seen falling output in Germany, France, Italy, Japan, Canada, the US and Ireland. And we are now seeing falls in output here.
Many of the recent events in the banking system would have been unimaginable a year ago.
Few would have predicted that each of the five large Wall Street investment banks would have, by now, either merged, sought government help or collapsed. In Britain, the de-mutualised building societies are all gone – taken over, broken up or nationalised.
The Bank of England’s Financial Stability Report, published at the end of October, estimated subprime and related losses at almost three trillion dollars.
The financial system lies at the heart of the UK economy. Businesses and families throughout the country rely on it every day.
So this isn’t just about our financial institutions in the City and Canary Wharf. It’s also about households and businesses across the country - pensioners worried about their savings, young couples seeking a mortgage to buy a home, owners of small firms struggling to get credit, and people worried about their jobs.
No government can prevent an economic downturn, but we have been doing – and will continue to do - everything possible to stabilise the financial system and restore confidence to the markets.
Government will continue to take the steps necessary to ensure sustainability in the medium term. And we will return borrowing and debt to a sustainable level once these shocks have worked through - just as we have in the past. The Chancellor will set out plans in next week’s the Pre-Budget Report, that demonstrate our commitment to keeping the public finances on a sustainable path.
One thing is certain: the relationship between financial institutions and governments has changed forever. There can be no return to business as usual. The chancellor has made it clear that we will have to return to the issue of regulation.
In this new age of global markets, we also need new global institutions. The problems we face are changing, and it is right that the means of solving them should change too.
Both the prime minister and the chancellor attended last weekend’s meeting in Washington of the G20 countries and the UK has been among the first to call for:
The Prime Minister has been at the forefront of calls to create a new framework for global financial stability. These calls led, under the UK’s G7 Presidency in 1998, to creation of the Financial Stability Forum.
But while the FSF today has knowledge, it lacks power. The IMF, on the other hand, has power but less knowledge. This is why we need the two organisations to work better together, and with national regulators, towards a system that gives early warning of incoming global economic and financial shocks.
The era of irresponsible credit is over. The economic downturn has, once again, driven home the importance of saving.
Savings and assets provide people with independence throughout their lives, security if things go wrong, and comfort in old age.
Since 1997, the Government’s strategy has been to promote saving and asset ownership for all, throughout their lives – from childhood, through working life, and into retirement. This approach has been underpinned by the principle of progressive universalism – providing support to all, with greatest support to those who need it the most.
Tax-advantaged Individual Saving Accounts (ISAs), introduced in 1999, have been successful in developing and extending the saving habit and ensuring a fairer distribution of tax relief.
Over 18 million people, around one in every three adults, now have an ISA- many more than those who ever held a TESSA or PEP.
You’ll all be aware that we made changes to the ISA regime recently. These changes, which became effective in April, are designed to deliver certainty, simplicity and flexibility for savers.
We raised the ISA limits. Every adult now has an annual ISA investment allowance of £7,200. Up to £3,600 of that allowance can be saved in cash, with the remainder invested in stocks and shares.
And we’ve created greater flexibility for transferring money from cash ISAs to stocks and shares ISAs.
The Child Trust Fund aims to promote saving literally from the cradle. Every child born since 1st September 2002 is provided with a £250 voucher to start up an account- and those families on low incomes receive an extra £250. This money can’t be touched until the child reaches 18 years old, but up to £1200 can be added to the account every year without incurring any income or capital gains tax.
I announced a fortnight ago the latest statistics on the Child Trust Fund. They are encouraging. About 97 per cent of eligible parents are aware of the Child Trust Fund and around three quarters of parents continue to open accounts for their children within the first year.
The Child Trust Fund will ensure children have savings as they reach adulthood; it will help them get into the habit of saving; teach them about the benefits of saving; and help them understand personal finance more generally.
The Saving Gateway will provide extra support for saving among people on lower incomes, and will be introduced nationally in 2010. Around 8 million people will be eligible to open Saving Gateway accounts, and for each pound they save they’ll receive a contribution from the Government – providing a strong incentive to save, and helping to bring people into the financial mainstream.
Of course, all of the government’s schemes to encourage saving are no use if people don’t know about them or have the support they need to access them. So, the last thing I want to talk about is financial capability.
In difficult times such as those we are experiencing now, improving financial awareness, understanding and confidence is more important than ever. We must ensure that people have the guidance they need to make informed financial decisions so they can make adequate provision for themselves and their families.
Earlier this year Otto Thoresen set out a vision for an impartial, easy-to-access Money Guidance service, offering advice that is tailored to individuals’ needs and that will never try to sell them anything.
And, together with the FSA, we are now working to make this vision a reality. A £12 million pilot or “pathfinder” for the new service will be launched in the North West and North East regions of England early next year. It will give us valuable insights on how the service could be rolled out nationally.
In the meantime the Government and the FSA have launched a major awareness campaign to promote the FSA’s “Money Made Clear” website and consumer helpline. You may have seen the campaign in the press, heard the radio adverts, or spotted our advertising in supermarkets, and on petrol pumps.
And when it comes to financial capability, the old adage “get ‘em young” applies. From this September, financial capability and economic wellbeing have been a dedicated strand of the secondary curriculum in England. The Government has also allocated £11.5 million for “My Money”, a programme to improve financial education in schools. Among other things, this will support teaching primary school children about their Child Trust Fund, linking with the Government contribution to the Child Trust Fund accounts of each 7 year old, which will start from next September.
The final part of this savings jigsaw – and perhaps one of the most important - is ensuring the market is structured in a way to help people get the best out of it: driving competition, value for money and choice.
The Chancellor will set out further details of our thinking in this area in the Pre-Budget Report.
And this has also been the focus of the FSA’s Retail Distribution Review. We’re all looking forward to the RDR feedback statement next week. It’s clear that the IFA sector will play a vital part in the post-RDR world and I know that AIFA and its members have played an active and constructive in the development of the RDR proposals.
In the face of such uncertainty, financial advisers earn their fees more than ever. You all have a role to play in helping clients to navigate their way through these tough times. And, in the longer term, you can all play your part in restoring the confidence of consumers in the financial system.
Thanks once again to my generous hosts and may I wish AIFA and its members well for the coming year.
