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Newsroom & speeches
10 September 2009
The UK financial services sector brings clear benefits to the EU. London is a global hub, and the access to capital, expertise, and skills that the EU enjoys from its access to London is vast.
However we should also be clear that the UK and London benefits, and indeed needs, the EU. In this globalised age, it is through the EU that we can ensure financial stability, and improved opportunity.
That is why I believe it is vital that we work with and in the EU – we can and must provide the leadership, the critical analysis, and the engagement required. It is also why we need a strong and well-regulated EU, to advance our ideas globally. The future success of London and our financial services industry will depend on the shape and scale of the new EU and global regulation. This is a task that we as the UK cannot undertake on our own and which the EU cannot undertake successfully without the UK. Collectively, we have a responsibility to promote financial stability and economic recovery.
There should be no doubt that London and the UK financial centre is critical to the EU economy. London is the leading centre for trading international bonds, the largest centre for over-the-counter (off-exchange) derivatives, the largest market for foreign exchange trading, and has a well-established reputation for asset management. It is highly international, and open, and success in London drives growth across the global economy.
But it is also clear that the UK and London benefit from our place in the EU. First, because it is not simply enough to have in place high regulatory standards in the UK to ensure stability. And second, because we benefit from the EU’s open and single market, and the influence it can bring to the opening up of other markets.
On the first, ensuring high standards, we have seen from the recent financial crisis that what happens outside the UK can have significant impacts on our economy and our finances. We believe that an open market and financial globalisation is in the UK’s interests, but we also recognise that open markets must be properly regulated. And we cannot do this on our own. We know that we need good regulation – not just in London and the UK – but across Europe. We therefore need to ensure that the EU applies similarly high standards of regulation. Through the EU we can ensure that the single market applies a strong coherent set of rules for financial services to ensure stability and growth.
Secondly, as I have said, we need to ensure that financial institutions based in London continue to have access to European and global markets – including wholesale, insurance and asset management.
As we prepare for economic recovery, we need to facilitate growth and this means both promoting London as ‘open for business’ and working with Europe to ensure that we can access markets across national boundaries.
For these two reasons – protecting our markets and our economy, and promoting our financial services industry, the success of the financial services industry is critically bound up in the standards we set in the UK, Europe and in other global market places. We should be clear that it is through the EU that the UK can achieve these objectives, and that when it does, the UK benefits enormously from its membership of the EU.
Our goal should be to ensure collectively – and I mean here businesses, governments, and regulators working together – to have a regulatory framework that will deliver sustainable and responsible growth and allow financial institutions based in London to access vibrant markets in Europe. To succeed, we need to work collaboratively with Europe to shape decision making – not simply belly-ache or grand-stand. London is the financial services capital in Europe, and as such, we need to be at the forefront of the debate about reforms.
To achieve this we need to do three things. First, we need to provide the intellectual leadership. Second we need to carefully explain, where relevant, where we see problems with what Europe proposes. And third, we need to engage with Europe early and at every opportunity to actively promote our ideas.
Providing intellectual leadership means continuing to develop solutions to the problems we have encountered, whilst not stifling markets and innovation. Here we have much to teach Europe.
We need to explain to Europe when its proposals do not meet intended objectives, or could have unintended consequences. We can only do that through collaboration – simply grand-standing will not work.
With this spirit in mind, we need to acknowledge the legitimate concerns that lie behind EU initiatives on hedge funds, alternative investment fund management and Solvency II. But we need to ensure that we set out the evidence and the consequences of changes to deliver reform that is proportionate and appropriate.
We are having success with this approach – I visited Brussels earlier this week and was pleased to see growing support for a more proportionate directive on hedge funds. We have explained the benefits of private equity and the unintended consequences of legislation. The EU needs to support the role that private equity can play in recapitalising businesses with inadequate capital structures. I was further encouraged in a meeting this week with Charlie McCreevy, but we need to continue to work with the Commission to fix this Directive and make it better, not to kill it.
And with regards to solvency levels for insurance firms, we will continue to work with the EU to deliver prudential regulation, avoiding knee-jerk reactions and over-conservatism for its sake alone. Solvency II will be good for our insurers and others in Europe, but work is still required if we are to avoid harmful consequences in one or two areas, including the annuity market.
Finally, where we need to make progress, we need to spend time and energy working with Europe to negotiate effectively.
I take this very seriously. Government has a crucial role to play.
As business leaders, you also have a critical role to support us in this strategy. Good policy needs to be based on solid evidence and stakeholder feedback; and I would urge you to consider how you might engage with Europe through effective consultation and lobbying, not just with the Commission and Council of Ministers, but also with the European Parliament. It is disappointing that we now don’t have a voice within the important EPP group; this presents further difficulties for us in achieving good outcomes, especially on the AIFM Directive.
I have set out the approach that we are taking to work with Europe. I now want to turn to the approach that I believe Europe should take to succeed in achieving a stronger, global consensus in regulating financial markets.
Europe is unique in that it has years of experience of cooperation and common rules through the single market. That experience of compromise and balancing financial stability with consumer protection, fair competition and an open market gives the EU the authority to lead.
However, to exert that leadership it must be disciplined and follow two simple steps:
This may include EU Member States making sacrifices to accommodate non-EU legal traditions and practices. The “compromise” that is familiar within the EU needs to be practised globally.
Our shared objective should be to secure quality regulation at a global level mirroring the progress made in the EU in the last 10-15 years with the single market. If we can achieve this we can repeat the EU win/win by securing a truly global financial market.
To ensure we get the best rules possible it is essential that financial institutions provide policymakers with evidence to ensure that regulation meets its objectives and does not have unintended consequences. I have been struck by how much progress we have made on private equity on the basis of evidence and how little progress we made when people just complained.
Engagement with Governments, business and citizens is critical when preparing legislation. The FSA in the UK has long established procedures in which industry and users have confidence. The EU needs to establish similarly credible procedures, if we are to develop standards that will be adopted as best practice globally.
And once we have developed them, we need to take these best practice ideas and standards abroad and sell them to other jurisdictions. That way we can ensure global financial market stability, combined with efficient allocation of capital, and so higher levels of global growth.
The vision we have for the EU single market is one that is open, efficient and stable providing the European and global economy with services that give value to market users.
So for the UK it matters that we engage with Europe and it matters that we get our strategies and reforms right in Europe. We need to take an active approach, working with business, to ensure that reforms are based on a solid understanding of markets and deliver responsible growth.
The EU now has the opportunity to provide global leadership, providing it follows some simple steps. The UK intends to continue to provide the intellectual thinking and will work to both increase the quality of global regulation and maintain London and the UK as the world’s leading financial centre.
