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Newsroom & speeches
24 November 2009
Thank you for inviting me here today. I was in Brighton less than 2 months ago for the Labour Party Conference, where Gordon Brown promised to rebuild our financial sector for the good of the whole economy.
It has been a busy two months – we have struck deals with major UK and international banks operating in the UK on bonuses, finalised RBS’s participation in the APS, and last week, we published the Financial Services Bill.
We have taken decisive action to support our banking system, and this has come at a considerable price to the tax-payer in the short-term. We have not intervened in the financial sector for its own sake. We have not saved the banks to save the bankers.
For centuries, the UK has led the world in providing finance. For generations, British people and businesses have benefited from the ability of our banks to support the aspirations of our companies and families.
Whilst I do not agree with Lloyd Blankfein’s comments that bankers are doing God’s work, I do believe that banks have a vital social role; they provide credit to home-owners and businesses, they facilitate saving and the safe transmission of funds. It isn’t simply banks – insurance companies provide security for future pensioners and protection against the consequences of unwelcome events.
Furthermore, in the UK, we have developed expertise and competitive advantage in financial services; 80% of Europe’s asset management industry operates from the UK. Financial services supports over 1 million jobs directly across the country and accounts for 8% of national output.
We often forget that banking and financial services means more than just the City of London. This is a sector that matters for jobs across the country, not simply in the financial services sector, but jobs in SMEs and industry that depend on banks for credit, advice and services.
We are committed to a thriving, highly competitive and responsible UK financial sector that is an example to the rest of the world.
But when we say we want our banks to be able to continue to be highly competitive, we mean it. Genuinely competitive businesses can stand on their own two feet; they do not need a safety blanket of implied taxpayer support.
On that definition, the events of the last two years have shown that too many banks around the world were not competitive. In the UK, our banks are only alive because the government has taken decisive, innovative action to protect the sector and the economy.
From the nationalisation of Northern Rock, the recapitalisation of Lloyds and Royal Bank of Scotland, and the guarantee of interbank lending, it has been actions by government that have kept our banks operating. The action we took in this country to protect the banking system has been replicated, in one form or another, across much of the world.
We learnt that some banks spectacularly misjudged risks and failed to hold enough capital and liquidity; that too many were obsessed by short-term results; that they had lost touch with the "real economy" they were meant to support.
The priorities must therefore to be to implement the necessary regulatory reform to ensure that banks are no longer able to take on dangerous levels of risk and to ensure that the taxpayer is fully protected.
These reforms need to be made at the national, regional and global level.
But regulatory reform must not kill innovation or stifle creativity. The health of the British economy relies on banks to support lending, and, through that, the creation of jobs and prosperity.
Taking these points in turn, we must continue to pursue regulatory reform. The process of reform began at the outset of the crisis. Our immediate concern was to beef up our ability to wind firms down with the Banking Special Provisions Act and then the Banking Act 2009.
UK reform proposals have been adopted as global standards through the Group of 20. Living wills, better structured compensation and higher, better capital standards and liquidity requirements are now being implemented by all our major competitors.
We have shown we are serious about protecting the competitiveness of the UK banking sector.
But what we need now is a new understanding of what a competitive banking sector means for the UK - a banking sector that only works in the good times is not competitive at all.
Last week, we published the Financial Services Bill, which will continue to drive further reform.
We will give the Financial Services Authority a statutory duty to implement living wills that will see banks genuinely confront their potential weaknesses and think very seriously about the challenges they would face if hit by crisis.
This importantly sits alongside work by the International Monetary Fund to seriously explore proposals to ensure that banks, not governments, meet the cost of future failures as part of a new social contract between finance and society.
This will not only mean taxpayers will not have to stand behind risky trading operations, but that banks should be far less likely to fail in the future. They will be competitive in the full sense of the word: independent, safe and strong.
We also know a competitive, stronger banking sector will be one with better-informed and protected customers. That is why we will form a new consumer education agency, roll out a nationwide money advice service and give consumers more rights when they challenge their bank.
And we will press to ensure rewards for senior bankers and traders are justified and do not contribute to excessive risk taking. The FSA will have powers to ensure that any proposed remuneration contracts which drive risky behaviour are not allowed to stand.
Sir David Walker will oblige more transparent and accountable approaches to high-end remuneration and place more responsibility on shareholders to act like engaged and responsible owners.
There is an important role here for Trade Union members who are member nominated trustees to work to set longer-term investment goals and exercise influence that will shape corporate values and behaviours.
We can never again have a situation where remuneration policies encourage senior bankers to take on risks, rewarding them handsomely in the good times, but leaving the taxpayer to pick up the tab when that risk backfires.
Asymmetrical remuneration policies, tilted in favour of risk, might be good for traders. but they are not good for customers, employees, creditors and owners of banks – or the taxpayer.
I am not here to bash bankers. The majority of people in banks are on modest salaries working in branches and service centres. We must not demonise a whole industry of hard working people because of a minority of irresponsible people in the City.
For Lloyds and RBS, we have negotiated no cash bonuses and deferral for those at the top, for those earning under £39,000, up to £2,000 will be payable in cash.
We will place greater responsibility on fund managers and others to act as responsible and engaged owners, and effective fiduciaries.
I look forward to Sir David Walker’s final report, which will be published this week, which will make important recommendations to strengthen governance.
But domestic reform will only take us so far. As the crisis has shown only too well, what happens in other countries matters, and we need to be satisfied that regulation is robust across the world and that our banks compete on a level footing.
Through the G20, we have agreed tough new rules on remuneration – we have been on the front-foot in implementing these.
We are in the process of agreeing tougher capital standards, to ensure that banks across the world hold sufficient high-quality capital to absorb losses
In Europe, we are working with partners to develop appropriate European supervision, capable of spotting and mitigating systemic risk and ensuring that all jurisdictions have robust regulatory regimes.
The Icelandic banking collapse has taught us that simply ‘getting it right here’ won’t protect our depositors.
But I’d like to end where I began. We need a strong, vibrant and dynamic financial services sector.
Tougher regulation is a necessity, but we must not kill our banks or our financial sector. We need to ensure that our financial services sector is competitive, creating jobs and wealth.
A diverse financial services sector, with a spread of business models, is critical to this. The Government wants to see a strong, competitive and sustainable building society sector in the future.
Whilst the traditional building society model has weathered the financial crisis relatively well, there are challenges ahead which must be addressed. The Government has taken action through the 2007 Building Societies and Mutual Societies Act to make it easier for mergers between different kinds of mutual.
We have been working with a ‘Building Societies Expert Group’ to highlight good governance in the sector; explore the scope for shared funding models to enable societies to diversify their funding; enable Building Societies to explore opportunities for raising core capital; and exploring the potential for sharing services.
I have been working with European partners to ensure that Directives agreed in Brussels don’t stifle our growth sectors in the UK. On the AIFM Directive, we are making progress in shaping the legislation to deliver a proportionate result that will not have harmful outcomes for asset management, a specialism in which the UK excels.
On Solvency II, we have a real opportunity to work with partners to deliver necessary reforms to the framework of insurance and meet customer needs for security.
The banking industry is changing; change can be disruptive and it can be scary. This change is necessary; we cannot allow the banking system to carry on as if nothing has happened.
We need to rebuild a financial sector capable of supporting long-term sustainable growth and creating jobs.
We need a diverse banking sector, with a strong mutual sector sitting alongside listed companies.
We need to earnestly reform regulation, curb excessive risk.
We need to campaign internationally to secure a level playing field for our banks and financial service providers and safety for our taxpayers.
We need to bring people with us as we rebuild our financial services sector. The Government has taken action, and will continue to act, but we need industry to play its part. We look to people like you, finance and legal professionals, to continue to work to drive up standards. This looks like a fascinating conference, and I wish you well.
Thank you.
