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The Future of Financial Services

Lord Davies of Abersoch, Minister for Trade, Investment and Business,  Minister for Trade, Investment and Business (jointly with the Foreign and Commonwealth Office)
Mansion House, London,  28 May 2009

Lord Davies of Abersoch

Introduction

Britain has a very diverse economy. In the past 20 years we have become outstanding in a whole range of industries. But we are very good at talking ourselves down.

The reality of the UK today is that we are a knowledge-based economy, a diverse economy – and we are excellent at research and development.

We are leaders in life sciences; in nanotechnology; the maritime industries are growing exponentially; in pharmaceuticals; and the mobile phone industry – which didn’t exist 20 years ago – is one where we have got a real competitive position.

I could go on through a list of industries where Britain really has excelled.

And just look at the regeneration of some of our cities in the UK. I was in Manchester a couple of weeks ago and it was extraordinary to see the way it has been regenerated and the jobs that have been recreated.

The UK has changed, so we need to make sure that whatever discussion we are having – about whatever industry – is balanced.

But what I’m discovering, as Minister for Trade, is that if we don’t sell ourselves here in Britain, then our competition is certainly not going to do it for us. They’re going to talk us down.

 

The financial services industry

At this moment in time we have all sorts of question marks over the future of the financial services industry. So, as someone who is now travelling around the world as an ambassador for the UK, I think it’s important we pause for a moment and ensure we are balanced in our discussions about the financial services industry.

The reality of this industry and London’s position within it is that it’s a combination of tradition, of excellence – but also of innovation.

Look at the London Metals exchange - it’s seen roughly a 22% increase in volume last year. It’s right at the heart of metals trading across the world.

Look at Lloyd’s of London - it’s a hugely important part of the insurance industry across the world.

Look at the surplus from the financial services industry in the UK economy last year, which was £43bn.

Look at the London stock Exchange and the respect it enjoys across the world. And the way people still see the centre for capital-raising as London, whether it be equity or debt.

Look at the fact we’ve got the largest insurance market in Europe - and the second largest in the world.

Look at the legal profession – 98% of commercial arbitration cases are done in London.

All absolutely extraordinary achievements.

But my worry, having moved out of the industry and into government, is that some institutions are behaving already as if nothing has happened.

Moving back to claiming the same level of bonuses; moving back to the same business models; carrying on as if nothing has happened.

When you talk to people on the street and talk to small and medium sized enterprises cross Britain, as I do, you see the depth of feeling and the anger towards the financial services industry.

So this is an industry, in my view, that has to fundamentally change. In three to five years it will be fundamentally different, across the world, to how it is today. The Chinese believe that; the Indians believe that; it’s an industry that’s going to go through substantial change.

Nobody has the answer to exactly how it’s going to shape up. But I believe that the more we debate the key issues, the more that clarity will emerge around the shape and organisation of the industry in the future.

 

Questions to address

Some of the questions I have – and I served on the board of a bank for a long time – include:

What is the right governance model for a bank? Some of the models we had did not work.

What is the right mix to have of executives and non-executives? We had lots of different examples, so which is the right model?

What is the role of the audit committee? Should there be outsiders on it that do not sit on the board?

What is the role of the regulator? How intrusive should they be on strategy; and on mergers and acquisitions? It’s clear that in some cases when institutions got into trouble, it was M&A and that last deal that broke their bank.

What is the right liquidity model given that lots of investment banks are still reliant on wholesale markets for funding. What is the right model if you’re buying long-term assets but taking short-term deposits - should that be allowed?

What are we going to do about the fact that institutions have two sets of accounts? We have one set of accounting rules for America and another for the rest of the world. Until such time as we have one set of accounting rules for the world, in my opinion, we risk having another crisis.

I think there is a debate to be had about the role of the shareholder. Given that the hedge funds represent such a large percentage of the shareholding in banks, and that they don’t want to even meet the management sometimes, how do you interact with hedge funds when you run a bank?

 

Conclusion

Finally, I think there is a big question now about the role of banks in society. We can’t have banks going bust across the world and then just say in response, “That’s fine, we’ve bailed them out, we’ll just move on”. Society will not allow it.

So there are some very fundamental questions about the industry. And it’s my concern, looking at it from my perspective, that the industry seems to be moving back to business as usual. But it’s not business as usual. There have to be fundamental changes. So let’s discuss them while we have the chance today.