Category: Economy

The speech made by Mark Hoban, the then Financial Secretary to the Treasury, on 2 March 2011.

Good afternoon.

I’d like to start by saying that it’s a pleasure to be here today, less than a fortnight after the Government launched its latest consultation on financial regulation.

And I’m delighted that the early reaction to the consultation has been so positive.

Since May of last year, we’ve certainly come far.

But of course, we still have some way to go before this legislation is ready for the statute books.

And it’s for this reason we’ve decided that draft legislation should be subject to intensive pre-legislative scrutiny.

To get the draft Bill ready in time for scrutiny, we’ve had to shorten the period of consultation by a few weeks.

But we’re making every effort to ensure that all interested parties have the chance to help inform our thinking….

…through events like this; upcoming roundtable discussions and forthcoming meetings.

Today I want to concentrate on our proposals for the new Financial Conduct Authority.

But before I delve into this detail, I think it would be helpful if I outline a bit of the context.

Domestic Regulatory Reform – Where The FCA fits in

During the financial crisis the regulatory foundations laid by the previous administration were tried, and found to be sorely wanting.

As the pressure began to mount, cracks rapidly spread, exposing the structural flaws in the regulatory architecture.

And it was the taxpayer who was forced to intervene, to prop up the financial system, and prevent it from total collapse.

This is a situation we simply can’t afford to repeat.

So we’re putting in place a new regulatory architecture – one that will ensure all regulation of the financial system is effectively targeted.

As a first step, we are creating a single, dedicated, macro-prudential regulator.

… to ensure that any risks developing across the financial system are identified and dealt with.

This new body is the Financial Policy Committee – who, as part of the Bank of England, will have chief responsibility for maintaining financial stability and addressing systemic risk.

The interim FPC has now been appointed and will meet for the first time soon.

And at a more micro level, we’re setting up the Prudential Regulation Authority – as an operationally independent subsidiary of the Bank – with responsibility for prudential regulation of deposit takers and insurers.

By bringing together both micro and macro-prudential regulation under one roof, we will improve the coordination and coherence of financial supervision.

Why the Government is setting up the FCA

But that’s not the end of the story.

Far from it in fact.

If we’re to improve sustainability and resilience of the financial system, it’s vital that we safeguard the interests of savers, investors, and borrowers.

If customers have confidence in regulation, then they are more likely to invest, save and plan for the future.

So alongside a more secure regulatory base, we need a financial sector that works for everyone – that earns our confidence, competes for our services, and keeps us properly informed.

Which is why we’re setting up the new Financial Conduct Authority.

This new body will monitor the behaviour of all financial institutions – from the smallest retail credit union, to the very largest investment bank.

Yes, I recognise this is quite a broad church.

And that’s why a ‘one-size-fits-all’ approach just wouldn’t work.

Instead, the FCA will use its own judgment – its own discretion – to ascertain the level of intervention needed across different markets.

Whether in the retail, wholesale, or markets sphere – this new regulator’s actions will be guided by a single ambition: to protect and enhance confidence in the UK’s financial system.

Which will be complemented by three operational objectives.

The first of these is to facilitate efficiency and choice.

This will provide the impetus to bring down costs.

Improve consumer outcomes.

And ensure that there’s a wide-range of products, services and providers available on the market.

The FCA’s second operational objective is to secure an appropriate degree of protection for consumers.

So that the products they invest in, are the products that are advertised.

Where financial information isn’t misleading, disingenuous, or ill-informed.

And where people understand the risks that they’re undertaking.

Let me be clear, what is appropriate protection for a customer taking out a mortgage will not be the same as for an investment bank hedging its interest rate exposures.

And “appropriate” for retail consumers doesn’t mean they should not take on responsibility for their actions

And finally, the third operational objective of the FCA is to preserve market integrity.

To protect and enhance the soundness, stability and resilience of our financial system.

And improve the way our markets function.

Taken together, these reforms will help instill greater trust and confidence in our financial sector.

This has obvious benefits for consumers, but also for you – the industry – more generally.

How, you might ask?

Well, it will encourage more people to invest in your products.

It will make financial markets more accessible to a wider audience.

And ultimately, increase demand for the services you provide.

How the FCA will be different

Under the FCA, the regulation of market conduct will be very different.

To start with, this new body will be the first to have a single focus on the conduct of business.

It’s also the case that we want the FCA to play a far stronger role promoting competition than its FSA predecessor.

Regulation in itself is not enough to promote good consumer outcomes – we need to see competition between providers and choice between products.

That’s why we’re making it one of the FCA’s formal duties to promote competition more broadly.

Because I believe that competition is a powerful tool to deliver better outcomes for the consumer.

It enables consumers to shop around, get a better deal, and have confidence in the products they’re buying into.

So consumers need the right kind of information to enable them to shop around, we need to make it easier to them to switch between products and to compare their respective features.

This can only be a good thing for the financial sector as a whole.

Under the FCA, there will also be important changes in the approach to conduct regulation.

In the past, the onus of conduct regulation has always been on the point of sale.

Under the FCA this will still remain important, but the new regulator will complement this traditional focus on sales, marketing and disclosure, with an approach that tackles the issue from a different angle…

…with a greater focus on products themselves.

This will allow the FCA to take greater account of the products people are buying into.

Their volatility.

Their returns.

And the risks involved.

It will mean that the FCA will look at how financial products are evolving.

And take action if it feels that consumers are suffering, or there’s a risk that they may suffer in the future.

For this reason we want to give the FCA the power to ban products where it spots a serious problem.

Now I understand that certain quarters may feel apprehensive about this development.

So I’d like to reassure you that we recognise the importance of striking the right balance between protecting consumers… and providing certainty for the financial sector.

Which is why we’ve tasked the FCA with consulting on a set of principles that must be met before such action is taken.

This way, we’ll know where we stand.

What we can expect from this new regulator.

But also what’s expected from the industry.

And this way, consumers will have a greater confidence in the products that are on offer, and be able to participate more freely in financial markets.

Transparency

Openness and transparency will be at the heart of the FCA’s work.

We expect the FCA to have a regulatory culture based on a presumption of transparency

…so that it makes greater use of its powers to make disclosures itself or require disclosures by firms, whilst respecting the appropriate treatment of confidential information.

To further strengthen this we’re introducing two new powers in relation to transparency and disclosure.

The first of these powers will enable warning notices to published.

I know that some people may think differently, but allowing consumers to know if enforcement action is underway is incredibly important.

If the firm in question is going through the enforcement process – but continues to carry out that activity – then surely it’s our responsibility to flag this up to its customers and to others who may have an interest in what the firm is doing.

I understand that some of you have concerns about this new power… but there’s in some instances the issue has been exaggerated… and I’d like to address some of these misconceptions.

First of all, I’ve seen that some people believe that the FCA will publish the details of every warning notice it issues.

I can assure you that this isn’t the case.

Yes, the FCA will be free to publicise the existence of a warning notice where it sees fit.

But let me be clear, this is a power, not a duty.

So if disclosure is not in the interests of the consumer…

…causes reputational damage disproportionate to the matter at hand…

…or undermines the regulator’s position…

…then the FCA will be able to use its own discretion when deciding if disclosure is really in the public interest.

The second rumour I’d like to dispel is that the subject of a warning notice will have no say in events as they unfold.

Let me be clear, before giving any details to the general public, the regulator will notify the firm of its intentions.

At no point in this process will the firm be left in the dark… or feel that their views have not been taken into account.

And the final story I’d like to quash is that the FCA will never make an admission if enforcement action comes to a halt.

In fact, the opposite is the case.

If the regulator decides to stop an investigation, it will issue a ‘notice of discontinuance’…

…this will ensure that the FCA, like the industry, will also be publically accountable for their actions.

And this gives industry and the public an opportunity to assess the regulator’s success in taking enforcement action.

I will say more on the subject of accountability in a moment…

…but let me first set out briefly why we are also taking a new transparency power in relation to financial promotions, as greater transparency will be central to the work of the FCA.

This is why the second power of disclosure we’re consulting on relates to misleading financial advertising.

Confusing or ambiguous adverts are a key source of detriment for retail consumers.

Where at times products are being sold based upon inaccurate descriptions of the costs involved, the returns you’ll get, or the risks you’ll be undertaking as a consumer.

But current powers mean that – more often than not – the regulator is unable to publish details of the action it takes to deal with misleading financial promotions.

So, as part of our consultation, we’re proposing that the FCA should be able to publish all the details relating to the withdrawal of misleading advertisements.

This will increase confidence in the regulator’s ability to protect consumers.

Make the actions of the regulator more understandable to consumers and to the industry as a whole.

And engender better practice across financial markets, by making firms’ misconduct more visible to the general public.

Accountability

But these reforms are not just about new powers for the regulator, and greater transparency requirements on firms.

The Government will ensure that the regulator will be accountable to those it regulates…

…through requirements to consult and carry out cost benefit analysis

…through statutory panels, including a new markets panel

…and through the principles of regulation on openness and transparency which set out how we can expect the regulator to behave.

And we want to go further and see greater accountability and transparency where things go wrong

We will therefore legislate for the FCA to be required to make a report to the Treasury where there has been significant regulatory failure…

…and for this report to be laid before Parliament so industry and consumers can see what went wrong and why.

FOS and the FCA

We are also planning to reinforce the distinction between the roles of the FCA and the Financial Ombudsman Service, to give firms greater clarity and certainty.

We need to strike the right balance between the role of the regulator in preventing or intervening early in issues which may have a wider impact…

…and the role of FOS in resolving individual disputes between consumers and firms.

So we will strengthen and formalise the cooperation and coordination mechanisms between the FOS and FCA through a statutory requirement to produce an MOU.

Conclusion

So in conclusion, it is true that the FCA will be more interventionist than the regulatory authorities of the past.

And the Government makes no apologies for that fact.

Having a strong and focussed conduct of business regulator will be an asset to our economy – and to the financial sector itself.

It will help instil a sense of trust in the services you provide.

It will preserve our country’s reputation as the world’s leading financial centre.

And it will create new opportunities for you, the industry, by giving everyone, regardless of their financial acumen, the confidence to invest in the products you supply.

I look forward to hearing your views on this matter.

Your ideas for how the FCA should operate.

And your thoughts on how we’re progressing.

So that together we can build a stronger financial sector.

One that helps drive the economic recovery; meets the needs of business; and works to deliver the right outcomes for its customers.

Thank you.

The speech made by Mark Hoban, the then Financial Secretary to the Treasury, on 3 March 2011.

Introduction

Thank you.

It’s a pleasure to be here today with Scottish Financial Enterprise.

With almost one in ten jobs in Scotland based in financial services… you already represent a significant part of this nation’s economy.

And having grown by over a third in the last 5 years, I don’t envisage your importance diminishing…

…Quite the opposite in fact.

A strong Scottish financial sector will underpin a prosperous and successful Scottish economy.

Not just as a source of prosperity in your own right, but also because it’s your industry that helps make an entrepreneur’s vision become a reality.

Your industry that provides the finance needed for investment and enterprise.

And it’s your industry that will prove vital in supporting growth and securing the economic recovery.

Today, however, I would like to talk about the Government’s plans for the economy.

The important role that the financial services sector has to play.

And how this fits in with our approach to financial regulation.

As the Minister responsible for financial services, I’m well aware of the issues you’re currently facing.

That businesses in Scotland have suffered in recent years.

Where on the one hand, you hear Government calling for greater private investment.

But on the other, the impact of the financial crisis has led to a general re-pricing of risk… and that investment opportunities are not as clear cut as they used to be.

From a policy-making perspective, this is perhaps one of our greatest challenges.

Because investment and growth are one of the same.

They’re mutually reinforcing.

To the extent that you struggle to have one without the other.

And this is a dilemma that any Government faces in the wake of a downturn.

Where growth has taken a hit, confidence has suffered, and investment prospects are more difficult to forecast… what’s the solution?

Economic strategy

Well this Government’s answer has been to set out a clear and credible plan for growth.

After a period of turmoil, what investors need is some certainty.

And that’s what we’ve provided.

We’ve made it clear that tackling the deficit is our chief priority.

Because allowing uncertainty surrounding the public finances to continue will undermine confidence.

It would risk spiralling interest rates, rising inflation and higher taxes in the future to compensate for wasteful expenditure today.

So yes, we’ve had to make difficult judgements about how we spend our money. But the alternative – to do nothing – would have damaged the economy for years to come.

That’s why we will eliminate the structural current deficit over the next four years.

Return debt to a falling path over the same period.

And place our public finances on a stable footing.

With the emphasis firmly on cuts to public expenditure… as opposed to tax rises for individuals and businesses.

Last year’s Spending Review saw us take a big step towards delivering this promise – and it’s a promise we fully intend to keep.

Government investment

But let’s be clear.

Returning our public finances to a stable footing is not enough.

There’s also an important role for Government in supporting the private sector… by creating a stable and competitive tax system.

In our first Budget, we announced our plan to create the most competitive corporate tax regime in the G20.

We said we’d look at the problems that had plagued the system in the past.

And listen to businesses ideas for reform.

What became apparent was that two things had to change.

First, that our headline rates were putting us at a competitive disadvantage.

That over the past decade, governments across the world had been cutting corporation tax, while we had stagnated.

And if we want growth… if we want to attract business from across the world… then this is a situation that has to be rectified.

That’s why we’ve chosen to cut corporation tax by 1% this year…and in each of the next three years.

So that by 2014, we’ll have a headline rate of just 24%.

This will be the lowest rate of any major Western economy, one of the most competitive in the G20, and the lowest this country has ever seen.

The second concern that businesses voiced was the growing uncertainty that had been symptomatic of our predecessors’ approach to tax policy.

With the introduction of two fiscal events for every financial year.

Each one jam-packed with tax amendments.

All of which were made under the veneer of consultation.

While in reality, businesses often had little or no say in the tinkering of tax policy, let alone the frequency of these changes.

So we’ve adopted a very different approach.

Putting greater stability and predictability at the very heart of our tax system.

And seeking to give businesses the certainty and confidence needed to make long-term investment decisions.

This is something we demonstrated last year… having published our Corporate Tax Road Map – setting out our long-term plans for CT reform.

This is all part of our new approach to tax policy making.

One that is more collaborative, more open, and more transparent.

Because competitiveness is not just about having lower rates… it’s also about the way you tax; how you make tax changes; and the costs of compliance.

SME access to finance

But on the path to sustainable growth, access to finance remains an obstacle.

And the reasons are clear for all to see.

Financial institutions have retrenched; weathered the financial storm; and looked to rebuild their balance sheets.

Credit has become harder to come by; investment has suffered; and the flow of cheap money has all but dried up.

Small and medium-sized enterprises in particular are finding it difficult to secure affordable funding.

And if we want a private sector recovery, this is something we have to address.

In Scotland, SMEs represent almost 99% of all businesses.

They’re easily the nation’s largest employer.

And ultimately, it’s their success that defines growth in the economy.

So we’ve been looking at how to create the right incentives to promote responsible and sustainable lending…

…not just to help the small businesses we have today, but to also to invest in the industries of tomorrow.

Whether it’s green technologies, advanced manufacturing, pharmaceuticals, engineering or whatever the future may hold, it will be largely built on the back of private finance.

In our July Green Paper – Financing a Private Sector Recovery – we assessed the availability of business finance in a recovering economy, in particular for creditworthy SMEs.

And as part of our response to this paper, we’ve announced a series of measures to increase the flow of resources, such as:

The £2.5bn bank-led Business Growth Fund – to provide equity investment to established and growing businesses.
Continued support for the Enterprise Finance Guarantee – to enable over £2bn of lending to small business.

£200m of additional funding for the Enterprise Capital Funds…

… And just a few weeks ago, we reached an agreement with our largest banks to lend at least £76 billion this year – £10bn more than last year – to help growing small businesses.

But it’s also apparent that many businesses still feel shut out of the equity financing market.

That they’ve become over-reliant on bank lending as their primary source of external finance, when other types of funding would better suit their needs.

This is something we’re keen to address.

Because… with over 70% of the European equity market… and a vast array of specialist services and expertise… there’s a real opportunity to do more.

And as one of Europe’s largest financial centres, we have stay vigilant when it comes to the Commission’s busy regulatory agenda.

Domestic regulatory agenda

And we have been busy on the domestic regulatory front too.

During the financial crisis the regulatory foundations laid by the previous administration were tried, and found to be sorely wanting.

As the pressure began to mount, cracks rapidly spread, exposing the structural flaws in the regulatory architecture.

And it was the taxpayer who was forced to intervene, to prop up the financial system, and prevent it from total collapse.

This is a situation we simply can’t afford to repeat.

So we’re putting in place a new regulatory architecture – one that will ensure all regulation of the financial system is effectively targeted.

We’ve started by doing away with the failed tripartite system – where responsibility for the financial system was diluted across the Bank of England, the Financial Services Authority, and the Treasury.

It was a model that contained a number of inherent weaknesses.

First, it placed responsibility for all financial regulation in the hands of a single regulator – the FSA. Its dual mandate: supervising the safety and soundness of firms while regulating the relationship between companies and their customers.

With so many objectives, this led to a loss focus.

And second, the tripartite regime gave the Bank of England partial responsibility for financial stability, but it lacked the tools to do tackle the problems it identified.

In essence, there was a lack of clear focus and responsibility.

But regulatory structure was only one part of the problem.

Too much emphasis was placed on ticking the right boxes and filling in the right forms, as opposed to actual analysis of risk.

Most worryingly, the old system prevented the regulatory authorities from exercising their own judgement – their hands we’re tied in bureaucratic knots.

So we’re condemning this arbitrary approach the history books…

…and taking forward reforms that will give supervisors more discretion to use their own judgement, their own expertise.

As when tackling the challenges posed by individual firms and particular products, a one-size-fits-all approach doesn’t work for such a diverse and complex sector.

As a first step, we are creating a single, dedicated, macro-prudential regulator.

… to ensure that any risks developing across the financial system are identified and dealt with.

This new body is the Financial Policy Committee – who, as part of the Bank of England, will have chief responsibility for maintaining financial stability and addressing systemic risk.

The interim FPC has now been appointed and will meet for the first time in the very near future.

And at a more micro level, we’re setting up the Prudential Regulation Authority – as an operationally independent subsidiary of the Bank – with responsibility for prudential regulation of deposit takers and insurers.

By bringing together both micro and macro-prudential regulation under one roof, we will improve the coordination and coherence of financial supervision.

But that’s not the end of the story.

Far from it in fact.

If we’re to improve sustainability and resilience of the financial system, it’s vital that we safeguard the interests of savers, investors, and borrowers.

If customers have confidence in regulation, then they are more likely to invest, save and plan for the future.

So alongside a more secure regulatory base, we need a financial sector that works for everyone – that earns our confidence, competes for our services, and keeps us properly informed.

Which is why we’re setting up the new Financial Conduct Authority.

This new body will monitor the behaviour of all financial institutions – from the smallest retail credit union, to the very largest investment bank.

Whether in the retail, wholesale, or markets sphere – this new regulator’s actions will be guided by a single ambition: to protect and enhance confidence in the UK’s financial system.

Which in turn will encourage more people to invest in your products.

Make financial markets more accessible to a wider audience.

And ultimately, increase demand for the services you provide.

Conclusion

So to finish I’d like to reiterate that few governments have faced challenges like those seen today.

But we’ve risen to these challenges by providing a more stable tax system, to mitigate uncertainty.

Increased access to finance, to support the recovery.

Reformed our financial architecture, to promote stability and confidence.

And, most importantly of all, delivered macroeconomic stability, to help you plan for the future.

But now I’d be keen to hear your ideas for supporting growth in Scotland.

Your thoughts on what more needs to be done.

And your plans for the future.

Thank you.

The speech made by Mark Hoban, the then Financial Secretary to the Treasury, on 24 March 2011.

Thank you and good morning everyone.

Throughout its long history… from its beginnings as a small group of coffee-houses with a sideline in commodity and stock prices… to today’s high-tech trading platform… the London Stock Exchange has provided the capital to grow and develop businesses both at home and abroad.

And like the economy, the LSE has had to change; adapt; and branch out into new and exciting markets.

AIM, of course, being an excellent example of this.

Where in a little over 15 years it’s gone from a small exchange, with a focus on domestic SMEs, to an international marketplace that’s raised over £70 billion pounds worth of capital investment.

To steal a phrase from your Budget submission Xavier, AIM is one of the important rungs on the equity funding ladder…

…but I know that there’s much more we need to do to finance growth in our economy.

Limited access to finance is one of the barriers to business development we identified in our Plan for Growth, which we published yesterday.

Our Plan is also rooted in the recognition that the ‘success’ we enjoyed in the run up to the financial crisis was neither stable nor sustainable.

That growth was fuelled by debt – both public and private.

And it was too heavily concentrated here in London and the South East.

Which is why we need a new model for growth.

One that builds on our strengths.

Ensures our economy is more sustainable.

And tears down the barriers that are preventing SMEs and mid-caps from being the engines of domestic success.

Plan for growth

In pursuit of this, we’ve set out four key ambitions that will guide economic policy for the years to come.

• To create the most competitive tax system in the G20.

• Encourage investment and exports as a route to a more balanced economy.

• Create a more educated workforce that is the most flexible in Europe.

• And make the UK the best place in Europe to start, finance and grow a business.

So I’ll take each in turn.

Starting with a competitive tax system.

Competitive tax system

Since coming to power we’ve already made great strides towards delivering on this ambition.

Having committed to cutting corporation tax in each and every year of this Parliament.

Reforming the process for making tax policy… through greater consultation and the publication of draft legislation.

And having set up the Office for Tax Simplification – whose work has enabled us to scrap over 40 tax reliefs and look at options to merge the operation of income tax and National Insurance Contributions.

But as part of the Growth Review we’ve gone a step further.

While in June’s Budget we announced a one per cent reduction in the headline rate of CT for every year to 2014…

…Yesterday’s Budget announced a further reduction in the main rate of CT… Taking it down to 26 per cent this year, and just 23 per cent by 2014.

Yet lower tax rates are just one part of the story.

In a global economy we need the right tax framework to retain and attract multinationals…

…So we’ve also set out our plans for Controlled Foreign Company rules, to make them more competitive, and more territorial.

And to ensure that the UK remains a world-leader in innovation, we’ve introduced a new 10 per cent rate of corporation tax on all income from patents… while increasing R&D tax credit for small businesses to 200 per cent… Subject, of course, to State Aid approval.

Taken together these measures will not only make the UK a more attractive place to locate…But also support higher levels of investment across the whole economy.

Creating a more balanced economy by encouraging investments and exports

Yet supporting investment is one thing, but we also have to ensure that growth is more sustainable, and certainly more balanced than we’ve seen in the past.

We need an economy that benefits everyone, with growth in every part of the country – not just London and the South East… and an economy that exports high-quality, high-tech goods to the rest of the world.

This is our second ambition.

As it’s no secret that Britain has become too reliant on a small number of sectors – based in an even smaller number of places – to help support the rest of the economy.

Which is why the Chancellor announced the creation of 21 new Enterprise Zones across the country.

Where businesses who choose to locate in these regions will benefit from lower business rates.

And the rates they do pay will be invested directly back into that area – not siphoned off by the Treasury.

These measures will help realise the potential of communities from Weybridge to Tyne Bridge, and Manchester to Winchester.

They are designed to help develop places that demonstrate a wealth of untapped potential.

So that every region has the opportunity to build on their strengths, and take advantage of local opportunities.

Britain is no longer the workshop of the world.

We have instead become increasingly reliant on imported goods as our exports have fallen.

And we’re yet to take advantage of opportunities in new markets… which is why we still export more to Ireland than to Brazil, Russia, India, and China.

We’re determined to address this.

And we see small and mid-cap firms as a key part of the solution.

Across Government – and in partnership with our banks – we are putting together a package of support to help SMEs and midcaps break into new markets and access the finance needed to encourage trade.

A better educated and more flexible workforce

But if we want a high-tech economy; with higher exports; and businesses that are able to compete on an international stage, then Britain needs workers with the right skills to help make this a reality.

Which is why our third ambition is to create a better educated and more flexible workforce.

To help make this a reality the Chancellor announced that we’re allocating £180 million to deliver 50,000 additional apprenticeship places.

The demands of technology mean that we must work with small and mid-cap firms to help them take on some of the extra 8,500 advanced and higher apprenticeship schemes we announced yesterday…

…This will enable us to compete with the best in the world.

This comes on top of our longer term reforms to education – championed by Michael Gove – to raise overall standards in our schools.

But while the quality of our workers has held businesses back, so has the increasing burden of red-tape.

Where employment laws have undermined recruitment.

And planning regulation has discouraged much needed building – whether it’s new homes, new infrastructure, or new commercial premises.

Our radical reforms to regulation will set businesses free – allowing you to create jobs, instead of battle bureaucracy.

Which is why we’ve announced a moratorium that will exempt all micro and start-up businesses from new measures for the next three years.

And it’s why we are launching a public consultation to identify the most burdensome regulations, with the presumption that regulation should be cut, unless there’s a good reason for it to stay.

Creating the right businesss environment

But on the path to sustainable growth, SMEs still face considerable challenges when compared to their larger counterparts.

This is something that I know has been a real concern for businesses during the past few years.

Yet while the financial crisis has seen lending conditions deteriorate, access to finance has always been a major factor holding growth back in the UK.

The LSE recognise this with its championing of AIM and also of Order book for Retail Bonds, which improves firms’ access to debt markets.

And while this is already helping to address some of the funding gaps that exist…

…it’s a fact that if we want to create one of the best business environments in the world, then we need to go further.

The finance needs to be there to help businesses grow from a bright idea through to a successful mid-cap business and beyond.

Which is why we’ve announced:

• an increase in income tax relief, to 30 per cent, under the Enterprise Investment Scheme for equity investments in small companies and start-ups.

• A doubling of the lifetime limit on capital gains for Entrepreneurs’ Relief to £10 million – for the serial entrepreneur.

• And reached an agreement with our largest banks to increase the size of their Business Growth Fund to £2.5 billion – to grow established small businesses to mid-caps.

Proper financing will help businesses climb the ladder of equity funding.

But creating the conditions for investment requires work both here in London, but also across Europe as well.

And on this front, we’re being equally vigilant.

Europe

We know that raising capital can be expensive.

We want to reduce the costs so more of the money you raise can be invested in your business.

So you asked for an increase in the threshold for securities at which Prospectus is required… under the new proposals this will double to €5 million.

You wanted to see an increase in the number of investors needed before a Prospectus is required… well this has been raised from 100 to 150.

And in Britain we’re bringing forward the implementation of these measures and launched a consultation last week… So you can keep more of the money you raise.

SME markets

We want to see deeper and more liquid markets for SME, mid-cap, equities… and the future of those markets will be determined by a review of MIFID.

Now I know that the Company CEOs in this room no doubt find MIFID very dull and equally dry.

But that’s no reason for ignoring it.

Because the Review could have a profound affect on how easy it is for you to raise capital in the future.

And that’s why I’d encourage you to work with the Government, the LSE and others to create the right market framework for small and mid-cap firms.

And it’s why I hope you’ll continue to work with the Government to develop solutions to problems you’re facing.

Conclusion

Over the last few months we have listened to UK businesses.

We’ve held over 1,000 meetings to find out what you want from this Government.

Many of the proposals announced yesterday are a direct consequence of your requests.

You asked us to free you from red tape – we’ve done that.

Said you needed a more competitive tax system – we’ve done that.

Said that more needed to be done to train our young people – and we’ve done that too.

We’ve responded to your challenges.

So today I’d like to set you a challenge.

We’ve created the framework for growth… Now you have to build on it.

It’s now your turn to invest in Britain’s future.

Your time to recruit new workers.

And your opportunity to export goods and services the world over.

That is how we will drive growth in this country.

That is how we will create the jobs of the future.

And that is how we will build the more dynamic, prosperous and sustainable economy that this country deserves.

Thank you.

The speech made by Mark Hoban, the then Financial Secretary to the Treasury, on 6 July 2011.

Thank you for inviting me to speak here today a little over a year since we first came to Government.

And a year on from inheriting a rather unenviable economic situation.

The largest peace time deficit on record

An unbalanced economy still jittering from the crisis

And a financial sector climbing a steep path to recovery, but hindered by vast regulatory uncertainty.

The last twelve months however have given us cause for cautious optimism.

The budget deficit is falling from its record highs.

Output is growing as we rebalance away from debt-fuelled consumption to investment and export

Half a million new private sector jobs have been created in the last year – and that includes an extra 25,000 jobs in the Square Mile alone.

And we have set in motion some of the biggest ever changes to regulation of our financial sector to set the foundations of a more stable economy.

But herein lies the challenge. As the Chancellor said in his Mansion House speech two weeks ago, we have to confront the “British dilemma”.

As a global financial centre that generates hundreds of thousands of jobs, a successful banking and financial services industry is clearly in our national economic interests.

But, whilst we strive for global success in financial services, it’s clear that success should not come at the cost of wider economic stability.

We have to answer how we can create a successful, competitive and stable financial services sector.

And added to that we need a financial sector that earns the trust of its consumers.

What is often missed in the account of the financial crisis, is that it was also a crisis of trust between consumers and the financial system.

Before the crisis, consumers fell prey to predatory practices of some banks, such as mis-selling of Payment Protection Insurance; during the crisis consumers lived in fear of losing their lifelong savings; and now consumers often feel that banks are unfairly refusing credit, altering fees, or changing overdraft facilities.

As we emerge from the shadow of the financial crisis, we have an opportunity to tackle this crisis of trust. To reshape financial services for the future. To forge a system that is stable, competitive, and fair for consumers.

And in the last year we have already made significant progress towards that goal.

Independent Commission on banking

On coming to Government we established the Independent Commission on Banking to consider structural and non-structural reforms to the UK banking sector to promote financial stability and competition. In April it produced its Interim Report. A hugely valuable contribution to the domestic and international debate on regulatory reform.

As the Chancellor said in his Mansion House speech we accept in principle the two key recommendations of the report.

Bail-in instead of bail-out – so that private investors, not taxpayers bear the losses if things go wrong

And a ring fence around better capitalised high street banks to make them safer, and to protect their vital services to the economy if things go wrong.

Of course the Commission will produce its final report in September, and we look forward to its final recommendations.

Domestic regulatory reform: macro – and mirco-prudential regulation

In the mean time we have also embarked on fundamental reform of our domestic regulatory system.

It was the failure to foresee and prevent the crisis that has undermined trust in the sector of course, but also in the regulatory authorities. The tripartite system failed spectacularly in its responsibility to monitor and mitigate the systemic risks before the crisis. We are addressing these failures.

We are establishing a permanent Financial Policy Committee inside the Bank of England. Its job will be to monitor overall risks in the financial system, identify bubbles as they develop, spot dangerous inter-connections and stop excessive levels of leverage before it’s too late.

We are also abolishing the Financial Services Authority in its current form, and creating a new Prudential Regulation Authority with a focus on micro-prudential regulation. It will bring judgement to the vital task of regulating the soundness of individual firms that manage risk on their balance sheet. We are ending the tick box culture that dominated the tripartite system of regulation.

Three weeks ago the Interim FPC met for the first time, followed by the publication of the latest Bank of England Financial Stability Report. Both warned of continued sovereign and banking strains stemming from the Euro area and urged banks to use periods of strong earnings to store capital and build resilience against these risks.

These changes to regulatory supervision are essential to ensure that we more effectively monitor and address micro and macro prudential risks. They go a long way to regaining the trust of consumers in banks and the regulators.

Consumer at heart of regulation

But we need to go further. We have to place the consumer at the very heart of the regulatory system. Effective prudential regulation alone is not enough to deliver optimal outcomes for consumers.

In order to deliver the best outcomes for people, businesses and the economy, we need three further things:

Firstly, a competitive market that delivers efficient prices, a diversity of providers and products, and the innovative provision of new products and services that meet consumer needs

Secondly, consumers with the capability to engage with the financial system and take responsibility for their actions

Thirdly, consumers that are supported by robust, fair and proportionate consumer protection measures which build confidence in the financial services industry

Competition. Capability. Confidence.

We are embedding this ethos in the new regulatory framework.

And the new Financial Conduct Authority will be central to this.

As the new conduct regulator, it will have the single strategic objective to protect and enhance confidence in the UK financial system.

It will do this by promoting efficiency and choice, the bedrock of a competitive market….securing appropriate protection for consumers…and protecting and enhancing the integrity of the financial system.

Competition

Overlaying this, the FCA will also be under a statutory duty to promote competition, as it exercises its general functions.

Competition is vital to driving better outcomes for consumers and we fully expect that the FCA will be pro-active in executing this duty.

We expect the FCA to pro-actively increase transparency and disclosure across financial markets.

And in the future I would fully expect that the FCA to take the lead when it comes to tackling competition issues that cause consumer detriment.

Taking the example of payment protection insurance (PPI). In this scenario the stronger competition duty and powers we envisage for the FCA would have allowed it to take targeted action to intervene swiftly, and tackle head on the ‘point of sale advantage’ that credit providers had.

In other cases, where the FCA identifies a structural competition issue of concern, we are also providing the FCA with the power to initiate a referral to the OFT. And we are putting a duty on the OFT to set out its response. In this way, we believe the FCA and the OFT’s roles will complement each other in future, improving competition and outcomes for consumers.

Capability

But competition alone is not sufficient to deliver better consumer outcomes. We also need consumer capability and confidence.

Taking consumer capability first, it is vital that consumers have the capacity to take positive control of their finances, make educated financial decisions for themselves, take a more active role in managing their financial affairs.

Continued disengagement from the financial world threatens to leave many people unprepared for the unexpected or for later life – but it also risks exposing many customers to unresponsive financial services firms insufficiently focussed on their customers’ needs.

And we are tackling this head on. Only three weeks ago I spoke at the launch of the Money Advice Service, set up by government, which offers free and impartial financial advice to consumers – to help them take charge of their personal finances and play a more proactive role in the market.

It will help many people start to save or invest for the first time, but it will also help people get a better deal as more demanding, better informed customers.

At the same time, we have consulted on developing a new suite of simple financial products. Products that consumers can easily understand and that set the benchmark by which to compare other products and brands in the market. Products that should be aimed at the mass market, that should be available without regulated advice, that help people make sense of the market. And I will be announcing next steps on simple products shortly.

Confidence

But even with greater competition and greater consumer capability, there will be instances where we need to go further to deliver optimal consumer outcomes.

Competition and consumer capability needs to be buttressed by protection.

As such the FCA will have a clear objective to secure protection for consumers.

To that end the FCA will have a new power to publish the fact that it has taken action against a misleading or inaccurate financial advertisement.

The FCA will also have the power to ban products or to restrict certain product features. Again, looking back at the PPI, in a similar situation, the FCA would have the tools and authority to prohibit the selling of PPI products, such as the single premium PPI, until firms redesigned them and demonstrated that they could sell them safely.

This new power will enable the FCA to intervene more quickly and decisively where it spots a problem by imposing a temporary ban with immediate effect for up to 12 months. It will also enable the FCA to render unenforceable any contracts made in breach of the ban.

And we are also providing the FCA with the power to disclose the fact that it is taking disciplinary action against a firm or individual.

This new approach will act as a significant deterrent to firms and help establish best practice.

We have faced strong resistance from the industry on these proposals, but we will not shift.

These changes are absolutely essential if we are to deliver a real change in the conduct of regulated firms, instil greater confidence in financial products and services, and incentivise financial institutions to think of their consumers first. Of course, however, we are building necessary safeguards on the use of these powers to ensure that they are used appropriately.

We also want to see improvements in the market for consumer credit. In December last year the Treasury and the Department for Business, Innovation and Skills published a joint consultation on transferring responsibility for consumer credit regulation from the Office of Fair Trading to the FCA.

We believe bringing consumer credit into the same regulatory regime as other retail financial services can deliver strong protections for consumers; remove duplication and burdens on business; and improve market oversight.

Looking beyond regulation, both Departments are also carrying out a joint review of consumer credit and personal insolvency to ensure that we have a framework that is fair to consumers and fair to the industry. This review takes a broad scope looking at advertising of consumer credit, store cards, bank charges, and also covers all aspects of the consumer credit lifecycle, from the decision to take out a loan through to its redemption, including what happens when things go wrong.

We will publish summaries of the responses that we have received to both the review and the consumer credit consultation before the end of the month. The Government’s response, and our decision on the most appropriate regime for consumer credit, will follow later in the year.

With such a transformed regulatory environment it is important that the regulatory and advisory bodies work together to protect consumer outcomes. We are putting measures in place to ensure that the FCA will take into account information provided by the Financial Ombudsman Service and the Money Advice Service. And so that the Ombudsman Service can communicate it concerns about a product or service as clearly as necessary, we are also permitting it to publish determinations where it considers it appropriate.

None of these changes however, absolve individual firms of responsibility for the products they offer. The fact that a product has not been banned will not constitute a stamp of approval. Just as we want consumers to be able to take responsibility for their decisions, firms must remain accountable for their actions.

There remains the risk that the FCA won’t be able to prevent all conduct failings. And in those instances we need to ensure that the matter is handled decisively and efficiently by the regulator. We must ensure that we learn the lessons of the years of uncertainty for consumers – as was the case with mis-sold Payment Protection Insurance.

We are entrenching greater clarity and transparency in the redress process to ensure that the FCA really grasps the issue promptly and effectively, and provides consumers with confidence that they will receive swift, fair and consistent redress.

Conclusions

We have come a long way in a year, to answer the British Dilemma that I referred to at the start. We are reforming regulation of the financial sector create a market that:

Underpins a more stable economy.

Supports a wider economic recovery.

Delivers the best outcomes for consumers.

It’s in all our interests to have a safer, more secure and more resilient financial sector motivated by sustainability, stability and consumer welfare.

Last month, we put out our blueprint for reform and draft legislation for further consultation and pre-legislative scrutiny. And this week, we published a consolidated version of the Financial Services and Market Act as amended by our draft legislation.

I look forward to your continued input as we implement our reforms.

The engagement and ideas of those companies and organisations represented in the room tonight is critical to the success of this new framework.

We need to get this right today, to avoid another crisis tomorrow.

Thank you.