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.