# = pounds sterling
HM Treasury News Release
156/98 24 September 1998
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STEPHEN BYERS OUTLINES PROPOSALS TO
"ENHANCE LONDON'S REPUTATION AND POSITION
IN FINANCIAL SERVICES"
"Our reforms of the financial services regulatory regime will
enhance our reputation as a clean and attractive place to do
business, and increase the public's confidence in the industry,"
said Chief Secretary Stephen Byers today. He was speaking to a
Financial Services Authority (FSA) conference in London where he
also gave examples of the type of behaviour which will be covered
by a new code of conduct.
He also emphasised the importance of having a robust regulatory
structure in place to maintain London's pre-eminence in the
financial services area at a time of global economic turmoil
elsewhere;
"Recent events in Japan and elsewhere have shown that highly
developed economies require highly developed and transparent
systems for supervising financial services. Where
supervision is ineffective and fails to command confidence
the health and growth prospects of the whole economy can be
threatened. London and the UK generally has an excellent
reputation. The creation of the FSA is an opportunity to
enhance that reputation further.
One area which will contribute to enhanced confidence is our
new measures to deal with market abuse. These fill a gap that
currently exists. A new code of market conduct will underpin
this regime. It will detail the type of abuses which we are
seeking to deter and set out safe harbours. Examples of the
kind of behaviour include:
artificial transactions which give the market the wrong
impression as to the real supply and demand for an
investment;
abusive squeezes whereby the position of one player in
the market, who has temporary control over the supply of
a product, results in arbitrary prices; and
misuse of privileged information which is not available
to the rest of the market.
These measures, linked to our proposals to deliver greater
consumer protection, are all aimed at making sure that the UK has
a fair and balanced regime fit for the future."
A copy of the full text of the Chief Secretary's speech is
attached.
NOTES FOR EDITORS
Proposals to modernise and simplify the structure of the UK's
financial regulatory structure were published as the draft
Financial Services and Markets Bill on 30 July 1998. A copy of
the Bill and associated information can be found on the
Treasury's website: http://www.hm-treasury.gov.uk and hard copies
can be obtained by calling 0191 215 0110 free of charge.
The public consultation period ends on 30 October 1998.
CHECK AGAINST DELIVERY
SPEECH BY RT HON STEPHEN BYERS MP, CHIEF SECRETARY TO THE
TREASURY, TO FSA CONFERENCE, 24 SEPTEMBER 1998
Introduction
1. The UK financial services industry is highly successful and
immensely important to the UK economy. It accounts for 7%
of our GDP. It employs over 1 million people. And of course
millions of people rely on its services. Most, if not all
individuals at some time purchase, and rely on, financial
products from pensions and insurance to securities and
derivatives.
2. Financial services provide an example of how the UK can
compete on quality and excellence both at home and throughout
the world. At the heart of the UK's financial services
industry is the City of London, one of the world's leading
financial centres. The London Stock Exchange is the largest
trade centre for foreign equities in the world. And the
Foreign Exchange market here is the largest and most
important in the world, with a daily turnover of around 500
billion dollars.
3. So an efficient and effective financial services industry is
vital for our prosperity, stability and international
competitiveness. Millions of people depend on the
availability of modern financial services and fair and honest
markets and advice.
4. To secure the future of the UK financial services industry,
it is vital to ensure the UK enjoys a high degree of
confidence and is seen as a clean place to do business.
Central to this is an effective regime of regulation.
5. An effective regulator needs a robust structure. It must
hold a high degree of market confidence. It must offer
protection to customers. It must be able to effectively
tackle malpractice and financial crime. And this should be
within a framework designed to ensure maximum cost
effectiveness.
6. Recent events in Japan and elsewhere have shown that highly
developed economies require highly developed and transparent
systems for supervising financial services. Where supervision
is ineffective and fails to command confidence the health and
growth prospects of the whole economy can be threatened.
7. Clean and transparent markets and robust financial
institutions are vital to the success of any economy,
particularly at a time of global economic turmoil. London and
the UK already have an excellent reputation. The creation of
the Financial Services Authority is an opportunity to enhance
that reputation further and create real competitive
advantage.
8. The introduction of the euro on 1 January next year will also
have significant implications for the financial services
industry.
9. We are the first British Government to declare for the
principle of monetary union. The fact is that it would not
be in our economic interests to join next January as there
is not the necessary convergence with the rest of Europe.
In order to ensure a genuine choice in the future, we must
also make the necessary practical preparations now. We are
working closely with business to do just that.
10. The introduction of the euro will present huge challenges and
opportunities to the Financial Markets. Not just in
preparation but also because of increased competition for
business.
11. I am confident the industry and the City of London will
maintain its competitive advantage. There are plenty of
institutions that are gearing up to take advantage of the new
opportunities that EMU will offer. We need to meet that
competition head on, and we are well placed to do so. But
no one - no institution - can rest on its laurels. The
Government is determined to do everything it can to enhance
London's reputation as one of the world's foremost financial
institutions, and by far the largest in our time zone.
12. That is why we're preparing Britain for the euro. And why
we're determined to put in place a regulatory environment fit
for the 21st Century. London and the UK must be the market
of choice for the global industry. All of us - Government
and industry need to do what we can to achieve that goal.
Economic stability
13. An essential precondition for a successful economy is a
platform of economic stability. Stability allows industry
to plan for the long-term future.
14. The action taken by this Government will ensure the necessary
slowing of the economy so we get back on track for steady and
sustainable growth and avoid a return to the boom and bust.
15. The first building block for high levels of growth and
employment is a stable economic framework. It is essential
to enable individuals, families and businesses to plan ahead
with confidence. That is why the Government has taken the
narrow party political advantage out of interest rates by
giving the Bank of England independence.
16. The Bank has raised interest rates to 71/2 per cent in order
to get inflation under control. Long-term interest rates
have fallen to their lowest level for well over 30 years.
Of course, the Government understands and recognises the
concerns of manufacturers, but what businesses fear most is
a return to the cycle of boom and bust which brought record
levels of business failures.
17. And that is why we have reduced government borrowing from 27
billion Pounds to 8 billion Pounds. A commitment to spend only what
we can afford. We have implemented a significant fiscal
tightening, equivalent to 3 1/2 of GDP over the 3 years from
coming into office. And we have maintained a tight control
over public spending - as we promised in our manifesto.
18. The Comprehensive Spending Review put in place firm three
year plans for each department. These plans fully meet our
fiscal rules, and at the same time provide an extra 19
billion Pounds for education and 21 billion Pounds for the NHS.
19. At a time of instability in the international economy, no
country is immune from the effects caused by the problems
currently being experienced in Asia and in Russia. But as
the balance of risks in the world economy has shifted, we are
committed to preserve the conditions for sustainable growth
and financial stability in the UK.
20. These decisions are right for the UK as a whole, and also for
the financial services industry.
21. Amidst the uncertainty, we have to keep our nerve.
22. We need to respond in two parts.
23. In the short-term, it is crucial that emerging markets and
developing countries press ahead with reform. The lesson
form the current crisis is not that market disciplines have
failed, but that in a global economy, with huge capital
flows, the absence of such disciplines can have a devastating
effect. Countries must put in place the right policy
framework - monetary policy targeted at low inflation, sound
and sustainable fiscal policies and structural reforms
designed to improve the supply side performance of the
economy. Tax systems that work. Strong properly regulated
and full transparent banking and financial systems.
24. And we need to consider how to strengthen the existing
international financial system to meet the new challenges of
the global economy.
25. There are a number of key priorities.
26. Promoting greater accountability and openness will strengthen
the incentives on governments to pursue sound policies, will
enable markets to price risk more accurately and should help
all countries to manage more effectively the risks of global
integration.
27. We must continue to work towards our goal of liberal capital
markets, but we must be cautious about how we do so, ensuring
that the right pre-conditions - in particular sound financial
systems - are in place
28. And also, at a time when we are calling for greater
accountability, transparency and disclosure o the part of
governments, it is essential that the international financial
institutions apply these principles themselves.
29. Recent developments have also underlined the vital importance
of sound, properly regulated financial institutions. The IMF
and the World Bank need to give this issue much higher
priority, working more closely together and with the main
international regulatory organisations.
30. Work is already going on in many of these areas. As the
impact is international, so the response must be
international too. We must design a new international
financial system for a new international financial age.
31. Just as the FSA is now the single regulator for UK owned
complex groups, we need a co-ordinating supervisor to oversee
the affairs of every large internationally active bank and
other financial company.
Why reform?
32. It is reform of our own system of regulation that I now turn.
Reform of our system of regulation has been well overdue.
Under the existing system, in order to undertake a full range
of financial services business, authorisation has had to be
sought from as many as five or six separate regulators. This
fragmentation has created scope for confused lines of
communication and a lack of clarity about who was responsible
for what.
33. And the system has been far from easy for the consumer to
understand. Nine regulators, eight complaints handling
schemes and four compensation schemes. Hardly user friendly!
34. And the system could also be inconsistent. Each of the
regulators operating under a different set of powers,
resulting in inconsistent treatment of similar sorts of
regulatory issues.
35. Perhaps most importantly, the regulatory regime no longer
reflects the reality of the development of financial services
markets. In the modern world UK banks and other financial
services businesses offer the full range of services from
mortgages through share dealing to arranging pensions and
life insurance. It simply does not make sense for these
businesses to be overseen by a number of different
regulators, particularly when the new activities could
clearly have a significant impact upon the financial health
of the core business.
Financial regulation: what we've done so far
36. Since coming into office in May 1997, we have already made
considerable progress in reforming the regulatory regime.
37. We quickly confirmed we would be setting up a single
regulator, the FSA. The FSA came into being last October
with responsibility for regulation under the Financial
Services Act. It is to be responsible for the full range of
financial regulation, including a grater independent element
in the oversight of Lloyd's. And with Royal Assent to the
Bank of England Act, it acquired responsibility for banking
supervision this Summer.
38. The single regulator will replace 9 existing regulators.
Organisational consolidation is already well under way, and
should see all the regulators housed under the same roof by
the end of the year.
39. The single regulator will bring many benefits. Firms will
no longer be regulated by multiple bodies and there will be
no duplication of effort. Regulatory requirements can be
rationalised.
40. For the consumer, the structure will be rationalised with
single points of access for the public for enquiries,
complaints and compensation.
41. And the industry will benefit because bringing different
regulators together will make regulation more cost effective.
42. The UK will be an even better place in which to invest, both
for institutions and individual investors. The new regime
will bring competitive advantage to the financial services
industry in the global marketplace. And it will allow
individuals to invest and save for the future with greater
confidence.
Draft Financial Services and Markets Bill
43. One of my first acts as Chief Secretary was to approve the
publication of the draft Financial Services and Markets Bill
for consultation. This will give the FSA the full range of
modern statutory powers.
44. The new regulatory system will be an improvement on the
current arrangements. Accountability will be enhanced. The
new regulator will have a Board appointed by and accountable
to Ministers with its objectives clearly set out in
legislation. And it will be required to consult on new
proposals for rules, and to demonstrate that the benefits
exceed the costs.
45. Cost effectiveness is a vital building block for the new
regime. Inappropriate, overburdensome regulation would make
it difficult for UK businesses to compete effectively in the
global market place and increase costs for consumers
unnecessarily. The Bill recognises the difference between
professional wholesale markets and retail markets. There
will be a statutory requirement for the regulator to use its
own resources in the most economic and efficient way and the
non-executive members of the Board will report annually to
the Treasury on this.
46. Above all, I hope we will see a new emphasis upon high
standards, while giving firms the opportunity to decide how
they should be met. I don't want to see 40 rules where the
same effect could be achieved through 4. We will be looking
to the regulator to ensure that the management of firms are
fit to take on their central responsibility for the health
and conduct of their firm. But where the FSA is confident in
a firm's staff and systems, then management must be left free
to manage.
Market confidence
47. The Bill also introduces a new range of measures designed to
further enhance confidence in UK markets. These include a new
civil regime for dealing with market abuse. The draft
legislation gives the FSA the power to levy civil fines
against those who abuse the financial markets.
48. Examples of the kind of behaviours we are aiming to deter
are:
artificial transactions which give the market the wrong
impression as to the real supply and demand for an
investment;
abusive squeezes whereby the position of one player in
the market, who has temporary control over the supply of
a product, results in arbitrary prices; and
misuse of privileged information which is not available
to the rest of the market.
49. These behaviours upset the normal operation of the markets,
reduce their efficiency, and can have significant impacts on
the wider economy.
50. This new regime, which extends to both regulated and
unregulated persons, will fill a gap which currently exists
in the regulatory system and help safeguard the proper
operation of the financial markets. This is in all of our
interests.
51. The market abuse regime will not replace the criminal
offences in this area. As now, where market abuse is serious
and deserving of criminal punishment, those concerned will
be taken before the criminal courts. There is no question of
our being soft on City crime. We have given the FSA an
explicit objective to reduce financial crime, which will
include action to prevent and punish insider dealing,
financial fraud and money laundering. We will be giving the
FSA wide investigation powers in these areas and, for the
first time, the power to prosecute such cases.
52. The FSA will also be given powers of intervention and
discipline in respect of regulated persons that are at least
as extensive and as flexible as those of the various
regulators which are being brought together. Among those
disciplinary powers will be a power to levy fines on
regulated institutions. This is a power currently enjoyed by
the self-regulating organisations on a contractual rather
than a statutory basis. Putting this powerful regulatory
sanction on a statutory basis will we believe greatly enhance
the FSA's authority and effectiveness.
53. It is right to arm the regulator with an effective array of
sanctions, but these must be balanced by a satisfactory
appeals mechanism. That is why we are proposing to create a
new single tribunal to consider appeals against the FSA's
exercise of its powers. The tribunal will be entirely
independent of the FSA, and will be managed as part of the
Court Service.
54. Naturally, there are limits to what the FSA can do in a
global market place. We have to recognise the complexities
of regulating an industry which operates across national
boundaries and which includes international businesses
engaged in a range of financial activity. The new regulatory
structure will take full account of this international
dimension.
55. Extensive cooperation between the FSA and regulators in other
countries is clearly very important. The FSA will be able to
play a significant role in such cooperation in the
appropriate international organisations. It will also have
powers to assist overseas regulatory bodies. The draft
legislation enables the FSA to use its powers of intervention
when requested to by an overseas regulator. We also intend
to give the FSA new powers to conduct investigations on their
behalf. We want to ensure that the FSA has stature and is a
power in the international regulatory community, and is
universally regarded as a leading world regulator.
Consumer protection
56. The Government is strongly committed to consumer protection.
Of course, Caveat Emptor is an essential part of any
regulatory system. Yet a regulatory system must make sure
the customer has sufficient information to make an informed
decision. The personal pensions mis-selling episode showed
a broad cross-section of individuals could be misled into
buying the wrong product for their needs.
57. Customers should be aware of the risks attached to any
product. And they should know what their investment will
cost. It is in everyone's interests that customers have the
confidence to buy the products they need.
58. And so the FSA will be given statutory responsibilities to
protect consumers and to promote public understanding of the
financial system.
59. We want public awareness of financial services to be a high
priority for the FSA and the industry. The aim is to ensure
that consumers have the ability to understand and question
the advice and literature they are given. I also hope the
FSA and firms will take action to improve the transparency
of the firms' literature.
60. And if things do go wrong, the Bill provides for easier
access to the ombudsman and compensation schemes.
61. I welcome the recent announcement by the FSA of progress
towards the creation of a single ombudsman and the co-
location of the existing schemes.
62. This is a significant step towards delivering the consumer
protection that is vital in building confidence in the
industry.
Consultation process
63. Reform of the financial services regulation is already well
under way. It is vital to maintain the momentum towards
reform. To do this, we need input into the consultation
process from the industry and consumers.
64. We are determined to have high quality legislation ready for
introduction to Parliament. So the Government is committed
to a genuine and open consultation process. This is an
opportunity for the industry to play a part in shaping the
regulatory regime of the future. I strongly urge you to
respond to the consultation and let us have your views. It
is in all our interests to get this right.
Conclusion
65. The UK financial services industry and City of London in
particular, enjoy a pre-eminence internationally.
66. These reforms of the regulatory regime will enhance our
position. They will increase the confidence of the public
in the financial services industry. And they will make the
UK a more attractive place to do business.