18 January 2012

Speech by the Financial Secretary to the Treasury, Mark Hoban MP, to the London Stock Exchange; MiFID

Resolving the eurozone sovereign debt storm is the immediate crisis that we all have to deal with, and we are as eager as our euro area counterparts to see a comprehensive resolution to the crisis.

European regulatory reform - challenge

But over the longer term, we have the equally substantial task of financial sector reform correcting the regulatory failures of the last decade, and ensuring that regulation keeps pace with evolving markets. In driving forward regulatory reform, we need to learn the lesson of yesterday, but also recognise that today’s markets could trigger tomorrow’s financial crisis.

So in the UK, we are reforming the structure and approach of our regulation, looking ahead as well as behind. There are those who argue that regulatory reform is the enemy of growth – that we should postpone reform. But we reject that argument – ineffective regulation and supervision of banking led to a massive contraction in our economy. A stable and resilient financial system provides sustainable economic growth. But we must understand the impact that reform can have on growth – disproportionate regulation can restrict investment, lead to higher costs for investors and lower returns for business.

Growth is aided by open and competitive markets and we must be aware of those who will use reform to fragment markets – reform must be consistent and non-discriminatory. Reform should not erect barriers either within or around Europe.  To allow that to happen would be to diminish the opportunities available to businesses and investors of all types. That is why we are vigorously guarding against that retreat. A free and open Single Market has brought huge benefits to the whole of the EU and is the most powerful tool that we have to foster renewed growth as we recover from the financial crisis.

European regulatory reform - principles

We will support the Commission wholeheartedly in its duty to protect and promote the Single Market in financial services even as we embark on vast regulatory reform. Now more than ever, it is critical that Member States are able to have confidence and trust in EU institutions to see through regulatory reform in full and to stand up for the Single Market.
 
That means ensuring full and consistent implementation of high minimum regulation standards across the EU, whilst allowing Member States to impose higher requirements where needed to ensure financial stability. It means protecting the integrity of the single market, ensuring that regulation does not fragment the Single Market by currency, geography or firm. And it means applying one of Europe’s core principles – the free movement of capital – to countries outside Europe’s boundaries and as much as to those within it.

London and Europe thrives because of our freedoms – erecting barriers around Europe impoverishes everyone by denying opportunities for European firms to grow using capital from outside Europe and restricts out opportunity to support growth in Africa and Asia.

It was because of the value we attach to the Single Market, the maintaining and Open Europe and protecting taxpayers and consumers alike by backing tougher regulation and supervision that the Prime Ministers sought safeguards at last month’s European Council. That approach characterises our robust approach to regulation reform at home and abroad.

In the same way, we cannot afford to impose a Financial Transaction Tax if it is not going to be applied globally. Without global consistency, those transactions covered by the tax would merely relocate to countries not applying the tax.  As the Commission’s own impact assessment shows, a unilateral European tax could reduce EU GDP by as much as 3.4 per cent, or €422 billion.

MiFID

The MIFID Review offers a huge opportunity to promote competition and the Single Market in financial services. We have already seen the beneficial impact that MiFID has had in lowering costs and spurring growth in equities markets, and it is right that we seek to update the directive for the significant changes in the market since its original implementation.

But any reform of MiFID has to be driven by evidence not political whim. It is vital that the Commission undertakes the necessary analysis and deliberation to understand the impact of reform, and considers any unintended consequences. For instance, whilst it is clear that greater transparency has had a positive effect in equity markets, it is not necessarily the case that that precisely the same measures are directly transferrable to other market classes.

Both bond and derivative markets are considerably less liquid than equity markets, and extreme care is needed to ensure that transparency requirements are carefully designed to work for each asset class. For example, the component bonds that make up Markit’s iBoxx bond indices are some of the most actively traded bonds in Europe. But looking at over 9,000 of these bonds, only 52 per cent actually traded at least once in a six-month sample period in 2010.

It is because of this complexity that the Commission must undertake rigorous impact assessments to fully understand the costs and benefits of increased transparency. Likewise, the Commission must undertake the same analysis when it comes to updating MiFID to reflect changes in the commodities market. The Commission cannot succumb to knee jerk reactions which may only serve to increase costs for European citizens.

It is vital to remember that the commodities derivatives market serves a critical economic function in allowing end users to mitigate commercial risk. That is why we are sceptical about blanket position limits across all markets – they have a role to play in defined circumstances.  But more often than not, active position management by exchanges and authorities will be much more effective in tackling market abuse and indeed provide a more rigorous approach. It is incorrect to think that blanket limits will enable governments to control prices as some would seem to suggest. Furthermore, the Commission must resist pressure to use MiFID to raise barriers against third countries seeking to trade with the EU.

Across EU dossiers there has been an increasing and worrying tendency to try to implement strict equivalence or reciprocity provisions through EU legislation. It’s an approach that could serve to effectively close EU financial markets to third country firms. For instance, it seems that no third country would meet the standards as set out under the current MiFID proposal.

From the moment that MiFID is passed and until equivalence decisions are taken, it would close the EU market entirely to any new third country firm. And barriers would be placed in the way of outward investment flows too, for example restricting access to emerging markets. At a time when we have to do everything we can to attract ever more investment within but also beyond the EU’s borders, it’s an approach that merely undermines our growth ambitions.

DG Competition in particular has a fierce reputation for objective and rigorous economic and competition analysis, and a record of upholding their Single Market obligations in the European Treaty. It is vital that DG Competition lives up to those duties in the weeks and months to come, without political interference. To protect and promote the Single Market as we implement a vast agenda of reform. Across the European financial services agenda, the Commission must not let political expediency trump economic evidence.

Responsibility of the European Commission

I fully understand nonetheless that the Commission faces a huge challenge to resist pressure to delay, obfuscate and pander to vested interests in the EU. We see the Commission as parties in our commitment to protect and promote the Single Market in financial services…to meet its responsibility to secure regulation in the interest of all 27 members of the EU. Regulatory reform that is ambitious, effective and based on rigorous economic analysis.

Full speech

© HM Treasury