17 February 2012

Speech by Mark Hoban MP: What is the UK doing to strengthen financial market regulation at national and EU level?

Mr Hoban, Financial Secretary to the Treasury, said that the UK Government is in fact at the forefront of international efforts to remedy the failures of regulation, both in the UK and around the world, that led to the worst financial crisis in almost one hundred years.

Strengths of EU financial services sector

The EU is already the world’s leading exporter of financial services, with extra EU exports of €60 billion accounting for about a quarter of financial services exports worldwide. And within the Single Market, cross-border trade is even higher at €72 billion. The sector also accounts for almost 6 per cent of total EU economic output, and employs close to 10 million people in financial and professional services, including almost 2 million people in Germany – broadly the same as in the UK.

But of course the importance of financial services to the EU economy goes far beyond this direct contribution to trade and employment. I strongly believe that the EU financial services sector should continue to serve the wider economy, channelling the funds of savers to investment opportunities, transforming our bank deposits into loans to our businesses and helping businesses and individuals manage risk.

Helping European Governments raise almost €1 trillion in bond markets in 2010, helping European companies raise almost €3 trillion in funds since 2006, and helping EU citizens save over €6 trillion in current and savings accounts. A successful European financial services sector is in all our vital interests. Germany and the UK included.

Need for regulatory reform

A crisis that exposed collective and global failures of regulation and supervision of the financial system. 2008 wasn’t an Anglo-Saxon crisis, it was a universal crisis that has come at great cost to us all with both Germany and the UK rescuing failed banks and providing hundreds of billions of euros in guarantees and other support. These are costs that we simply cannot repeat.

Regulatory dilemma

We cannot allow financial sector success to come at a cost to economic stability. But as we pursue reform, we have a delicate balance to achieve. How can we create a successful but stable financial services sector across Europe? How can we preserve the innovation that fuels the sector’s success without putting the wider economy at risk?

It’s a difficult line to tread, but if we need guidance, where better to look than the great German sociologist, Max Weber. In his words, “three pre-eminent qualities are decisive for the politician: passion, a feeling of responsibility, and a sense of proportion". Given the severity of the crisis and the detrimental consequences for taxpayers across the EU, there’s certainly passion.

And there’s equal responsibility felt by us all, the UK included, to learn from the failures of the past, implement reform now, in order to prepare the crisis of the future. But it is vital that we approach that reform with a sense of proportion. It is only through strong and proportionate regulation that we can build a platform for a successful European financial system, sustainable growth, and international investment.

Disproportionate regulation merely stifles growth, restricts investment, lowers business returns, and imposes higher costs on investors and consumers alike. In a global financial market, where capital is highly mobile, disproportionate and poor regulation will simply drive good capital to other destinations outside of Europe to the cost of European savers, investors and businesses.

High frequency trading

But at the same time reform has to be underpinned by evidence not political whim. For instance, whilst it is clear that greater transparency has had a positive effect in equity markets, extreme care is needed to ensure that transparency requirements are carefully designed to work for other, less liquid, asset classes.  Similar care is needed in updating MiFID to reflect substantial changes in the market place in recent years such as high frequency trading.

For that reason, the UK is again leading the way through its Foresight project, which is undertaking a detailed assessment of how computer trading may evolve and how this will affect market quality and stability. The outcome of that study will help bolster the international evidence base before taking decisions that could inadvertently reduce trading options and damage liquid and effective markets, not just in London, but around the world. Indeed, it is worth remembering that Deutsche Börse is among the largest venues in the world for high frequency trading.

Full speech

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