Greg Clark is Financial Secretary to the Treasury and MP for Tunbridge Wells. Follow Greg on Twitter.
Amidst so much sunshine now, it’s easy to forget just how dismal the start of summer was last year – and not just weather-wise. It was at the end of June 2012 that the Libor fixing scandal broke, triggering high profile resignations and fierce public debate.
The intense response was well-merited, given everything else that has happened: the bailing out of the banks with £66 billion of taxpayers’ money; the cynical mis-selling of worthless PPI products to ordinary working people; and the mis-selling of abusive interest rate swaps to small businesses. After all of that, the attempts to manipulate Libor – a benchmark so important it was known as the ‘price of money’ – dragged the reputation of the City of London to a new low (though, of course, similar activities took place in other financial centres around the world). I recall a double page spread in the German newspaper Handelsblatt, featuring a panoramic view from London Bridge and the headline, in English, ‘City of Shame’. Britain’s financial sector – our largest industry – depends totally on trust. So for such damage to have been done to its reputation was nothing short of catastrophic.
A year on, it is worth surveying how much has changed – and how this Government has moved further and faster than our competitors to restore trust in financial services and the rigour of the regulatory framework. We did so in challenging circumstances: Labour’s disastrous legacy on these (and other) issues, threatening moves from Europe and the usual pressure to water-down our reforms.
Within two weeks of the Libor scandal coming to light, we asked Martin Wheatley, the UK’s new financial conduct regulator, to undertake an urgent review into what steps were needed to restore the standing of the benchmark. He reported back in September, and my first public appearance as a Treasury minister was to endorse his findings. By Christmas, we had legislated to make the manipulation of benchmarks a criminal offence punishable by imprisonment; we made Libor subject to regulation by the Financial Conduct Authority; and we required the British Bankers’ Association to remove itself from the operation of the benchmark. Last week, an independent committee chaired by Baroness Hogg awarded the right to administer Libor to a new, internationally-respected, operator. Meanwhile, we changed the rules so that fines for abusing Libor no longer went to the banks, but to good causes like military charities.
In December, the Financial Services Act was given Royal Assent. It buried the tripartite system of regulation, invented by Gordon Brown, which had failed so dismally in preventing the financial crisis. From April this year, the Bank of England is once again in charge of regulating the financial stability of our banking system, through its Financial Policy Committee and its Prudential Regulation Authority. The bureaucratic and toothless FSA has been replaced with a dedicated Financial Conduct Authority with a remit to promote consumer welfare by driving competition.
In February, we introduced the Banking Reform Bill, which implements the recommendations of the committee chaired by Sir John Vickers. The retail operations of Britain’s banks will be ring-fenced from the riskier investment banking activities. There will be no question of an implicit taxpayer guarantee standing behind high risk activities. Indeed, the ring-fence was strengthened by a recommendation from Andrew Tyrie’s Parliamentary Commission on Banking Standards that any firm that attempted to game the new system should be forcibly split up.
The Bill completed its House of Commons stages last week. In the House of Lords, it will take on the recommendations of the Tyrie commission – which include a new regime to make sure that the senior decision-makers in banks take responsibility for what happens under them; a criminal offence of reckless misconduct; and further strengthening of the requirement on regulators to promote competition.
Beyond Westminster, the UK has, in recent months, scored some notable successes in the European Union’s Council of Finance Ministers (Ecofin). Many feared that the arrangements that the Eurozone countries wanted to put in place to integrate their banking systems would be used to impede UK access to the Single European Market; but, in December, we secured a legally-binding requirement that Britain could not be the subject of direct or indirect discrimination in any of the actions of the new Single Supervisory Mechanism. In two successive all-night Ecofin meetings discussing the European Banking Resolution and Banking Directive, the UK stood firm and secured agreements on bailing-in holders of bank debt rather than depositors or taxpayers and on recognising our £2.5 billion a year Bank Levy as a required contribution to financial stability.
Britain’s financial services industry is vital to our prosperity. The sector provides jobs to over two million people and contributes one pound of every eight to the taxes that pay for our public services. Furthermore, the worldwide market for financial services is set for long-term expansion. We must trade on our traditional strengths, demonstrating to rapidly developing economies and the burgeoning global middle class that we can act as expert and dependable financial partners.
In March, we launched, with the City of London and industry representatives, the Financial Services Trade and Investment Board, which is promoting the United Kingdom as the best place in the world for finance. Our Asset Management strategy includes reform of tax rules that were making the UK unattractive to overseas funds. In March, we also announced the abolition of Stamp Duty on shares listed on AIM, helping medium sized businesses access the London markets. Work is advanced on our strategy to champion the contribution of our insurance sector, which, as I’ve written about before, is a huge UK asset in a growing global market.
This year saw the relocation of the headquarters of the global insurance giant Aon from the USA to London – a recognition of what we have to offer. Last week the new Governor of the Bank of England, Mark Carney, took office. The appointment of Dr Carney in November was universally greeted as a testament to the internationalism and standing of the UK in attracting the foremost central banker of his generation.
All of the above is just a summary of what has been achieved since the storms of last year. As the air clears, it is evident that the environment in which our financial services operate has been transformed. There is further to go, of course – the practices of banks need to live up to the high standards that are now demanded of them, and the new regulators have to demonstrate that they will use their powers wisely but decisively. I am certain that this year of change will stand this country in good stead for the global opportunities – and domestic responsibilities – that lie before us. As the Parliamentary commission put it in their recent report: “High standards in banking should not be a substitute for global success. On the contrary they can be stimulus for it.”