Speech: London, 30 June 2015 – Jonathan Hill, European Commissioner for Financial stability, financial services and capital markets union at TheCityUK Annual Conference
It is a great pleasure to be here at the annual conference of an organisation that does so much to champion the UK’s financial services industry. And there is of course a lot to champion.
Hundreds of thousands of people work in financial services and linked industries here in the City. They are linked in turn to other financial centres in the United Kingdom, forming part of an industry which altogether employs two million people. Many of them come from outside Britain, and much of the industry does business beyond Britain. Not surprising when financial services are Britain’s biggest and most important export. They make up nearly a tenth of Britain’s economy and contribute more than a tenth of UK tax receipts. In other words, London’s financial services are a great asset for Britain. But they are also a great asset for the rest of Europe. From here investment flows out across the continent: UK banks lend more than 2 trillion dollars into other European countries; more than a third of UK private equity funds’ investments go to companies elsewhere in the EU.
As a great champion of the industry, TheCityUK is acutely aware of the importance of London’s global and European links. You are an organisation which is serious and which is taken seriously. So for me this is the natural place to come to talk about how I am approaching financial regulation, how I am working to build a stronger single market in capital, and how what I am doing fits into the Commission’s broader agenda.
As a Commission we have one very clear priority, which is growth and jobs, and a clear principle by which we go about our business: to be big on the big things, and small on the small things.
Under First Vice-President Frans Timmermans, we have a new drive on regulating better and legislating less. This year we proposed less than a fifth – one fifth – as much legislation as was usual each year under the last Commission. And we will be reviewing two and a half times as much legislation as in previous years to check whether it is working as intended.
Any idea for new legislation can only be taken forward if it gets Frans’s sign off. And a few weeks ago, he launched a new Better Regulation package that will improve the quality of new laws through better impact assessments and more effective reviews. One idea is that we should in future be able to scrutinise substantive amendments to legislation made during the legislative process and not just in advance of it. And personally I think that’s a good idea; one that should help improve the quality of EU legislation and one, incidentally, at which those concerned about the quality of legislation in the UK might also care to take a look.
Alongside our big push on free trade, we have launched three major single market projects: in energy, in the digital economy, and my own area of capital markets. Bigger markets, more competition and more trade will help economic growth and generate more of the jobs we need.
So I think that’s not a bad start for this Commission and shows that our focus on what we have set as our over-riding priority – jobs and growth – is more than just words. Growth is now returning to the European economy. Reforms introduced in many countries are bearing fruit. That’s why the situation in Greece where growth had also returned last year is so frustrating.
Since December our priority has been to find an outcome that supports growth and jobs there. And throughout this very difficult process, the Commission has explored all avenues to take on board Greek concerns and to find a fair deal with the Greek authorities. At the same time, and I think that President Juncker was absolutely right to stress this yesterday, it has also been essential to try find an outcome that could be supported by the other 18 democracies in the eurozone lending billions of their taxpayers’ money to Greece.
It would be quite wrong to portray this, as some are trying to do, as bureaucracy versus democracy. The interests of all democratically elected governments involved need to be taken fully into account. I know that many on our side, including Jean-Claude Juncker and many in the Eurogroup, feel that it was the Greek Government who walked away from the table, who walked away from compromise, including as late as last Friday night.
I know President Juncker is keen for this part of the story to be told, so that the Greek people understand ahead of their referendum how flexible we have been, and how determinedly we have worked – are still prepared to work – for an agreement.
Now back to the single market – a market of 500 million people spanning 28 countries. Perhaps it is worth reminding ourselves of why the single market – in the words of Sellar and Yeatman in 1066 And All that – is a Good Thing.
Why is it a Good Thing?
Trade within the EU has more than tripled since 1992 – growing faster than trade between the EU and the rest of the world. In this job I get to hear from lots of businesses who are clear about the benefits of being part of the Single Market. Easyjet, for example, have said that their business is ‘a product of the EU’s deregulation of Europe’s aviation market’, without which, they say, ‘we would not exist’. Single market legislation has cut the time it takes to get market authorisation for pharmaceuticals from up to five years per country to one year for the whole EU, while in the car industry moving from separate national approval systems for new car models has cut the cost of developing those models by ten per cent.
And just today we’ve announced progress on getting rid of roaming charges in a couple of years’ time.
The right to offer goods and services throughout the EU has also helped advance London’s position as the financial centre of Europe. To take one example, two fifths of all euro-denominated foreign exchange trading in the world happens here. Being part of the Single Market has made Britain a launch pad for worldwide investment into Europe. By value, almost a fifth of capital investments destined for Europe come to the UK. In one survey carried out by the British Government, half of all companies investing in the UK cited membership of the Single Market as a reason for doing so. Over half the UK’s stock of Foreign Direct Investment comes from other EU Member States and the EU is Britain’s single biggest market for the export of its financial services.
Many of those Single Market’s benefits are, I know, today taken for granted. They seem part of the background. But whether it’s cheaper flights, cutting the cost of innovation for vehicles or pharmaceuticals or attracting investment from across the world, those benefits have helped make the British economy what it is today.
Being in the Single Market is, of course, about more than just having access to it. It means having a say over its rules – something that non-EU governments which have to pay for access to the Single Market understand only too well. I also know from the British businessmen and women that I’ve met, whether in services or in manufacturing, how important they think being in the Single Market is for their businesses’ future.
Today the CityUK publishes its proposals for more competitiveness in a reformed Europe. I very much look forward to hearing about them from Sir Gerry and I will pay close attention to the case you make. Given the rising challenge we face from the new economies, given the huge demographic challenges we face in Europe with an ageing population and the increasing cost of social services, we clearly have to be more competitive. That necessity, and the imperative to encourage growth and jobs, drives my approach to my portfolio and, indeed, to financial regulation.
Over the last five years or so, we had to legislate at speed while the fires of a crisis were burning all around. And as a result our financial system today is stronger, better regulated, more resilient. And no one is putting that new framework into question.
But if you have to legislate at speed, in the middle of a crisis, you cannot be expected to get every bit of regulation 100% right. And the economic context in which you regulate changes too. So if five years ago the biggest threat to financial stability was the financial crisis, today the biggest threat to financial stability is that lack of growth and jobs. We need to encourage investment in general, and long-term investment in particular. It follows therefore that we need to look at all the factors that affect it and make sure that we have struck the best possible balance in our rules between managing risk on the one hand and enabling growth on the other. And if we find that our legislation has had unintended consequences, if the cumulative impact is different from what we had expected, then I think we shouldn’t be afraid to amend it. So I am taking the same approach in my portfolio as the Commission is taking as a whole: less new legislation, and more reviews of existing legislation.
So I see jobs and growth in a more competitive Europe as my core task, and the Single Market as the context in which I work. More than fifty years after the Treaty of Rome made the free movement of capital one of the EU’s four fundamental freedoms, that market in capital is not yet complete. So for me, the Capital Markets Union is a classic single market project. It is for all 28 member states; it is supported by all 28 member states; there is good support in the European Parliament backed up by more than 700 responses we received to our recent consultation.
At its simplest, its aim is to link savings more effectively with growth. To provide more options and better returns for savers and investors. To offer businesses more choices of funding at different stages of their development. To help ensure that the financial system supports growth and jobs and helps with those demographic challenges that Europe faces.
And when we talk about the CMU helping to boost growth, I mean growth throughout the EU, for those countries without well-developed capital markets as well as those with them. Indeed, I think it is countries which don’t have established financial centres whose businesses and investors could benefit the most, because the CMU should create the conditions for capital to cross borders, to flow to entrepreneurs with high growth potential, no matter where they are found.
I think it can also strengthen the stability of our financial system. Europe’s current system is heavily dependent on bank financing, so if there is a contraction in banking, lending to the whole economy dries up – which is, of course, exactly what we have seen in recent years. If we encourage equity investment, in place of debt, we could make the economy more resistant to shocks.
We have identified three themes as being at the heart of the project: how the CMU can increase funding options for business; how it can create more opportunities for investors; and how it can encourage cross border investment.
The first theme looks at how we can build a financial system that is better able to meet the financing needs of all our businesses at different stages in their development. And this emerged as a top priority from the consultation. So we will look at how to strengthen some key links in the chain on angel investment, venture capital and other forms of finance like crowd-funding. We will review the EUVECA regulation, we’ll investigate how to eliminate passporting barriers to funds raising capital across Europe, and we’ll support the development of the private placement industry.
We will also review the Prospectus Directive,whichgoverns the information a business must provide when it offers securities to the public. And as the gateway to capital markets, we need to make sure that prospectuses do what they’re meant to do: giving investors information that they can understand without being so burdensome and expensive as to discourage their use.
We will also move quickly to develop a framework which can encourage a return to securitisation. Now the door will remain firmly shut on the bad old ways of the past but, building on the work of the ECB and of the Bank of England, we will bring forward a proposal to support securitisation products that are simple, transparent and standardised. This could make a positive difference to long term investment by broadening the investor base to include more long term investors such as insurers and asset managers and free up bank balance sheets to lend more to the wider economy.
The second theme is creating opportunities for retail and institutional investors, who are the fuel in the capital markets union’s tank. Life insurance companies and pension funds are the natural long-term investors in European equity, venture capital and infrastructure. They have the deep balance sheets and the long time-horizons to be able to manage significant exposure to equity investments.
Over recent years, however, these institutional investors have held more significant amounts of liquid debt at the expense of equity. And there is a concern on the part of some Member States, the insurance industry and others that the regulatory framework may indeed be driving this tendency. So we will look at Solvency II to see how we can encourage more investment in infrastructure.
Retail investors obviously need to be at the heart of the CMU. Over the years, small investors have been reducing their investment in shares, and the proportion of retail investors among all shareholders is less than half what it was in the 1970s. They will only invest in capital markets if they have confidence in them. So I want effective consumer and investor protection and to dismantle the barriers to the single market for retail investors and we will look at ways to take this forward. I will be bringing forward a green paper on retail financial services issues later this year. By doing what we can to promote transparency, choice and competition in retail financial services I hope to make some of the benefits of the single market more tangible to consumers in Europe.
There are other long-standing and deep-rooted obstacles that stand in the way of cross border investment, from those which have their origins in national law — insolvency, collateral and securities law — through obstacles in infrastructure, such as a lack of access to credit data, particularly for SMEs, through to questions of supervision and tax barriers. These issues form the third main theme of our response to our consultation. We will be looking at this area carefully, balancing the need to make good and early progress in some areas with the need also to address these difficult long-standing structural issues.
In September I will come back with an Action Plan which will set out the way ahead. Concrete proposals will follow hard on its heels. Early actions will include a comprehensive package on securitisation with updated calibrations for Solvency II and the CRR, the definition of infrastructure with revised calibrations for Solvency II, and our proposals to review the Prospectus Directive.
What does CMU mean for the City of London? As a recent paper from the Bank of England pointed out, ‘London’s specialisation infinancial markets will put the United Kingdom in a strongposition to engage and support the development of CMUand will generate additional opportunities for exports. With the euro area being the United Kingdom’slargest export market, there will be indirect benefits for theUnited Kingdom of improved euro-area economicperformance as a result of CMU.’
My goal over my term as Commissioner is to increase funding options for business; to create more opportunities for investors, and to encourage cross border investment. It is to adopt an approach to regulation that is risk-based and proportionate, that gives business greater stability and certainty as they plan ahead. To help create the conditions where the financial services industry can make a full contribution to the economy and, indeed, to wider society. To build a stronger Single Market in financial services and to bring more competition, more choice and better services to Europe’s citizens. To achieve those goals will require hard pounding, but I believe we have a good opportunity to push forward with a single market agenda. I have no doubt that it will be in the interests of London’s financial services, but I am equally clear that it will very much be in the interests of the whole EU.