Mark Hoban – 2012 Speech at St. Stevens Club

Below is the speech made by Mark Hoban, the then Financial Secretary to the Treasury, at St. Stevens Club on 4 July 2012.

Since this Government came to power, we have been clear that the banking system and the regulation of it needs to change – to empower consumers and prevent the greed and dishonesty that has sadly become associated with elements of the sector.

The impact of the financial crisis, and the shocking revelations we have seen since – the mis-selling financial products, the attempted manipulation of the LIBOR Rate – have vindicated that view if ever it were in question.

I want to set out today the steps we are taking to restore honesty, integrity and stability to the sector.

To ensure that consumers are empowered – whether they are individuals or small firms – to participate in the sector on an equal footing, both through improved regulation and greater competition.

To restore trust and confidence in the functioning of financial markets.

And to strengthen regulation so that a small group of firms cannot put the entire economy at risk – as we saw in 2008.

Historically, the relationship between financial services and the state was a commercial one. The first bankers from Lombardy financed the King and his military adventures.

The relationship between financial services and its customers were essentially private, meeting the emerging needs in a growing economy – insurance for cargos; friendly societies providing protection against illness, unemployment and death; building societies meeting the aspiration for people to own their own home; local banks and stock exchanges providing capital for business.

But as markets have grown in complexity, as businesses have grown larger and become run increasingly remotely from their customers, as financial products have become sophisticated beyond the comprehension of most, the need for transparency and market integrity has only increased.

And the role of the State in that relationship between the financial services sector and its customers has grown.

And so there has been a demand that the sector, and the regulation of it, evolve to protect consumers, whether they are buying a pension or trading complex debt instruments.

That is a demand that this Government is meeting.

Consumers can be vulnerable because providers of financial services know so much more about those services than their consumers.

If my iPhone is faulty it’s obvious straight away. I know that I can quickly and clearly assert my consumer rights.

If my pension is faulty, it may be far less easy.

If I’m mis-sold a pension, it may take years to realise the extent of the damage.

And it may take sophisticated knowledge of finance – well beyond what it’s reasonable to expect of the average consumer – to understand what has happened and how best to set it right.

And under the regime that we inherited, conduct of business regulation did not always get the focus or the attention it deserved. Too little was done too late to identify consumer detriment and tackle it effectively.

The high profile recent coverage of widespread interest rate swap mis-selling we have seen is a case in point. I am pleased to see the FSA is evolving its approach to improve the way it deals with these issues. In handling this, the FSA has shown a determination that these customers get appropriate redress and get it quickly.

This stands in stark contrast to its approach to the mis-selling of PPI, where it took years – not months – to reach the same conclusion.

Placing the interests of consumers at the heart of the regulatory system and restoring trust and confidence in financial services is one of the reasons why we have introduced the Financial Services Bill.

The creation of the Financial Conduct Authority as a dedicated conduct of business regulator marks a major further evolution in consumer protection.

Securing better outcomes for consumers by creating the FCA, as we committed to as soon as we came into office, is at the heart of the new regime.

The FCA’s operational objectives demonstrate what we are trying to achieve.

First, promoting effective competition that is in the interests of consumers in the financial services sector, recognising that competition in well functioning markets provides the foundations for those markets to deliver the right outcomes for consumers.

But further, consumers may need additional help. So the FCA will have an objective of securing an appropriate degree of protection for consumers – so that they are treated fairly, are provided with the right information at the right time, and are empowered to make the choices that benefit them.

They will have a more proactive, interventionist approach to regulating the conduct of business.

They will have new powers to intervene, to ban or impose requirements on financial products.

They will be able to publish details of warning notices regarding proposals of disciplinary action and misleading promotion.

And they will enshrine principles of transparency and openness in the new regulatory framework.

We are leading a radical change in approach – empowering regulators to intervene earlier using their judgement, rather than relying on a tick box approach to regulation that has enabled elements of the sector to fall well short of the conduct that is expected of them.

We saw a clear demonstration of a new, more robust approach by the FSA last week – in the findings relating to Barclays and attempted manipulation of the LIBOR market in the years running up to and during the crisis – a scandal that has caused a huge blow to the reputation of the banking industry.

The LIBOR issues are not just contained to Barclays or the UK – In addition to the FSA, competition authorities and Regulators in North America, Europe, Switzerland and Japan, are all investigating LIBOR, EURIBOR and other leading benchmark rates for alleged manipulation.

And not just at UK banks but other non-UK financial institutions. The very fact that in the case of Barclays the LIBOR rate under investigation was dollar – not sterling – Libor underlines that these are global markets and that this is a global problem.

On Monday, the Prime Minister and the Chancellor set out the steps we are taking in response to this issue.

And it will be the incoming CEO of the FCA – Martin Wheatley – who will lead a rapid and full review into what reforms are required to the current framework for setting and governing LIBOR, and provide hard hitting, practical recommendations to stamp out similar practice in future.

The Government is also recommending to Parliament that it consider undertaking an urgent inquiry into the culture and professional standards of the banking industry, in order to help shape the urgent reform needed of this sector.

But at the same time we must not forget the need to learn the wider lessons of the financial crisis, whose impact continues to be felt across the world.

In particular, it is essential that we strengthen prudential regulation to ensure that bank failure cannot destabilise the entire financial sector or the wider economy.

The crisis shows that banks – particularly large, systemically important banks – need significantly tougher minimum capital, liquidity and leverage standards.

And so I welcome the G20-endorsed Basel agreement, which reflects a global consensus that tougher standards of prudential regulation are crucial to reducing the likelihood of a repeat of the credit crisis.

Alongside these reforms to international standards, the Government is introducing major reforms to address the lessons of the financial crisis.

The new Prudential Regulatory Authority, and the new Financial Policy Committee, both introduced by our Financial Services Bill, will ensure that at every level, the sector receives the independent scrutiny that it needs – spotting the risks present in an interconnected banking system before it is too late.

Together, these bodies will bring the judgement and foresight to the task of supervision that the sector needs.

And we are going further still – reforming the structure of the market itself as well as the institutions that govern it – driving the change required for financial services once again to be placed on a sustainable footing.

As the state necessarily becomes more involved in regulation and oversight of the financial sector, there is one area where it is critical for us to reverse an unacceptable element of that interdependence- the state standing behind the banking system.

The two hundred year old role of the Bank of England to support a failing bank as the lender of last resort was and remains an important part of the resolution of banking crises.

Bank balance sheets grew rapidly in the last decade, and the risks banks took on become more complex, but the regulatory system and bank governance did not keep pace; nor did resolution arrangements. In effect, the state has been guaranteeing the banking sector.

So, in 2008-09, it was the taxpayer that bailed out RBS and Lloyds, and taxpayers across Europe provided almost 300 billion Euros in capital to stave off catastrophic collapse.

This Government is determined to ensure that never happens again.

Banks and their investors cannot be allowed to privatise gain and socialise loss. To take for themselves the benefits when things go well, but accept no responsibility for losses when things go badly.

Nor can we allow banks to believe taxpayers will always take the pain in the bad times, so that banks are free to take on risks safe in the belief that they will be rescued if their bets don’t pay off.

In summary, banks must be able to fail. But they must be able to fail safely.

That principle is a key thread which runs through this Government’s financial services reforms.

Ring-fencing will separate retail deposit-taking entities from complex investment banking; making them easier to resolve without interrupting continuity.

Bail-in will allow losses to fall on creditors, rather than taxpayers.

And recovery and resolution planning will ensure banks and authorities are prepared in advance to tackle failure. Alongside ring-fencing, they will ensure that critical economic functions can be hived off and maintained through a future crisis.

So we have a responsibility to reform regulation to tackle the lessons from the financial crisis.

In doing this, we must of course avoid the ‘stability of the graveyard’ that results from over-regulation – compromising the sector’s ability to provide wider social and economic benefits, by constricting lending or stifling innovation.

So we will ensure reforms are proportionate and balance the costs to industry against benefits of greater stability.

The financial services sector is a vital part of the functioning of our society. And an important contributor to the growth and strength of our economy.

But its very importance leaves us vulnerable, and it is crucial that we act on the lessons of the past.

Not only do we understand more about the risks posed by banks and the wider financial services sector; the weaknesses of the regulatory regime in place in the run up to the financial crisis are manifest and need to be tackled.

We are committed to reform that secures a stable and successful financial sector with a global outlook… a sector that provides sustainable lending, supports stable growth, and meets the aspirations of families and firms, but one that doesn’t put the savings of households, the wider economy, or the public finances in jeopardy.

Thank you.