at Thomson Reuters, Canary Wharf, London E14
Wednesday 16 December 2009
Check against delivery
I'm delighted to see so many of you here today for the launch of our consultation paper on resolution arrangements for investment banks.
14 months ago Lehman Brothers failed; a defining moment in the recent crisis.
The immediate impact of this failure was felt in financial centres around the world, including here in Canary Wharf and in the City.
We know that the City has the power to generate jobs and wealth; its successes - and as we have learnt, failures - are intimately bound up with the wider economy.
The recovery of our financial services sector will, once again, drive growth, employment and prosperity. The banking system is critical for lending and saving; for homeowners and pensioners; for innovative start-ups and businesses; for employment and security. Economic growth, and the benefits that come from it, require an effective and responsible City.
Time for reflection
Being so close to the New Year, it is appropriate for us to reflect on the recent past, and use this to inform our collective efforts to rebuild our financial services sector.
Over the past 18 months, the Government has led the global debate on this rebuilding effort. Through the Banking Act, The Financial Services Bill and Sir David Walker's report, among other measures, the Government has backed up its promises with actions to cement and enhance the UK's reputation as a centre for financial excellence.
The UK is an international centre for investment banking and, along with New York, London is a global leader in the provision of investment services. It is our intention that it should remain so.
Around half of European investment firm activity is conducted through London. The majority of major firms are either headquartered, or have a major office here.
The activity of investment firms in OTC and other derivatives and foreign exchange trading, as well as prime brokerage and the provision of corporate advice, contribute greatly to the UK's prominence as a global financial centre.
The measures we have brought forward, including today's, are all about protecting the City, and thus to a large extent the wider economy it serves. A robust, vibrant and responsible financial sector is for the UK an international asset that should, and must, be cherished.
And as with anything of value, when it takes a knock, you want to try and ensure that this doesn't happen again.
The collapse of Lehman taught us a lesson - it showed us the significant cost of investment bank failure, and the damage that can be done unless the resolution of systemic firms can be handled properly.
At the time of its demise, clients had over 840,000 pending trades and more than $35 billion in cash and assets tied up in the insolvent estate. When, and indeed if, trades would settle and assets be returned to their owners was unclear.
This uncertainty contributed to financial instability, as clients struggled to gain access to assets and cash, and counterparties tried to ascertain and hedge their exposures.
I'm not here to dwell on Lehman's. I'm here to talk about how we learn from these experiences and move forward; our earnest focus must now be on continuing to support the recovery of the banking sector (as it has been since October 2008) in order to facilitate economic recovery.
Today's consultation paper marks another important step in protecting and rebuilding the UK investment banking sector.
And it is apt that I start with the implications for you, the industry, as I welcome the strong hand you have had in shaping this consultation. Today's paper is the result of an extensive process of consultation with industry experts, including buy- and sell-side firms and their representatives, insolvency practitioners, accountants and legal experts.
I believe this is a good example of government working in partnership with industry and regulators to achieve outcomes that benefit all. In complex areas such as this, effective reforms will only ever be secured though c-operation and constructive engagement.
For those here today that have helped I extend my thanks and I hope that we can continue working together to build a thriving and sustainable future for the City.
What does the paper do?
So what are we proposing? In short, we will make it possible for an investment bank to fail without the risk of the systemic contagion evidenced by Lehmans, and through this, better protect clients, counterparties and creditors.
There are four main areas which I'd like to draw out. But before I jump in to technical detail, I want to stress that I genuinely believe that these proposals will make our investment banking system safer, more secure and prosperous. Improved transparency and clarity will help attract investors, business and investment to the UK.
Firstly, we have set out proposals to enable a managed wind-down of an investment bank; put simply, we need to avoid the risk that systems will fail and the lights go out as they did at Lehman.
It is vital that an investment firm's systems remain operational at the time of failure; we have set out proposals which include requirements for investment firms to make plans for the actions they would take in the event of their own failure.
This may sound a touch morbid, but it is essential to investor confidence - investing in London should not be an all or nothing gamble, and these measures will allow investors to make calculated determinations in a secure environment.
As I have said before, the best way to prepare for a potential crisis is to assume that you may be at the epicentre of one.
We are setting out proposals that would require firms to keep the necessary information about their operations and structure that would be of use to potential insolvency practitioners. This will require better information sharing between firms and regulators.
A key element of this is the notion of an 'insolvency proof contract'. Firms will be required to ensure that their contracts with key staff include notice periods that ensure they can continue to work for a period after the bank's failure. The firm will also have to hold 'operational reserves' to allow key staff to be paid following a bank's failure, so that they can set about the important task of returning money to clients. This gives staff confidence they won't immediately lose their income or be kicked out of the door. And clients will be reassured that the people best placed to assist them will be there, will answer their phones and that they are appropriately motivated to help them when they need it most.
A new insolvency regime will include a special defence from liability for Directors to be able to implement 'Investment Recovery and Resolution Plan' or Living Will. We need swift, fair action - not hesitancy, obfuscation and red tape.
Our proposals will help the various authorities to better deal with a failure quickly and cleanly with minimal disruption.
Secondly, there are measures to help clients gain swift access to assets and money held on trust by investment firms.
It is vital that the administration of a failed firm is conducted with reference to the need for the speedy recovery of assets for clients and counterparties of the firm. This is about returning money to its rightful owners.
Increased daily reporting and disclosures will ensure that any insolvency practitioner can quickly and accurately identify client assets and money. Our proposals would give one named person explicit responsibility for client money within firms, providing clear accountability and lines of contact.
And to work in the interests of consumers we are considering whether it is necessary to create a new body or agency within the FSA, to prioritise and manage the return of client assets.
This is of the utmost importance - ultimately this is about client confidence, the lifeblood of any thriving investment bank.
Thirdly, the proposals seek to help counterparties of a failed investment firm. We are examining a number of options, such as extending protections that enable Multilateral Trading Facilities to deal centrally with a default, without risk of challenge from the insolvency practitioner.
The Government recognises that there are already moves to provide certainty for counterparties. I'm thinking of the market protocol on OTC cash equity trades and the action by Euroclear UK and Ireland, operators of CREST, to freeze pending settlement instructions in relation to an insolvent CREST participant.
Today's work builds on this and should give greater certainty to counterparties about their open positions, enabling them to hedge their exposures more effectively.
Finally, while we can never secure the position of every creditor, we are working to ensure that unsecured creditors do not lose out disproportionately from the failure of an investment firm.
In order to fulfill these ambitions, administrators must know that they are free to act in the best interests of all, without fear of undue 'legal risk' and red tape.
For this reason we are proposing a new administration regime for investment firms. This would enable administrators to focus on clients and counterparties, while also having an eye to the broader impacts of a failing firm, including financial stability.
The special administration regime would also involve a special defence from liability to enable a firm's directors to implement resolution plans and address potential obstacles in the context of the pre-insolvency resolution process. Administrators would also have a special defence from personal liability, enabling them to act more decisively and proactively in reconciling the failed estate.
So before taking questions with my fellow panelists I simply wish to reiterate that we are at a watershed moment for financial services, where we need to take stock and move forward.
It is clear to us all that reform is necessary if we are to avoid a repeat of the recent financial crisis. And in that context it is right that we look at measures such as more and better capital and increased liquidity. And as I have discussed today it is right that we introduce measures to limit the consequences of a future investment bank failure.
But all of these measures involve costs, either directly or indirectly, and these costs will accumulate. I know that the industry is concerned that in the rush to reform, the total cost will be allowed to spiral, ultimately threatening the very competitiveness we are seeking to promote.
And on this concern I can assure you that the Government is very alive to this risk and committed to ensuring that the totality of reform is proportionate and that the costs and benefits are carefully weighed. The consultation we are launching today will direct us toward conclusions that strike the right balance.
I also hope that I have made it very clear that the Government is committed to fostering a vibrant and successful financial services sector in the UK, securing the needs of customers in the UK, Europe and around the globe. I worked in the City for over thirty years - it pained me to see it stumble, but I am resolved to use my role and voice in Government to see the City, particularly its banking community, restored to its previous position as a celebrated and undoubted source of national comparative advantage and a beacon of trust, integrity and commercial success.
Today's paper is a great example of active partnership between the state and the commercial sector. Through co-operation and engagement with the City we are, together, learning the lessons of Lehman and applying them to the future for the benefit of all.
For the word document version of this speech please go to the following link:
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