AFME Equities Speech
At this time of year, all across London, politicians and public figures are asked to give the same speech,
What are your predictions for the year ahead?
What will be keeping you busy?
What will the challenges be?
The Brussels variant is what are your expectations for the – incoming – 6 month rotating Presidency?
So I get to do this twice a year not just once!
However, this year I can answer all of these questions as they relate to the financial services sector and in the context of EU financial regulation for 2016 with two words:
Implementation and Review
Gone are the days of the Barnier agenda which sought to push out as much new regulation as possible
A new announcement for the financial journalists leaked in order to scare the City every month.
Suggesting the banning of this, or that or the other.
Instead, Lord Hill, the British Financial Services Commissioner, will be looking at all of the regulation that was passed at the political level
And trying to make it work.
Instead of scare stories for the equities world about 500 millisecond minimum resting periods
We’ll hear about pragmatic reasons why a delay to such a large,
and whole sale change
to market infrastructure and practices
as found in MiFID
can be justified.
The general principle of an overarching 1 year delay has already been accepted by Parliament, Commission and Council
I am not going to bore you with details about the ongoing level 2 discussions
Most of the drafts are already in the public domain
However, my main prediction for MiFID implementation this year is to expect the final level 2 to be agreed in the next few months
The implementation delay is genuinely to allow both the regulators and industry more time to set up their IT systems and prepare for the coming changes
Don’t expect another year of lobbying for things that have already been decided.
I would only foresee changes to what ESMA has produced to bring them in line with the level 1 text
And then only in areas such as:
Pre Trade Transparency for non-equities
and the ancillary activities exemption
Most of what is applicable in this forum with regards to the equities world, is already out there.
I hope the proposed delay will allow more time for innovative market solutions to the new standard of regulation to be devised.
For me, this is the exciting area of financial services that we will now see new developments in this year.
Innovation in financial markets
The wide ranging and free flowing term – FinTech
As large market players become more encumbered with legacy technology
And stagnant views of the marketplace
New players will emerge to challenge those old assumptions
In some cases this will be because of those regulations that are forcing change onto the market
Services that are no longer profitable within a large bank still need to be provided
The way in which people interact with service providers has already changed
All taking the place of the bank manager, investment fund manager and pension advisor
Last year, the buy and sell side came to terms with these new technologies as the place to invest.
The next up and coming industry you want to be in at the ground floor on
To shape and develop
To understand from the beginning
Every investment bank had to have an accelerator
Every asset manager a primary stake in a fintech fund
The question this year will be whether those start-ups can actually take off
Will the money run dry if returns take longer to produce than expected?
Will the promise of new technologies actually be realised?
Most importantly from my perspective,
Will financial supervisors or regulation kill it off before it starts?
For every new fintech company that comes to see me to explain their new offering
An existing market player comes to talk to me about “preserving a level playing field”
I’m sure if the EU had existed at the time cool box makers would've opposed the development of refrigerators, and someone else would've lobbied me on health and safety grounds.
I see the regulatory challenge being to uphold the principles of the regulation:
And market stability
While enabling these new technologies and approaches to develop.
Ensuring investors receive adequate information on products before they invest doesn’t have to mean a hundred sheets of paper
The regulation states information should be provided in a “durable format”
Why can’t that be virtual?
A computer file in the cloud is infinitely more durable that a sheet of paper lying around my house
But this relies upon financial supervisors understanding and being open to new developments
The FCA’s regulatory sandbox approach is one that can and should be learned from across the EU.
The goal of regulation should be to provide a framework,
It should be flexible and not prescriptive.
These may not be concepts that have not been applied to EU regulation in the past
But 2016 is all about change
To quote David Cameron, for the EU to survive it needs the speed and flexibility of a network not the cumbersome rigidity of a block.
The question I am asked a thousand times a week is whether is not the UK will still be in the EU by 2017
Surely if there is a vote to leave the EU we won’t even need to implement MiFID on Jan 1st 2018
Maybe instead of lobbying to change the parts of MiFID that they don’t like, AFME and the relevant trade associations should simply be joining the Vote Leave campaign
Let me burst that bubble right now
A vote to leave would not get you out of complying EU financial services legislation
For that matter, ask South Africa
If you want to have access to the EU market, you have to comply with EU rules-
Whether directly, or by having national law which is compatible in effect.
While I’m sure there are some in this room who do not have any clients, investors or subsidiaries within the EU,
I suspect they are in the severe minority.
At the end of each set of negotiations on a financial services file there is always the outstanding issue of how to deal with third countries
The UK is often the lone – yet loud – voice fighting to retain open markets
Within Parliament, it is UK MEPs
from across the political spectrum
fighting to ensure something workable is agreed
The Commission staff look at legalistic solutions that are often impractical
The fact that the US, the most advanced financial market in the world –
Outside of London of course
Has spent the past 4 years trying to meet EU equivalence standards for CCPs in the derivatives world
Should give a taste of what we should expect as a financial centre outside of the EU.
It is not a given.
Switzerland’s approach to the much hated AIFMD
to ensure the many asset managers there had access to the EU
was to copy paste the regulation into its statute books
I’m told they even applied a “Swiss Finish” to it,
Adding things to what was there, not removing things.
My biggest prediction for the year ahead is that more and more financial regulation will originate at a global level
Entities like the Basle Committee,
will become genuine forums for decision making
the largest jurisdictions will agree the principles of regulation and they will then be implemented
Differences in implementation will continue
We will still hear about specificities of particular markets
But the similarities will be greater than the differences.
For market participants the more that is harmonised, the easier it will be to navigate.
28 different interpretations of what is highly liquid collateral will provide growth and jobs for lawyers.
Not growth and jobs for the wider economy
The fewer steps there are between global agreements and actual laws, the less add on you should expect
I would love to stand here and predict that the UK will vote to stay in a reformed EU
But I think the outcome is on a knife edge
Column inches have been devoted to process and who is funding what side of the campaign
Yet facts are few and far between
This should not be led by politician’s personal emotional attachment - or not –
to the EU, but based on fact.
My constituents want to know the facts
What does membership of the EU actually mean?
What would leaving mean?
And those facts are not on the front page of the Red tops.
A rather dull report from one of the city analysts, hidden on page 10 of a 20 page report
has attempted to quantify the loss to GDP growth of leaving the EU
This has been calculated as 1% per year for at least 5 years while the uncertainty continues
Yet more dull reports will give dry statistics on trade imbalances
Small print of board reports will give crisis planning on what large employers across the EU will do should there be a no vote.
But none of these are understandable or explainable on the streets of Cardiff or anywhere else in the UK.
Facts that should be in the public domain about what the alternatives to full EU membership are rarely discussed
Did you know that Norway is the 10th largest contributor to the EU in monetary terms?
It paid in just shy of a billion euros in the last 5 year mandate in order to be part of the EEA.
And they had to fully implement the Capital Requirements Directive, along with another 6000 EU Directives.
Directives they had no say over the content on.
Unlike the French banks who had their government in the room arguing for more positive treatment for government bonds
And German banks whose government fought tooth and nail to ensure their Sparkassen banks didn’t have to follow international accounting standards
And even the Danish banks got special treatment for covered bonds relating to their domestic mortgage market.
The Norwegian banks had to take it as a fait accompli.
Given the size of the UK financial services sector, that doesn’t sound like a good deal to me.
Yes, the UK doesn’t always get 100% of what it wants in a 28 way set of negotiations
– but we definitely do better than in a situation where we aren’t even at the table
That being said, the EU does need to reform
Not just for the UK, but for the entirety of the EU.
The Eurozone crisis
The refugee crisis
The Russia crisis
All of these demand a response
But the conditions are there for reform.
The new Dutch Presidency is condition number one
Who better to be in charge at a time of reform than one of the first countries to say no to an EU constitution?
An EU constitution that would have centralised more power in an unelected European Commission
Who better than the country that put forwards a 10 point reform plan for the EU when Gordon Brown was still Prime Minister of the UK?
Surprisingly to everyone, condition number 2 is the Jean Claude Junker Commission
A Commission that has set itself the target of releasing only 20% of the new legislation of previous years.
Just to clarify this is not a 20% reduction but to only generate 20% of the previous Commissions’ legislation
A Commission that has already reorganised itself into a corporate structure
A structure designed to reduce the number of competing departments that might produce more regulation
A Commission that has even appointed one specific Commissioner – who is unsurprisingly Dutch- to be in charge of a Better Regulation agenda
to act as gatekeeper, a final barrier to unnecessary new proposals.
This reform of the commission goes far beyond what David Cameron is calling for
Others in the EU want reform
So instead of all of your Trade Associations adding weight to either the vote leave campaign – or the vote to stay campaign
I would urge you to help get the facts about EU membership out there
What does it actually mean to stay or leave?
Find the facts and publicise them
The financial services sector thrives on data and research
Those who have heard me speak before will know that I love to receive data and evidence to back up a position
I’m not alone
It is right that the UK public is given the opportunity to have their say on their continued membership of the EU
But let’s make a decision based on fact and evidence
Not the misinformation that is currently out there.
I am positive about the year ahead.
Less regulation and more flexible and practical implementation
More global cooperation and less unilateral protectionism
A real chance to make a positive case for EU membership.
And Wales qualified for the Euros for the first time since 1958!
So maybe 2016 will be an extraordinarily positive year after all!