OREANDA-NEWS. July 16, 2015. Jonathan Hill, Commissioner responsible for Financial Stability, Financial Services and Capital Markets Union

City of London Corporation Policy Committee

I am delighted to be here this evening. Delighted to be here with my colleague – and friend – Jyrki Katainen, who is a great champion of the Single Market, and indeed of the UK. And delighted to be here with the City of London Corporation, a fabulously British institution which combines a great sense of history with being completely modern. A local authority which has to deal with the bins and parking in one breath and think about London's position as a great global financial centre in the next.

In your support for the arts, for charity and for education, in the help you give to entrepreneurs and apprentices, you also set a great example.

You show that the business of the City of London is rooted in the wider society it serves. This is exactly where the financial services industry needs to be: in the mainstream, not out on a limb.

And there is, of course, so much to celebrate. Hundreds of thousands of people work in financial services and linked industries here in the City; across the UK, you employ two million people, many of whom come and work in London from across the world. We all benefit from that ability to draw on European and global talent, a crucial part of London's being open to business.

Financial services are Britain's biggest and most important export, making up nearly a tenth of Britain's economy and contributing more than a tenth of UK tax receipts.  Everyone knows that the industry is a great asset for Britain. But they sometimes forget that it is 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. So the success of the City is tied to a successful Europe.

Jyrki has set out this Commission's new approach and our investment plan, which he has taken forward with such energy and determination. I want to say a few words about my plans in my own role as Commissioner for financial stability, financial services and capital markets union, a job title exceeded in length only by Jyrki's. And in particular two ways we could help to improve the environment for investment and growth in Europe.

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.

But if you have to legislate at speed you cannot expect to get every bit of regulation completely 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 the lack of growth and jobs.  We need to encourage investment, especially long-term investment. It follows that we need to look at all the factors that affect it and make sure that our rules strike the best possible balance between managing risk and enabling growth. 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, more reviews of existing legislation.   

Let me give you an example.

The Capital Requirements Regulation and Directive came into force two years ago: they tackle the vulnerabilities banks showed during the crisis, in particular the quality and quantity of capital they hold. They sit at the heart of our framework, ensuring EU banks have the buffers and capacity to absorb losses and protect taxpayers. They offer prudence and legal certainty; they have restored resilience and stability.

These were vitally important objectives. But now it is right to ask whether the rules are doing their job properly, or whether they are having any unintended consequences. To what extent have they affected the level of capital held by banks? Are they always proportionate to the risks? What impact are they having on lending to smaller businesses, and infrastructure? Could they be simplified or differentiated by risk or size, without compromising the overall objectives?

The Capital Requirements Regulation itself requires us to look into the effect of the legislation. So today I am launching a review of those rules. For the next 12 weeks we will be consulting, seeking evidence about how the rules are working on the ground. Not just from the financial sector, but those affected by it, and those who use it. So I want to hear practical examples, backed up by detailed figures, which will help us to review this legislation.

This is the right thing to do if we want to make sure that we strike the balance I spoke about, the balance between managing risk and enabling growth. It is also part of our commitment to Better Regulation, to regulate no more than is needed, and to be proportionate in our approach.  

We also want to strengthen the stability of our financial system by making it less dependent on bank financing in the first place.

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. This is why we have set out plans for the Capital Markets Union: a classic single market project, for all 28 member states; supported by all 28 member states; supported by the European Parliament and backed up by more than 700 responses to our recent consultation. 

At its simplest, its aim is to link savings more effectively with growth.

And that is growth throughout the EU: those countries without well-developed capital markets as well as those which have them.

There are three main themes: 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.

First, we need a financial system better able to meet the financing needs of all businesses at different stages in their development. So we will look at how to strengthen some key links in the chain, especially how to support business start ups.

We will look, in particular, at encouraging venture capital and will review the Prospectus Directive so prospectuses do what they're meant to do: giving investors information that they can understand without being unnecessarily burdensome and expensive.

On securitisation: 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.

Second: we should create opportunities for retail and institutional investors, 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, with deep balance sheets and long term horizons.

I know that some are concerned that the regulatory framework has been driving a tendency to hold more liquid debt at the expense of equity. So we will look at Solvency II to see how we can encourage more investment in infrastructure.

But it is not just about institutional investors. Over the years, small, retail investors have been reducing their investment in shares. 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 single market barriers for retail investors.

Third, there are other long-standing and deep-rooted obstacles that stand in the way of cross border investment: insolvency, collateral and securities law, credit data for SMEs, supervision and tax barriers. We will be looking at this area carefully. We can make good and early progress in some areas while also addressing difficult long-standing structural issues.

In September I will come back with an Action Plan which will set out the way ahead. 

There are opportunities here for the City of London. The Single Market has always been a force for creating jobs and growth across Europe. London, and Britain, have benefited greatly from it. Two fifths of the world's Euro-denominated foreign exchange trading happens here. Being part of the Single Market has made Britain a launch pad for worldwide investment into Europe and over half the UK's stock of Foreign Direct Investment comes from other EU Member States. The rest of the EU is, of course, Britain's single biggest market for the export of its financial services.

The Capital Markets Union is a chance to take the Single Market further, so that businesses across Europe can get the investment they need and give savers better returns.

It is just over six hundred years since work began on this ancient building, and some of the livery companies of the Corporation of the City of London are even older. The mediaeval guilds they used to form were not always famous examples of free trade and competition, but by becoming a champion of openness and economic freedom London has gone from being on the periphery of fifteenth century Europe to one of the greatest centres of global trade. I am confident that the Capital Markets Union is an opportunity that everyone from the Worshipful Company of Mercers to the rather more recent Worshipful Company of International Bankers can embrace to increase the prosperity not just of London but of the whole of Europe.