International Guild of Bankers dinner
Butchers Hall, Bartholomew Close, London EC2
17 March 2004Speech by Callum McCarthy

  1. I am honoured to be invited to speak to the Guild of International Bankers this evening, and do so with particular pleasure for at least two reasons.

    The first reason is that I was first educated in the ways of the City more than 20 years ago by your Senior Warden, in those far off days when he was – as I remember it – an assistant director at the Bank of England. I was then the Assistant Secretary to the DTI responsible for the Thatcher administration's first privatisation, that of British Aerospace, and would turn to Eddie for advice on a wide range of City issues. Much has changed since those – pre Big Bang – days of 1979-81, when, incidentally, the City had no experience in major privatisations, and when the merchant bankers (I don't think they would then have considered themselves investment bankers) were learning about privatisations as they went along. I remain deeply grateful to Eddie for his help then, although thoughtful as well in considering that but for his early tuition perhaps I would not have my present responsibilities.

    The second reason is that I regard myself as an ex-International Banker, in that I have in my time been responsible for a British bank's activities first in Japan and then in North America. Indeed, one of the main qualifications I have for my present post is that I have enjoyed the experience – no, I have had the experience – of being regulated by the Bank of England in London (in pre FSA days), by MoF in Tokyo and by the New York Fed in New York. So I feel considerable empathy with and sympathy for the position of Guild members this evening.

  2. I understand that this is an occasion for questions and discussion. I shall be brief – or relatively brief (my instructions, I fear to tell you were to talk for 20 minutes; you will be relieved to know that I have no intention of following them) – and I will attempt to set out some of the main issues which are or should be of interest for international bankers working in London.

  3. The first point to make is that London has been the most international of the world's capital market centres. The UK has benefited enormously from being neutral between foreign and British ownership of financial institutions working in Britain: we treat all banks, or brokers, or insurance companies, on a comparable basis, irrespective of the nationality of their shareholders or of their management team. I think it is fair to say that Britain has been more open to inward investment by foreign banks and foreign financial institutions than any other European country. Your presence here as members of the Guild of International Bankers demonstrates that in the most direct way.

    I am confident that policy will continue, despite the arguments sometimes advanced by some British financial institutions that, in a world of increasing consolidation, we should be more cautious in accepting foreign ownership, or should guard more jealously those remaining British institutions. I believe strongly that Britain will do best – and competitive British banks will do best – from establishing a marketplace which remains open; where the emphasis is on efficiency, good order and high standards; and where nationality of ownership or of management remains an irrelevance.

  4. What is clearly not irrelevant is that there should be means of maintaining the high standards we expect of banks and other financial institutions. It is worth considering whether there are particular regulatory issues when dealing with foreign banks or foreign financial institutions which do not arise with British owned ones. I think it is clear that there are some issues which are worth discussion.

    First, there is the need for us in the FSA as the regulatory organisation in London to have a counterparty in the overseas institution here in London with whom we can do business. You know that one of the guiding principles of the FSA is that we look to the senior management of those whom we regulate to take responsibility for their irms. It is their responsibility to act prudently and honestly, to set up and maintain controls which work, and to manage the risks which are inescapable in financial institutions. This responsibility must lie with the senior management of the company in the first instance: it is not something which principally lies with compliance functions or with internal audit – though, of course, both these can and should play useful supporting roles. So we need, for each financial institution operating in London, a clear means of communicating with the firm's senior management – which, in turn, means that we need the firm's London management to have the necessary clout within the firm. In a world of matrix management, where global product heads coexist with those with geographical responsibilities, this clout is not self-evident. So you must expect us to be interested in you, in London, having a clear and respected voice back to Tokyo, or New York, or Frankfurt, or any other head office.

    Second, there are clearly regulatory issues which arise from all cross-border banking, and which revolve round the correct relationship between home and host regulator. This general problem comes in many guises. For large groups operating substantially in London and New York and other capital market centres there is a need for full consultation and exchange
    of views between the regulatory authorities in the countries – something which I think works well between the major regulatory organisations. The FSA talks repeatedly with the New York Fed, and the Japanese FSA; for major groups like UBS or Credit Suisse based in Switzerland we hold tripartite meetings of American, British and Swiss Banking authorities. In other instances, we can find an imbalance between the expertise of a small home country regulator on the one hand, and the different issues which arise in a much larger and more sophisticated market such as the London market on the other. Here again, I think that these problems have been dealt with quite successfully, with the fallback position of reverting to a subsidiary rather than a branch status used where necessary. But both instances represent complications on the regulatory template.

    Third, there are regulatory complexities which come from different national systems of regulation: notably the difference between those countries like the UK, Germany or Japan in which regulation of (almost) all financial services falls under one regulator, and those countries where the responsibility is divided between several or even many regulators. For certain firms there has historically been no means of establishing a group view as well as a view of individual entities - something which the EU requirement for consolidated supervision will change. Last, there are some particular regulatory issues which arise for exchanges, where we need to make sure that different countries' requirements are properly identified and dealt with.

  5. I list these various types of international regulatory complexity not to claim that they are insoluble – indeed, experience shows that with hard work and goodwill they are soluble, and indeed have been solved. Nor do I list them as an excuse for protectionism: one of the dangers against which we should guard is the argument that regulation requires national solutions, or national ownership or management. As I said, the UK has greatly benefited from having an open policy towards foreign financial services companies. It is important that we retain this policy. But we will do best if we recognise that there are special features which require additional work, and put in the additional effort.

  6. With that background, let me turn to the wider issues of what we expect of international banks, and what they should expect of the FSA. You should expect us to work hard to promote wholesale markets which are efficient, orderly and clean. That is an objective which no-one argues against as a principle: it is necessary if London is to remain a competitive capital market centre that we should be efficient; it is in everybody's interests that markets are not disorderly; and it is clearly right that markets should be clean – that there is a set of rules, observed in practice as well as set out in rule books, which establish fair behaviour and prevent improper preference being given to one category of market participant or market user over others. The objective, as I say, is unexceptionable. What is more debatable is the cost of achieving this objective: how much effort, how much cost, is justified in any particular case? And how does the cumulative cost of individual measures affect efficiency and competitiveness? These are questions which we at the FSA live with all the time. This is as you would expect from an organisation which has a statutory duty, the requirement to act proportionately and efficiently, and which subjects all its proposals to cost benefit analysis. And – even were we not committed ourselves by law and by conviction to this principle – I am confident that the practitioners who pay the FSA's costs, and other commentators too, would make sure that this principle was repeatedly brought to our attention.

  7. I am therefore concerned to look hard at how we measure up against this test. I think the evidence is reasonably reassuring. I am heartened by the evidence of those who vote with their investment decisions, namely the international banks and international financial services companies represented here tonight. You are among the most internationally mobile of businesses, not only able to switch markets as more competitive market places – real or virtual – develop , but with a track record of demonstrating that you translate that capability into action.

    I take further encouragement from the results of a survey carried out last year by the Centre for the Study of Financial Innovation on behalf of the City Corporation. They asked 350 institutions – more than half of them under non-British ownership – for their views on the relative attractions of London, New York, Frankfurt and Paris as major international centres. Overall, London came a close second to New York in terms of international financial centre competitiveness. When asked to compare the different regulatory environments in the four centres, respondents put London on top of the list by a big margin. My own conversations with international bankers make clear to me that the threat to London as a major capital market centre arises more from the state of our transport systems than it does from the state of regulation. London also did well going forward; it was expected to have the most positive regulatory environment in five years' time, from the point of view of running a financial services business.

    We will continue to watch this balance between the benefits and the costs of regulation very carefully. To date, we have succeeded in holding the FSA's like-for-like costs flat in real terms over the year, and we will want to continue to do so – or, if possible, to improve on that performance. You, and others who pay fees to the FSA, have an interest in our costs being properly controlled. So, too, do John Tiner as Chief Executive and I as Chairman. One of the twin pillars on which the FSA's legitimacy depends is our demonstrating our effectiveness and efficiency.

  8. The costs of doing business in London is one aspect of our concern that the UK's wholesale markets should be efficient, orderly and clean. We are also concerned about orderliness. London has escaped the worst excesses of either the equity research scandals or the mutual fund market timing issues which so wracked New York. It is tempting, but I think it would be quite wrong, simply to relax in the comforting knowledge that another world capital market has had bigger problems than us. But it is important to recognise that the prime responsibility for clean and orderly behaviour lies with those who do the business, not with those who regulate. The senior management of financial institutions – the members of this Guild – carry the responsibility. We at the FSA will continue to make this clear, both by doing what we can to lighten regulatory burdens for those institutions whose senior management have shown themselves willing and able to take on their responsibilities; and by significant action, including enforcement action, against senior managers who fail to do so.

    In both wholesale and retail markets, we need to establish that those senior managers who act irresponsibly must expect to pay a price, both institutionally and individually. I think it important that we demonstrate this more effectively than in the past, particularly by reducing the time which elapses between an event which is problematic and the enforcement decision in respect of that event. At present, this takes too long, which is neither fair to the person whose behaviour is under investigation nor helpful in establishing clear messages about acceptable and unacceptable behaviour. The FSA will come
    forward in the near future with proposals to improve our enforcement processes.

  9. I do not want to end on an enforcement note. Enforcement, by definition, is a mark of failure, a breach of principles, standards or rules of a nature or scale to make subsequent punitive action necessary. But such action represents failure both for the practitioner who has committed the breach, and for the regulatory regime which has been breached. The challenge for both practitioner and for regulator is how to avoid breaches occurring.

    The basis of the financial regulatory regime in the UK is not adversarial, but a recognition of shared purposes. There is a confluence of interest between banks and their regulators in matters such as adequate control of risks, capital adequacy, management systems. We can help – and I hope do help – by spreading what we learn from supervision of individual firms by generalising the lessons (anonymously) for the benefit of the banking community as a whole. That is the purpose of our "Dear CEO" letters, which we will continue to use – though with greater control over the process. You help by being open and candid in your dealings with the FSA, and by taking your responsibilities as senior managers to heart. On that basis, I look forward to a continuing and growing importance of international banks in London.

  10. I have deliberately not delved into many subjects which are live issues: consolidated supervision, Basel 2, the European agenda now the Financial Services Action Plan is legislatively (but not practically in terms of implementation) nearly complete. As I said, I would be happy to attempt to answer questions. Even more than answering questions, I shall be interested in listening to views. You may have noticed that the job specification for the FSA Chief Executive specified that the person should be a good listener – a quality which as Chairman I also now hope to display.

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