Speech by Callum McCarthy - Chairman, Financial Services Authority

To the Chartered Accountants' Livery Company

19 April 2005

 

Introduction

Master, Wardens, Your Excellencies, My Lord, Mr Aldermen, Ladies and Gentlemen. 

It is both an honour and a pleasure to be the Master's guest at this Livery Dinner.  It is in fact the second time I have had this honour, since when Geoffrey Wilson was the Master in 1989 he was kind enough to invite me as his guest.  In one respect, I must tell you, things have gone downhill since then – not, I should hasten to say, in terms of the Livery Company's hospitality, which is as generous as ever;  nor in the quality of the Company's Master, which remains as distinguished as ever.  But you will, I think, sympathise with my view that being a guest in 1989 had a significant advantage over the same honour in 2005 in that all that time ago the guest was not required to make a speech.  How times have changed! 

 

  • I hope you will also sympathise if the subject on which I dwell this evening is simply that:  how times have changed – and what changes we can and should expect, in terms of financial services. 
  • It is sometimes hard to recognise the pace of change in financial services.  The changes over the last fifteen years – since I last attended this dinner – are evidence of the speed of change.  There are many statistics which demonstrate this, but the size of change is most easily comprehended in terms of the institutions in financial services.  Fifteen years ago, the US Treasury and bond market was dominated by Salomons, and the junk bond marked by Drexel Burnham Lambert – both now disappeared.  Then Japan accounted for 10 of the world's 20 largest banks, measured by assets;  today only four feature.  IBJ, Long-Term Credit Bank, Dai-Ichi Kangyo, Sanwa Bank and Tokai Bank are now names of the past.  In Britain, NatWest was in 1989 the country's second biggest bank by assets.  Names like Barings which appeared in the 1989 league table for M&A have disappeared completely.  The great names of investment banking of the late 1980s and early 1990s – SG Warburg, Kleinwort Benson, Schroders – are all now subsumed in large integrated institutions, with the names either lost entirely or attenuated severely.  In accounting, there were six big names where now there are four.  And, of course, where there were a dozen regulatory organisations, today there is just the FSA. 
  • The shape of financial services has also changed physically, with the growth of Canary Wharf as an integral and important part of the wider City of London.  In 1989, Canary Wharf was a building site and redundant dockyard;  the building in which I now work was not finished until 1990.  Indeed, throughout the 1980s I used to visit Canary Wharf not to do business, but to windsurf in a landscape where the destruction of warehouses made for particularly clear and consistent breezes.  How times have changed. 
  • Despite (possibly because of) – less contentiously and without ascribing cause and effect at the same time as – the disappearance of so many names, London – and the UK – has prospered greatly in the changes which have been so large and which have occurred so rapidly over the last 15 years.  There is no doubt that London has become over the last 15 years the most important international capital market centre in the world.  The UK accounts for 60 per cent of primary international bond trading, and 70 per cent of secondary.  There are more companies listed on the London Stock Exchange than on either the New York or Tokyo exchanges.  In the OTC derivatives market, the UK accounts for over 40 per cent of global trade, compared with 24 per cent for the US, 10 per cent for France, and 3 per cent for Germany.  Our fund management and insurance industries are both the third largest in the world, behind those of the US and Japan.  British banks have distinguished themselves in terms of profitability, and market capitalisation. 
  • It is of course no accident that London has become the most international capital market centre of the world.  It reflects a clear decision by government and by the regulatory authorities to treat financial institutions – irrespective of the nationality of their shareholders or their management – on the same basis, without preference for or protection of British institutions.  This makes the UK unusual – arguably unique – among large countries.  The difference is very real:  you can see it very apparently in the different treatment of the acquisition of Abbey by Banco Santander in Britain on the one hand and the continuing protection on the other and for Italian banks from foreign acquisition which is today a subject of controversy between the EU Commission and the Bank of Italy.  But the Italian attitude is not confined to Italy;  the concern for national champions, protected by the national government, is a feature of national policies towards banking in many member states in the EU. 
  • Our success has been based not on nationalist protectionism, nor on a latter day form of Colbertian support for national champions.  Rather it is based on a commitment to markets – markets which are efficient, orderly, and fair.  I am clear that this provides the best environment both for competitive firms and for their customers – in financial services as elsewhere in the economy.  And it also provides a basis for less, not more, regulation. 
  • We all have contributions to make to ensure that we continue to enjoy the benefits of efficient, orderly and fair markets.  First, we at the FSA will work hard to promote markets – both wholesale and retail – with those characteristics.  We will therefore want to see principles and 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.  You should therefore expect us, in facing the future changes which I expect to be as great and as rapid as those we have seen over the last 15 years, to work hard to promote efficient markets, and to seek ways of avoiding intrusive regulation and unnecessary costs. 
  • Second, we expect firms, and in particular their senior management, to contribute to this – to act responsibly, in line not only with detailed rules but also with the principles that lie behind those rules.  The more we achieve this, the less we will have to lay down detailed rules.  This would benefit both those who regulate and those who are regulated.  
  • Last of all, there is a critical part to be played by those who measure and account for the performance of financial services companies.  Reliable financial information is essential for markets to work.  It is necessary for the market system to survive.  Yet we have to recognise what we have undergone can only be soberly regarded as a crisis – I choose my words with care – in terms of the provision of reliable information, and the maintaining of standards of truth and fairness. 
  • In the US we have had the scandals of Enron and Worldcom, which have led to the legislative response of Sarbanes-Oxley – a legislative response which passed the Senate without dissenting vote, a measure of the strength of political feeling it engendered.  In Europe, we have had issues of financial reporting in companies as varied as Ahold, Parmalat, and Shell.  There is no doubt that these events, occurring in various countries and involving firms which were considered of the highest standing, have cast an unflattering and damaging shadow on those who provide financial information – including those who provide audit opinions.  We need to change this.  Accountants have a central role in making this change:  the provision of information which, in traditional accounting terminology is true and fair, and which represents the substance rather than the form of transactions, has never been so important.  The need to avoid a box-ticking mentality is as acute for accountants as it is for regulators.  On behalf of the financial regulator I undertake that we will avoid this temptation.  I encourage others among you who are accountants to do the same.
  • I have set out the dramatic changes – some involuntary, some planned - which have been such a feature for financial services since I last attended this occasion.  Comparable changes will occur in the years ahead.  I have set out what regulator, regulated company and those who have the crucial tasks of measuring performance of, and of auditing the risks to, companies can and should play.  It is a source of comfort to know that the members of this livery company will be intimately involved in this process.  I am confident that, if we all – regulator, financial firms and accountants – play our parts, we in the UK will be as successful over the next 15 years as we have been since I was last your guest in 1989. 
  • With that in mind, it gives me great pleasure to propose the toast of The Worshipful Company of Chartered Accountants in England and Wales root and branch may it continue and flourish for ever.