European Commissioner for Internal Market and Services
Financial market controversies and the outlook for next year
ICAEW (Institute of Chartered Accountants in England and Wales) - Debate on Financial Markets
London, 4 December 2008
[Ian (Smart – Chairman)] Thank you for your kind remarks and let me wish you and everyone else in the room all the compliments of the season. I am happy to be back.
However gracious the introduction though, I was surprised by the wording of the invitation. It suggested that I should be combative and use lots of humour in keeping with the festive nature of the event.
Well I can do combative as you all well know!
No time to laugh
But I do not find much to laugh about at the moment.
There will not be much festive cheer this year with billions lost from share values in recent months, creating huge falls in the value of pension funds on which so many members of our society depend especially at this time of year.
I do not find much to laugh about the total loss of confidence in markets and the drying up of inter-bank liquidity, putting millions of savers at risk, including people much less fortunate than ourselves.
It is no laughing matter that we now seem to be heading towards the biggest worldwide recession since the 1930s, resulting in the misery of unemployment and mortgage foreclosures for millions around the world. once again particularly hard at this time of year.
A reality check for us all
If I seem to be like the ghost of old Marley paying a visit to Ebenezer Scrooge and presenting him with a ghastly vision pre –Christmas vision, it is for good reason. It is time for everyone in the financial markets to have a reality check and understand how much the mood out there and the reality of the situation have changed. If there is anyone in the room who sees this in different terms, I would like to ask them what else they see. If they claim to see the Land of the Sugar Plum Fairy and the Kingdom of the Sweets, then they are definitely in the wrong Christmas story.
A mere six months ago, I was being barracked by people in the City of London for MiFID. I was being barracked on Credit Ratings Agencies and told that I was overreacting. I was being barracked on securitisation.
Well the orchestra has quietened down. Half of them have been sacked and the other half have seen their (financial) instruments broken.
I was being told that the industry could handle it, that they knew the risks, that the effects of subprime had almost finished working their way through the system. The people who told me this started out as PLC's but in their scale of denial about the crisis they have been much more like NMG's – Not Me, Gov!
I was being told that I did not understand markets, that the European Commission and national regulators and supervisors should just get out of the way and let markets do their thing. I was told that we needed to catch up with where markets were and stop being pedestrian or else we would be passed by.
Turning the situation around
And you will be passed – but by events and by regulation - unless you get serious about the extent of the change. What we need now is a bit of candour and humility from the financial services industry.
I would like to live in a world of light-touch regulation, where the regulator shouts "Play on!" as much as possible. But frankly, even the most relaxed referee has to intervene when you have a situation where not only are the players fouling each other on the pitch, but they are having a go at the crowd as well!
So how are we going to get out of this mess? We need to act in five ways:
I. Transparency and Disclosure. The industry has to act to disclose what they have and where they have it. We need accounting standards that give us a true picture and not just when the economy is working well. And we need a global accounting standard setter with 21st century standards of governance.
II. Regulation of risk management and prudential oversight. The EU needs to adopt the revised Capital Requirements Directive that I proposed in October and it needs to do so fast. We need Solvency II adopted and we need it fast. And we need a roadmap on how the risks from credit derivatives can be mitigated and we need it fast.
III. Incentives. Perverse incentives stemming from executive compensation schemes should go and they should go now. My proposals on securitization need to be adopted and they need to be adopted now. Conflicts of interest within rating agencies need to be tackled and they need to be tackled now.
IV. Oversight and Crisis Management. We have got to move towards much better oversight to detect and prevent crises or imbalances in future. It is why President Barroso set up a High Level Group on cross-border supervision under Jacques de Larosière to produce recommendations by March next year. And we need better crisis management mechanisms.
V. International Cooperation. And finally, we need much, much greater international cooperation. The G20 Summit took an important step forward, but we have to go much further and translate this into change on the ground. ... We need to cooperate whenever and wherever with our third country partners. For this reason, I was very glad to see that on accounting standards, we completed the move to dropping reconciliation, we agreed on equivalence for certain third countries and I welcome the courageous moves of the SEC on moving to IFRS for US issuers.
When these proposals are safely adopted, I will then come forward with a paper setting out a clear, collected and reflected vision for the years ahead, looking at how to reform our system to prevent future problems and crises in whichever shape.
Mr Chairman, Ladies and Gentlemen, we are in a dire situation, caused by mistakes and hubris in every part of the system. And this situation is hurting our pensioners, our firms, and our families. Things will never be the same again and we have to recognise that. But if we are realistic and implement the approach that I have outlined, we can turn things around and produce many happy and festive Christmases in the future.