Hm Treasury
This building and indeed this city, but this building in particular, reflects the UKs commitment to openness, competitiveness and innovation in financial services and the significant role that financial services can play in growing our broader economy, and theres been a great deal of talk in recent months about this.
Since 2010, the British economy has seen the third fastest growth in the G7 faster than France, Germany, Italy, Japan. It is clear that our long-term underlying growth rate needs to rise in order for us to deliver prosperity, lower taxes and more effective public services.
And its right then, that our long-term plan for this countrys growth is our commitment to openness, competitiveness and innovation writ large.
Thats why were cutting taxes, to ensure hard work is rewarded, and to allow businesses to take long, firm decisions and investment in R&D.
Thats why well continue to reduce our national debt, to fight inflation and deliver affordable mortgages for working people.
Thats why, through investment, we will ensure that our supply of homegrown, clean, affordable power is matched by home grown teachers, doctors and nurses.
Because since the beginning of 2023, weve seen real progress. Inflation and borrowing costs have fallen with inflation more than halving, our economy has bounced back, outperforming the forecasters, outperforming many of our European neighbours, and our national debt continues to fall.
I know that all of you, not just in Bloomberg, will continue to monitor our progress closely. But today I want to focus on the role that our capital markets can play in building our economy for the future. Rising to our economic challenges and achieving Britains economic potential.
Well, the first thing we should say is, well, what are we talking about? What are capital markets? Why do they matter? They play a key role in our economy because by allocating capital, facilitating investment, growth and job creation, they create investor returns. And those investors are not just international conglomerates. Theyre British businesses. They are British people. And all of this drives activity across the economy.
London in particular, is an international powerhouse with a foreign exchange market three times the size of the American one. The derivatives market 50% bigger than the American one, all of which helps to make us a global hub for investment.
Now, I have, this Chancellor, this government, were not the first to recognise the potential of capital markets to grow the British economy in the 1980s, Nigel Lawsons reforms, the Big Bang suspect, so to speak, unlocked the UKs capital markets.
However, in recent years they have lost some of the dynamism for which they became well known in that generation. We in this country have not been immune to the global shift away from public equities to private equity.
According to a recent paper by McKinsey, total private market assets under management have grown at an annual rate of nearly 20% since 2017, which was the first year I was elected to parliament.
But between 2015 and 2020, London accounted for only 5% of global IPOs, and the number of listed companies in the UK has fallen by about 40% from as recently as 2008, the year of the financial crisis. Now those, Im sure you agree, are sobering figures. And we take that on, and we know that we need to change them. But to change them, we must first understand whats driving them.
A large part of this story is the success of New York across the pond. Over the past five years, the FTSE 100 increased by 12%, while the S&P 500 increased by 81%. Nasdaq has been very successful in attracting new listings, especially big tech firms. There, American home grown American tech firms like Apple, Meta and Alphabet.
And interestingly, if you remove the seven big tech companies from the S&P 500, the gap in performance is not anything like as wide as one thinks. Indeed, at one point in time, and this is quite an interesting fact, at one point in time, Apple alone out valued the entire FTSE 100. And we are also seeing greater competition from smaller EU exchanges such as Amsterdam.
Its true however, there has been a broader trend over the past decade or so of a change in British investor behaviour, with domestic British investors shifting away from investing in UK equities and moving beyond our shores. Why has that happened?
My thinking after speaking with I dont know how many people in the last few weeks a month since taking this job. Is that our approach to capital markets must carefully balance appropriate regulation with investors appetite for risk. And our post 2008 approach has focused too much on the former and not enough on the latter. In part that reflects the culture mindset of the government and our regulators.
Now, as many of you may know, Ive spent some time in this office and beforehand making the case for the importance, the importance of risk in our society. And I pushed against the modern trend across the whole Western world. Its not just Britain. Pushed against the modern trend to seek to eliminate all risk, which has only accelerated after the Covid pandemic.
This culture of safetyism, [political content removed] which prioritises feelings of safety and the elimination of risk at all costs.
Now, look, this is an understandable, but its a deeply damaging instinct. We have to move faster. Yes, with speed limits and controls. But accepting that innovation and growth cannot come and an entirely risk free environment.
As I argued in my remarks to the FT banking summit, which was, I think, the first public statement I made in this post. There is no point us in the UK having the safest graveyard.
Through a journey of root and branch reform. We need to move from a risk off to a risk on outlook, to move from a complacent incumbent mindset to an insurgent one, whilst recognising the challenges that we face because its only through measured and purposeful risk taking that we can deliver progress, economic growth and a capital markets renaissance.
Heres what weve already achieved. Heres what weve already done. First step on our reform journey was to properly diagnose the problem that started in earnest in 2020, the end of 2020 with my very good friend Lord Hill. The UK Listings Review, which built consensus across government and the industry on how to boost IPOs and capital raising on UK markets.
Then 2021 Mansion House, our then Chancellor, now Prime Minister mapped out our destination and he said he wanted a more open, competitive, technologically advanced financial services sector. And he launched the Wholesale Markets Review to consider how we could use our newfound regulatory freedoms to make UK markets more competitive. So having diagnosed the problem, next came our solutions.
Reforms progressed across all areas in our legislation and regulatory regimes, but also in the culture and mindset of government and regulators. On the legal and regulatory front, we have passed a huge act, the new Financial Markets and Services Act 2023. This delivered the Wholesale Market Reviews most urgent changes, and as a result, firms can now trade in the most liquid market and get the best price for investors.
Weve also set statutory growth and competitiveness objectives for our regulators, established the new Regulatory Complaints Commissioner, Rachel Kent, who is here in the front row. So, she is, to ensure that regulators are fully accountable to market participants as well as accountable to consumers. And weve worked hand in hand with industry to carefully review every single aspect of our rulebook.
Now, this issue is very close to my heart. As the former chair of the Regulatory Reform Group in Parliament, which I set up. Ive long been a critic of the accountability gaps in our regulatory system and the disproportionately anti-growth mindset of many regulators.
However. As my thinking has evolved over time, Ive come to understand the responsibility that politicians have, not just regulators. Politicians from all parties. We as politicians must take a lot more responsibility for this. We created the system and incentives that the regulators operate in, whilst often blaming them for not acting fast enough on an issue of consumer harm, and then staying silent when industry complains about an ever more complex and costly rulebook.
This culture of risk aversion has been very present in politics as much as it has been present in the regulatory state, and this must change. So be in no doubt. While Im closely monitoring how the new system breaks down and closely monitoring how our regulators take on this growth and competitiveness objective that we have given them.
I will act and we will act further if we dont see a sensible shift in our regulators toward more pro-growth mindset. At the same time, I want to lead a cultural shift within our politics and within our politicians. More immediately, we are taking forward a host of new initiatives like the Digital Securities Sandbox, which will test the use of distributed ledger technology in trading and settlement. Thats just one of the huge range of reforms coming up stream. The results of these reforms is that after three and a half years, we are now within sight of making the UKs public markets match fit again.
But you and I know we must go further to fully deliver on the promise of our capital markets. The regulatory and legal reforms are a necessary but not sufficient condition. So let me tell you about the steps that we are taking now to go further, because were supporting companies through every stage of their investment life cycle.