Ladies and Gentleman,
It is a real pleasure to be back in Tokyo, particularly as the main reason for my return to Japan is to open the new premises of Lloyd’s Japan. Of course, Lloyd’s is not new to Japan, we have been issuing insurance policies in Japan since 1868. Through the years we have helped our customers and the market cope with a variety of earthquakes, windstorms and other challenging events.
The date 1868 is known by most Japanese schoolchildren. Unfortunately this is not because of the appointment of Lloyd’s first agency here, but because it marked the start of the Meiji era, when the great Meiji Emperor restored Imperial rule, ending over 250 years of dominance by the Tokugawa Shoguns.
Modern Japan was born in 1868. Feudal rule ended, the capital moved from Kyoto to Tokyo and the work began which would make Japan a world industrial and political power. The 19th century created the foundations for the success of both Japan and the United Kingdom. It made us both into global economic powers.
The question for both of us today, is will we remain so?
It is certainly true that the rise of China, Brazil and India is revolutionising the global economy. It is also quite clear that all of these countries will grow in power and prestige in this century. But it is not clear to me that this automatically spells trouble for the current economic powers.
If a person or a country becomes wealthier, that does not make his neighbour poorer. On the contrary, it is likely to make them both richer, as they can trade or borrow from one another.
In the league of world finance, Japan and London are veteran players - commentators ask questions about their fitness but they will stay on the first team if they keep scoring goals.
Japan and London face similar challenges. They are mature economies. Questions are asked about national debt, about competition, about whether the recovery will be V shaped or W shaped. These are important issues. But Japan remains the world’s second largest economy[1] and home to the second largest Stock Exchange in the world. And London remains one of two genuinely global financial centres.
The British Chamber of Commerce have asked me to speak today on the theme of “Fresh Challenges for the City of London”.
London has one perpetual challenge – to continue to be the best. To earn its place in the first team. And I believe that it will succeed. The Global Financial Centres Index, in its most recent report, noted that to be a global financial centre, strength was needed in all areas. And this is why London consistently stays – despite a bruised reputation or regulatory challenges – at the top.
So is London still performing? Are Financial services still performing?
A recent survey by Price Waterhouse Coopers estimated that in the tax year 2008-9, financial services accounted for £7.6 billion – around 18% of all UK corporation tax receipts and also for £61 billion of income tax receipts – 13% of the UK total.
Yet the amount of workers involved in financial services account for just 3.5% of the UK population. So, in tax terms, the financial services worker is very productive indeed.
People in the UK often bemoan the fact that “we don’t make anything anymore”. That is not strictly true. And this sentiment also ignores the fact that financial services provide jobs that are not simply well paid, but are interesting, challenging – and compared to British industries of even 50 years ago – safe, healthy and sustainable. There will always be a need for bankers to provide capital, for accountants to monitor it and for insurers to keep it safe.
None of this means ignoring the crisis or what caused it. Nor do I advocate continuing a “business as usual” approach. There needs to be real and heartfelt change in both the regulation and the governance of the banking industry to ensure there is no repeat of the recent financial crisis. But we need to avoid a kneejerk response in terms of regulation and political macro-management.
Nor am I complacent about the fact that there are many other cities which are working hard to take London’s position at the top of the global league. The challenges aren’t just from centres in Asia. They are also from other cities in Europe – from Paris and Frankfurt and from offshore centres.
So it is worthwhile considering, given the range of challengers to London’s crown, why does it remain at the top?
The UK is well positioned. Geographically, we sit between Asia and the Americas, in a convenient time zone. English is the business world’s language of choice and our common law system is business friendly. Added to that, we offer first rate services and a highly skilled labour force. There is another important feature of London workers – they are international. 30% of City workers who have university degrees were born outside of the UK. Just 25% were actually born in London. We are instinctively international. That will help us deal with the shifts in global power. Most people whom I know in London don’t see the emerging economies as a threat, they are too busy thinking what financial services they will need, and how to provide them.
Finally, London offers a huge variety of financial services. If you want to trade in metals, you can do it in London. Or if you are an international shipping firm, you will have an office in the City. To be a truly international centre, you need to be this diverse. At present, many other centres occupy a niche, but in London, we have experienced workers who understand the full range of financial services.
The diversity of the financial services industry is often forgotten. For the UK public, “the City” stands as shorthand for anything vaguely connected to money. We need to work on establishing clearer identities for the component parts of financial services.
If a downturn in the automobile industry caused economic hardship, people would not blame the electronics sector, because they too are a manufacturing firm.
Yet that is what has happened in this crisis. There are many parts of the financial services industry which throughout the financial crisis, maintained high levels of risk management and financial responsibility. My industry, insurance, is one.
Whilst I believe that London possesses the advantages which attract international business, I am not complacent. I support competition. It creates a race to the top; it cuts prices and raises the standard of the services we offer to the consumer. But competition means that we have to compete. No company, no sector and no country can continue to rest on their laurels. A reputation will take you so far, but it can quickly fail too, if performance falls.
Our competitiveness must be our number one priority. I understand the anger directed at parts of the banking industry. The desire to point the finger is very human. But laws, bills and acts are not the place for recrimination. The regulatory framework must position our financial services where they can compete internationally and make the money to re-fill the Chancellor’s coffers
I don’t support either more or less regulation. I support better regulation. The point of regulation is to make people’s lives better. And in terms of business regulation, if we get it wrong, we can make people’s lives much worse.
The current debate on regulation needs to avoid being too backwards looking. Law makers might succeed in preventing a re-run of 2008. But something else will happen and the laws won’t be fit for purpose, or inadvertently they will create a new problem, as the well meaning architects of the Sarbanes Oxley Act did. They solved the problem of the Enron excesses, but in the process drove lots of business from New York to London.
I would like our regulators to look to the future. We need a clear idea of what we are trying to achieve. A sustainable economy where our largest companies and create jobs for the 13 million people who, in OECD countries alone, have lost their jobs.
The other point, of course, is that governments should try, as far as they can, to create an international level playing field. In today’s globalised world, if businesses don’t like the regulatory environment in one financial centre, they can just move to the next. And as long as the loopholes exist, they will be exploited.
So the quest for the perfect financial regulations have become, increasingly, a matter for the international community as much as for domestic governments. Will 2010 be the year when governments across the world find a universal solution? This is a big demand. And I am not sure whether it will be achieved. But I do support the unprecedented levels of international co-operation which we have seen during this crisis.
London, of course, has some experience of international regulation, as the UK has been a member of the European Union for over 35 years. I know that the Japanese government is looking more seriously at the formation of a pan-Asian Free Trade Association.
Europe has created the largest free trade area in the world. All the European countries benefit from being able to export products and services without tariffs or excessive paperwork. I can hire top brains from Germany, or Italy or Finland without having to worry about visas and immigration. These are real advantages to any business.
If I am asked for advice, I always say that the most valuable advice which I can give, is not to share stories about what I have done well but to tell you about my mistakes. Asia needs to look at the mistakes, the problems that Europe has experienced. As it has an opportunity to examine these closely and to learn, not just from Europe’s successes, but also from its failures, which are always the areas where the individual member states find it hard to reach agreement. We are seeing at the moment, the difficulties of driving one economic policy which covers different member states.
This form of political integration is a painstaking task, it takes time and it requires countries to be honest and clear about where they want to co-operate – and where they don’t. But membership of the EU does bring real benefits to our economies, so it is positive that Japan and other East Asian countries are starting to think about this. ASEAN is a start.
Ladies and Gentlemen,
My aim today has been to show that whilst London has inevitably suffered during the financial crisis, it still possesses many advantages.
I see these advantages at Lloyd’s. We have been trading in the City of London for over three hundred years. And there is a clear sense of that depth of experience in our market. But we also pride ourselves on insuring the most difficult and complex risks in the world. And to do that, we have to be flexible and adaptable. For two hundred years, the bulk of our insurance was in the marine trade. But the world changed when cars and airplanes were invested. And so did we, developing the first motor policies and the aviation polices.
We have generations of knowledge behind us, but that is only useful if we apply that expertise to the risks which today’s world faces, whether that it the growth of information technology, or sustainable energy or a space flight.
And like London, Lloyd’s is, and always has been, a highly international firm. We insure risks in over 200 countries and we have licences in another eighty. We became the first overseas reinsurer to be admitted to the Brazilian market in 2008 and we’ve been operating as a reinsurer in China for over two years now. Every day risks come into our market from all over the world – it might be the new World Trade Centre construction in New York, or a mine in Latin America or cover for the Olympic Games in Rio. Our underwriters, because of their vast experience can deal with all forms of risk, wherever they are, quickly and efficiently.
And also like London, Lloyd’s has had prosperous times and problematic times. In the eighties and the nineties we had to deal with a string of very high losses. But we found the money and paid the claims. More significantly, we also looked at what had gone wrong and we made adjustments, transforming the way we manage risks and our capital.
This has stood us in good stead. In the first half of 2009, Lloyd’s recorded profits of $2.1 billion and our capital assets have grown to $3.3 billion. We have not been subject to the devastation inflicted on other parts of the financial services industry and the wider economy. In fact, here in Japan, Lloyd’s wrote more business in 2009.
Japan is our eighth largest market. We are proud that we have had a presence here since the start of Japan’s industrial era, over 125 years ago. We are committed to this market, one of the great global insurance markets. If you have risks which you would like us to cover, please do get in touch with Iain Ferguson, the head of our office here in Japan. I know that Iain and his staff will be only too pleased to help.
Thank you for your attention.
[1] CNN report 15 February 2010
