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The FSA is dead. Long live the Bank of England - and others
22 June 2010
On 16 June, Chancellor of the Exchequer George Osborne announced sweeping changes which will bring about a new regulatory structure for the UK’s financial services sector.
The biggest shake up since the formation of the Financial Services Authority (FSA) in 2000 will see the abolition of the existing tripartite regime between the FSA, Bank of England and HM Treasury, effectively scrapping the FSA.
Prudential regulation will move to a new body reporting to the Bank of England, and a new agency will be created to tackle serious economic crime.
The remainder of the FSA’s functions are to be transferred to a new Consumer Protection and Markets Agency. It is likely that the changes will take two years to implement and will be subject to much consultation and scrutiny.
As well as setting out proposals for reform of regulatory structures, on the same day of the Chancellor's speech, the Government appointed an Independent Commission on Banking.
It has been established to investigate possible structural measures to reform the banking system (including the possibility of separating retail and investment banking in a sustainable way) and to look at other measures which can promote stability and competition.
The Chancellor also announced that a bank levy is to be introduced, together with demands for further restraint on pay and bonuses, but did not go further than this.
The regulatory reform proposals build on the Coalition Government Agreement, which set out the intention to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation, and are aligned to the Chancellor’s White Paper on regulatory reform, published last year.
In relation to macro-regulation, the Government will create a new independent Financial Policy Committee at the Bank of England. This will have responsibility to look across macro issues in the whole economy that might threaten economic and financial stability.
The new prudential regulator (the Prudential Regulatory Authority) will operate as a subsidiary of the Bank of England and will carry out prudential regulation of financial firms, including banks, investment banks, building societies and insurers.
The New Consumer Protection and Markets Authority will, according to the Chancellor, regulate the conduct of every authorised financial firm providing services to consumers. Whether this includes firms other than those currently authorised by the FSA (for example credit providers and intermediaries) remains to be seen.
Whilst the creation of this ‘twin peaks’ approach of separating prudential and conduct regulation mirrors the system used in Australia, it bucks the trend of moves within the EU in the recent past to consolidate and unify financial regulation.
The separation of functions between the PRA and the CPMA needs to be clarified to manage conflicts in cross-over areas. For example, it is not yet clear what will happen to the FSA’s current enforcement powers or who will have responsibility for the authorisation and supervision of exchanges, clearing houses and other market infrastructures (a point flagged by the FSA’s chairman, Lord Adair Turner in his response to the Chancellor's speech) or other authorised firms, such as investment, mortgage and insurance intermediaries.
As well as clarifying the functions of the PRA and CPMA, how the two authorities will work together needs careful attention. Let us not forget that the way a financial services firm conducts its business can have a significant effect on that firm’s capital base. One of the factors that led to the credit crunch was that investors lost confidence in some of the products banks were putting out to the market and were not comfortable that such products worked in the way investors thought they would.
The Government also intends to remove the FSA’s functions in relation to economic crime and to move this into a new agency which will take on the role of tackling serious economic crime. As well as taking over the FSA’s functions in this area, the new agency is likely to replace the white collar crime enforcement and supervisory functions of the Serious Fraud Office, the Office of Fair Trading and HMRC’s Customs Division.
Therefore, it is probable that firms currently supervised by the FSA, OFT or HMRC for anti-money laundering purposes will in future be regulated by the new Serious Economic Crime Agency.
The Chancellor’s contention that because central banks are lenders of last resort, they need to be familiar with every aspect of the institutions they may have to support, which also means they must be responsible for day-to-day micro-prudential regulation as well, does seem somewhat flawed. The collapse of Lehman Brothers occurred under the watch of the Federal Reserve Bank in the US, and the Bank of England’s previous history with regard to the micro-prudential regulation of banks has also been somewhat chequered. The collapse of Barings and BCCI are examples of how things can go badly wrong under regulation by the Bank of England.
It should also be remembered that when the new regulators are put in place, staff currently working at the FSA will be moved over to the new regulators, as happened when the FSA was created from the amalgamation of a number of regulators in 2000. This could therefore lead to what is no more than an expensive moving of deckchairs, and surely the important thing is that regulators, no matter what name they are given, do their job properly and have the staff and organisation competent to perform their functions.
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Paul Estlin
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T: 03700 86 5667
I: +44 (0)161 954 5667
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