UK Proposes New Financial Regulatory Structure
Wednesday, February 01, 2012

The United Kingdom Treasury has introduced the Financial Services Bill into Parliament which, it is hoped, will fundamentally transform and strengthen the financial regulatory structure in the hands of the Bank of England.

The new legislation will fundamentally reform the current tripartite regulatory regime, which divides responsibility for financial stability between the Treasury, the Bank of England and the Financial Services Authority (FSA), and will give the Bank of England responsibility for both macro and micro prudential regulation.

Under the bill, the FSA will cease to exist in its current form, and a new conduct of business regulator – the Financial Conduct Authority (FCA) – will be established to supervise all firms across financial services and markets. The bill will also enable the transfer of responsibility for regulating consumer credit to the FCA, from the Office of Fair Trading, to better protect consumers.

A macro-prudential authority, the Financial Policy Committee (FPC), will be set up within the Bank of England to monitor and respond to systemic risks. However, responsibilities between the Treasury and the Bank of England will be clarified in the event of a financial crisis by giving the Chancellor of the Exchequer unilateral powers to direct the Bank of England where public funds are at risk and there is a serious threat to financial stability.

The Chancellor’s presentation of the bill emphasized that, as recommended by the Treasury Select Committee, the government “will create a targeted new power for the Treasury to ensure that Parliament and the public are in no doubt that the Chancellor is in charge when decisions are being made about whether and how to spend public money in a future financial crisis”.

In addition, responsibility for significant prudential regulation will be transferred to a focused new regulator, the Prudential Regulation Authority (PRA), established as a subsidiary of the Bank of England.

Further consideration of the bill in parliament is provisionally scheduled to take place on February 6, and Royal Assent is sought by the end of the year, for the new system to be operational in early 2013.

Financial Secretary to the Treasury, Mark Hoban commented that: “This government has taken the necessary action to tackle the difficult and dangerous legacy left behind by the financial crisis, including a tripartite structure not fit for purpose. We’ve listened to the views of stakeholders following an unprecedented period of consultation, and are determined to strengthen the financial system in a way that safeguards financial stability and protects consumers.”

George Osborne, the Chancellor, in comments at the World Economic Forum in Davos, criticized the existing “failed” system of financial regulation that had “allowed dangerous levels of leverage to emerge”. He called the previous tripartite system “incoherent” and confirmed that the government is looking to establish “clear lines of accountability, and restoring that crucial element of judgment”.

“During normal times,” he concluded, “the independent Bank of England will be responsible for prudential regulation and systemic stability, accountable to Parliament. But in a crisis, when taxpayers' money is at risk, both the responsibility and crucially the power to act will rest with the Chancellor of the day. I hope that we will never again see the paralysis and confusion that did so much damage when the latest crisis hit.”