U.K. Government Reveals Details of Financial Regulation Overhaul

U.K. treasury minister Mark Hoban on Monday (26 July) launched a three-month consultation on the government's plans for sweeping reforms to financial regulation. In presenting the consultation, Hoban provided more details on the plans originally presented by Conservative chancellor (finance minister) George Osborne in mid-June (see United Kingdom: 17 June 2010: U.K. Government Unveils Sweeping Changes to Financial Regulation). At the crux of the reforms is a desire to consolidate and strengthen the U.K. regulatory structure by transferring more supervisory power to the Bank of England, while the Financial Services Authority (FSA)—a brainchild of the ousted Labour Party—will be abolished. In effect, the reforms will mark the end of the discredited tripartite system of financial regulation spearheaded in 1997 by then chancellor Gordon Brown, whereby the Bank of England, FSA, and Treasury shared responsibility for financial oversight. Although the new bodies (detailed below) will be created later this year and in early 2011, the transition to the new system of financial regulation will only be completed in 2012. As a result, the financial sector will have ample opportunity to adapt to the closer supervision and oversight envisaged under the new rules. The consultation closes on 18 October 2010.

Bank of England and Financial Stability Dominate

Under the reform plans, the Bank of England will see its regulatory scope widened massively, with the institution becoming one of the most powerful central banks in the world. Under the plan, three new bodies will be created under the auspices of the Bank of England.

• Financial Policy Committee (FPC): The committee will be responsible for financial stability through the setting of capital and liquidity ratios for individual banks through the newly created Prudential Regulation Authority (PRA). Through the PRA, the FPC will also be able to place caps on leverage at firms, regulate bank lending, and demand higher collateral requirements. The committee will have 11 members: six from the Bank of England and five non-bank appointments, including the chief executive officer (CEO) of the newly created Consumer Protection and Markets Authority (CPMA), as well as a non-voting government representative. The FPC will meet four times a year and be required to publish its findings.
• Prudential Regulation Authority (PRA): The PRA will be responsible for carrying out the day-to-day supervision and wider prudential oversight of all deposit-taking institutions, insurers, investment banks, building societies, credit unions, and friendly societies, while it will also have the authority to grant permission for their activities and approve their senior management. The Bank of England will retain responsibility for supervising clearing and settlement houses. The PRA will have the ability to impose levies on firms in order to fund itself. The authority will be chaired by the Bank of England governor as well as a chief executive and deputy governor, Hector Sants (currently chief executive of the FSA).
• Consumer Protection and Markets Authority (CPMA): The CPMA will take on the functions currently carried out by the FSA. Under the plans, the CPMA will regulate the conduct of businesses towards retail customers, as well as their conduct on wholesale markets. It will be funded by fees on firms. The CPMA will also be the United Kingdom's representative at the new European Union (EU)-wide banking and insurance authority, while a markets division within the CPMA will deal with the EU's markets authority. The CPMA will be required to work with the PRA on issues affecting conduct and systemic risk, but the PRA's decision will be final, indicating a shift away from the previous focus on consumer protection as the ultimate goal. It is still uncertain whether responsibility for prosecuting criminal offences involving illegal market activity will be transferred to the new Economic Crime Agency.

Outstanding FSA Competencies

There are several competencies currently carried out by the FSA that have not yet been assigned to a new body and the public consultation is intended to help clarify the best course of action. At present the U.K. Listing Authority could be merged with the Financial Reporting Council in a bid to unify the bodies responsible for improving corporate governance. Meanwhile, the FSA's regulation of the Lloyd's of London insurance market could be divided between the CPMA and PRA. The possibility of shifting responsibility for consumer credit oversight from the Office of Fair Trading to the CPMA has also been floated.

At the same time, while work is ongoing at the political level to dismantle the FSA, on 23 July the authority implemented new powers granted to it by the Financial Services Act 2010, passed in the final days of the previous administration. Under the expanded powers, the FSA will now have the right to: impose financial penalties or public censure on those who breach short-selling rules; disclose significant net short positions; suspend firms or individuals by stopping them undertaking some or all of the activities that they are permitted to carry on for a period of time; and impose financial penalties on individuals who have carried out controlled functions without the necessary approval from the FSA.

Outlook and Implications