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U.K. unveils final financial services regulation legislation

by Laura Board in London | Published January 27, 2012 at 12:57 PM

The U.K. government on Friday, Jan. 27, published long-awaited legislation that will overhaul the way financial services are regulated and do away with a key agency that attracted widespread criticism during the global financial crisis.

The Financial Services Bill, the product of three consultations, reflects the Conservative-Liberal Democrat coalition government's desire to demolish a 12-year-old regime established by its Labour predecessor in which the Bank of England, the Treasury and the Financial Services Authority shared responsibilities under a so-called tripartite regime.

Most notably, the reforms call for the abolition of the Financial Services Authority. It will be replaced by three regulators: a "macro" supervisor, the Financial Policy Committee; the Prudential Regulatory Authority, which will monitor individual institutions; and the Financial Conduct Authority, charged with consumer protection. Both the FPC and the PRA will sit within the Bank of England.

The second reading of the bill is provisionally scheduled to take place on Feb. 6, and the legislation is expected to take effect early next year.

The government claimed the new setup will discourage " 'tick-box' compliance and foster a regulatory culture of judgment, expertise and proactive supervision."

"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," Treasury Minister Mark Hoban said in a statement. "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."

The bill comes after often bad-tempered jockeying between lawmakers concerned about the Bank of England's expanded powers as well as the role played by central bank Governor Mervyn King. The bill includes specific measures to increase the central bank's accountability in light of its increased powers. In addition, the governor of the Bank of England will now be employed for a single eight-year term, rather than two consecutive five-year terms.

But Michael McKee, financial regulation head at law firm DLA Piper, suggested the Financial Policy Committee will "still remain a very powerful committee which it will be difficult to control democratically in times of crisis."

The bill also legislates for a new crisis management regime and gives the Chancellor of the Exchequer new powers over the Bank of England when public money is at risk.

British Bankers' Association CEO Angela Knight said the statutory powers for intervention by the chancellor may kick in too late in any given crisis. "The bill has got it right when setting out the responsibilities for all the different crisis management functions but we feel there should be a rethink about the point when the Bank involves the chancellor," she said in a statement.

She also said the crisis management regime must dovetail with European regulatory so banks aren't subjected to two regimes.

Absent from the legislation are government-endorsed recommendations by the Independent Commission on Banking for large U.K. banks to hold equity capital of at least 10% of risk-weighted assets at their retail operations.

The government said separate legislation on that and other ICB reforms will be enacted before elections in spring 2015.

It is also planning a joint consultation with the FSA this spring over recommendations the regulator made in last month's report into the near-collapse of Royal Bank of Scotland Group plc, the Edinburgh institution that became Britain's costliest victim of the financial crisis and which is now 83% state owned. The FSA was heavily criticized for Royal Bank's demise and last month it admitted it should have done more to intervene in Royal Bank's disastrous €71.1 billion ($93.4 billion) consortium acquisition of ABN Amro Holdings NV, although the deal lay technically outside its turf.

In the December report, the FSA raised the issue of whether hostile bank takeovers should be outlawed. It also suggested that U.K. financial regulators should have veto powers over major international banking deals with a domestic component, while bank executives who run their institutions aground should face sanctions.

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