Transparency reforms would introduce external oversight of Bank of England for first time

The Treasury is consulting on measures it will include in new legislation that would reform the Bank of England, enhance its role as UK banking regulator and strengthen coordination between the central bank and the Treasury in the event of future economic instability. Its planned Bank of England Bill would bring the Prudential Regulation Authority (PRA) fully within the bank, ending its status as a subsidiary; and make the Financial Policy Committee (FPC) fully accountable to the bank rather than its Court of Directors.

"Ensuring the bank is well-positioned to fulfil its vital role of overseeing monetary policy and financial stability is a key part of the government's long-term economic plan," said George Osborne, the chancellor of the exchequer.

"The measures in the Bank of England Bill will ensure that the bank is on the best possible footing to oversee its expanded remit, delivering Governor Carney's 'One Mission, One Bank' strategy, and take further steps to protect taxpayers from firm failure. Bringing the Bank of England for the first time within the purview of the National Audit Office is an important reform and will improve transparency and accountability," he said.

The chancellor said that the planned legislation would build on the success of the 2012 Financial Services Act, which dismantled the previous Financial Services Authority (FSA) as of 1 April 2013. Since then, the PRA has been responsible for most of the day-to-day regulation and supervision of banks, building societies and insurers; while the stand-alone Financial Conduct Authority (FCA) has been responsible for conduct and compliance issues. The FPC, which is also part of the Bank of England, is responsible for wider 'macro-prudential' issues.

The planned legislation would implement Bank of England governor Mark Carney's 'One Mission, One Bank' strategy for the central bank by bringing all of its responsibilities within one shared vision and culture. This would involve ending the PRA's status as a Bank of England subsidiary, replacing it with a new 'Prudential Regulation Committee' within the bank; and reconstituting the FPC as a committee of the bank in line with the new Prudential Regulation Committee and Monetary Policy Committee. The FPC would also take over responsibility for setting the financial stability strategy from the Court of Directors.

Further governance reforms which would be taken forward by the legislation include changes to the structure of its Court of Directors in order to make it a "smaller, more focused unitary board"; the appointment of a new 'Deputy Governor for Banking and Markets', who would sit on both the Court of Directors and the FPC; and the appointment of a new external member to the FPC. The bill would also reduce the frequency of the now-monthly Monetary Policy Committee meetings to eight a year, bringing it more into line with the US Federal Reserve and the European Central Bank.

The consultation is open until 11 September, and the government plans to introduce its Bank of England Bill to parliament later in the autumn.

Financial regulation expert Michael Ruck of Pinsent Masons, the law firm behind Out-Law.com, said that the drive to improve accountability at the central bank "in many ways reflects the basis and thought process behind the Senior Managers Regime", which will apply to senior bankers from March 2016.

"Whilst the integration of the PRA and others into the Bank of England to create 'one bank' may seek to remove some of the separation currently being experienced between the various entities and committees, only time will tell if clear structural change is implemented, rather than this being a re-branding exercise, in order to achieve the chancellor's aim of strengthening the bank's 'governance, transparency and accountability'," he said.

However, insurance regulation expert Rabbani Choudhury, also of Pinsent Masons, said that the government's desire to fully integrate the PRA into the central bank would "raise further concerns" amongst insurers as to whether the regulator would become even more heavily weighted towards banking regulation.

"Prior to legal cutover, and even today, insurers have expressed concerns that the PRA does not have an appropriate balance and breadth or experience to take into account the requirements of insurance, and it was their preference for there to be a separate insurance regulator," he said. "With this impending change, it is possible that the insurance industry will feel even more marginalised."

"It would be helpful if the government and the regulators could demonstrate that banking will not dominate the new regulatory system, such as ensuring that members of the proposed Prudential Regulation Committee are comprised of an equal balance between members with recent and relevant financial services experience in both banking and non-banking areas, like insurance," he said.