Osborne announced the break up of 'tripartite' regulation, where supervision of the UK's financial sector is divided between the Financial Services Authority (FSA), the Treasury and the Bank of England.
Instead, the Government proposes to dismantle the FSA, handing most of the day-to-day regulation and supervision of banks, investment banks, building societies and insurance companies to the Bank of England. Consumer protection would be handled by a new Consumer Protection and Markets Authority and enforcement and white collar crime by a single, separate agency. The whole process is to be completed in 2012.
In addition, a new Financial Policy Committee at the Bank of England will address wider issues (so-called macro-prudential issues) that may threaten economic and financial stability and be able to take action in response. And a new banking commission will look at the structure of the banking industry in the UK, including the relationship between retail and investment banking.
The key proposals
- A new prudential regulator operating as a subsidiary of the Bank of England will be responsible for the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies
- An independent Financial Policy Committee at the Bank of England will address wider issues that may threaten economic and financial stability and take effective action in response.
- A Consumer Protection and Markets Authority (CPMA) will be set up to regulate the conduct of every authorised financial firm providing services to consumers. The CPMA will also be responsible for ensuring the good conduct of business in the UK’s retail and wholesale financial services.
- Enforcement will be handed to a single agency tasked with tackling "serious economic crime".
- FSA chief executive Hector Sants will remain at the FSA to oversee the transition and become the first new deputy governor and chief executive of the new prudential regulator.
- An independent commission on banking headed by former Bank of England chief economist Sir John Vickers will look at the structure of banking in the UK and make policy recommendations to reduce systemic risk, the likelihood and impact of bank failure and to promote competition in both retail and investment banking. The commission will report by the end of September 2011.
Maintaining regulatory focus
Tim Dolan, a partner with the financial services team of Pinsent Masons, the law firm behind OUT-LAW.COM, said the proposals could leave financial services in regulatory limbo for two years.
"One really hopes that the FSA's staff do not become too preoccupied with what their position will be in the new regime and that they do not lose their focus in the next two years while the new regulator is being formed," said Dolan, a former member of the FSA's enforcement division.
"It will also be very interesting to see whether the FSA can continue to attract all the new talent which it requires right now given the uncertainty which staff may face about their role in the new regulator," he said.
Dolan said that all FSA authorised firms will want to understand how the costs associated with creating the new regulator will be met. "They will be hoping that the levies they pay to the FSA, which have increased significantly over the last few years, do not go up further," he said.
One of the tasks of the new Banking Commission will be to look at the potential splitting of retail and investment banking operations from single entities.
Tony Anderson, a banking partner with Pinsent Masons, said that a separation of retail and investment banking operations in the UK "will impact not only on UK banks but foreign banks currently or planning to operate a combined model in this jurisdiction."
"All of these banking groups will be forced to significantly redesign their global operations to comply with a unique UK regulatory environment if this model is not replicated in the jurisdictions of other major financial centres," said Anderson.
"Will all global banks continue to use a combined model for their non-UK operations and only maintain a split model here? Will foreign global banks withdraw or reduce their operations in the UK as a result? By splitting the operations and losing current internal synergies there is also a risk that the cost of conducting retail banking in the UK will increase," he said.
"It will not so much be the architecture of the participants in retail and investment banking which will determine the riskiness of their operations but the effective regulation of their activities," said Anderson. "The findings of the Commission on reducing systemic risk will be more critical."
Will a one-stop regulator work for insurance?
The Government's decision to take financial services regulation out of the hands of the FSA may make sense for banks, but the case is less clear for the insurance industry, said Bruno Geiringer, a partner in Pinsent Masons' insurance group.
Writing in an opinion piece published on OUT-LAW.COM today, Geiringer says the case for handing the FSA's regulatory powers over to the Bank of England has not been made. He warns that remit of the Bank of England's new prudential regulator is too wide. "There is a real danger that this one-stop-shop regulator will focus too much on banking," said Geiringer.