Draft Financial Services Bill must be "significantly amended" to avoid another crisis, MPs say

In a report into the draft Financial Services Bill, which intends to overhaul the system of financial services regulation in the UK, a Joint Committee of MPs and peers said that the Bank had to be made more accountable to Parliament before it could be given new powers.

Making sure that the Chancellor assumes overall power and responsibility for handling any future threat to public funds will "remove the confusion as to who was in charge which aggravated the last crisis", the report concluded.

Committee chairman Peter Lilley said that the previous financial regulation system "failed to prevent the 2008 banking crisis or handle it properly".

"No single body had the stability of the financial system as its primary responsibility and once the crisis erupted and differences about how to handle it emerged no one person was clearly in charge. It is vital that if the taxpayer might be liable for costs to save a financial institution that the Chancellor is given early warning of any such risk and then automatically assumes responsibility for handling that situation," he said.

The draft bill proposes dismantling existing regulator the Financial Services Authority (FSA) and instead hand most of the day-to-day regulation and supervision of banks, building societies and insurers to a new Prudential Regulation Authority (PRA) within the Bank of England. A new Financial Policy Committee (FPC), also within the Bank, will address wider 'macro-prudential' issues that may threaten economic and financial stability, while a new Financial Conduct Authority (FCA) will handle conduct and compliance issues.

The new laws should "clarify the objectives, powers and accountability" of these bodies in order to end the "fuzzy allocation of responsibilities" which led to the failure of the previous system of financial regulation, the Committee said. As part of this the Treasury and Parliament "should exercise more oversight" of the FPC's remit in particular, with a majority of the body's staff made up of economic experts from outside the Bank of England.

In addition, the "substantial new powers" being given to the Bank on both monetary policy and credit supply should be matched by further changes to ensure it was "suitably accountable to Parliament and the public", the Committee said. It recommended replacing the Bank's existing governance structure with a new Supervisory Board, to include members with direct experience of the financial sector.

Lilley said that the draft bill rightly focuses on "putting prudential regulation back firmly within the Bank of England". However, the "culture, focus and philosophy" of a regulator has a greater impact on how it performs than its regulatory structure, he said.

"We propose clear objectives, powers and responsibilities and systems of accountability to foster the right culture and focus. Above all regulators must move beyond just applying rules once problems have occurred – we need forward looking supervision to anticipate and prevent another crisis," he said.

Although the Government claimed that the draft bill would foster this culture of 'judgement-led supervision', the Committee expressed its concerns that this concept was mentioned in the bill.

"Judgement-led supervision needs statutory backing," Lilley said.

The Committee also proposed setting up a group of representatives of the PRA, FCA, Bank of England and Treasury to maximise the UK's influence in EU and international financial policy.