Major shake-up will see end of FSA

Compliance Resource Network – Breaking News

Summary of the Osborne Mansion House Speech detailing the break-up of the FSA and the planned changes

In his first Mansion House Speech in the City of London last night (16 June 2010), the Chancellor of the Exchequer, the Rt Hon George Osborne MP, set out his plans for a major shake-up to the way in which the financial system is regulated in the UK.

He told his audience of bankers that at the heart of the financial crisis was a “rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify let alone prevent.”
The abolition of the tripartite regime of the Financial Services Authority (FSA), the Bank of England and the Treasury will make way for the creation of a new prudential regulator, which will see the FSA cease to exist in its present form.

The new regulator, which will operate as a subsidiary of the Bank of England, will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.

The Chancellor confirmed the creation of an independent Financial Policy Committee at the Bank, which will have responsibility for addressing macro issues that pose a threat to economic and financial stability.

The regulatory shake-up also includes the establishment of a powerful new Consumer Protection and Markets Authority; the purpose of which will be to regulate the conduct of every authorised financial firm providing services to consumers.

The new Authority will also be responsible for ensuring good conduct of business in the UK’s retail and wholesale financial services, and preserving the City’s reputation for transparency and efficiency, as well as its position as one of the world’s leading global financial centres.
The transition process for the proposed changes is due to be completed in 2012.

Highlighting the failings of the current system, the Chancellor commented that:

“The Bank of England was mandated to focus on consumer price inflation to the exclusion of other things. The Treasury saw its financial policy division drift into a backwater. The FSA became a narrow regulator, almost entirely focused on rules based regulation.”

He continued:
“No-one was controlling levels of debt, and when the crunch came no one knew who was in charge.”

Hector Sants, the FSA’s chief executive officer, who announced in February 2010 that he was stepping down this summer after three years at the helm, has agreed to remain at the FSA to oversee the transition and become the first new deputy governor and chief executive of the new prudential regulator.

The FSA’s chairman, Lord Turner, has welcomed the changes outlined in the Chancellor’s speech. He commented:

“The FSA now has the clarity of direction and timescale as well as the leadership that we need to meet the challenges ahead.

“I am delighted that Hector, who has done so much to transform the FSA during the past few years, has agreed to lead the transition to the new structure in 2012, and to become the first Chief Executive of the Prudential Authority and a Deputy Governor of the Bank of England.
“The crisis demonstrated the need for new regulatory approaches and more intense supervision, and the FSA has already implemented major change. But it also demonstrated the need to bridge the gap between macro-prudential policy and the supervision of individual firms. The Chancellor’s proposals for prudential regulation will enable us to do that, while building on the major changes we have made over the last few years. The timescale will enable us to manage the transition in a smooth and orderly way.”

On the subject of whether the Government should restrict or split the activities of banks, the Chancellor confirmed that the newly established Independent Commission on Banking, chaired by Sir John Vickers, would be tasked with this dilemma. The Commission will look at the structure of banking in the UK, the state of competition in the industry and how customers and taxpayers can be sure of the best deal. Thereafter, the Commission will form an opinion, and the Government will decide on the right course of action. Joining Sir John, the four other commissioners will be: Martin Taylor, Claire Spottiswoode, Martin Wolf and Bill Winters.
The Chancellor has set out his plans which represent a new settlement between the banks and the rest of society. Going forward, he is seeking, “A fairer settlement in which the banks support the people, instead of the people bailing out the banks.”

The Chancellor of the Exchequer’s full speech can be viewed here.

This news update has been provided by Unicorn partners Wolters Kluwer Financial Services.

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