HM Treasury has given itself new powers over the Bank of England in the event of a financial crisis and fleshed out the government’s plans to dismantle the Financial Services Authority (FSA) in favour of distributing regulatory responsibility across a trio of newly-created watchdogs.
The Financial Services Bill gives the UK’s Chancellor of the Exchequer authority over Britain’s central bank in circumstances when public funds are at risk and there is a “serious threat to financial stability”, according to the Treasury.
Under the new bill, the Chancellor is now solely responsible for any use of public funds and has primacy over any Bank of England decisions. If public funds are at risk, the central bank’s Governor now has a statutory duty to notify the Chancellor.
The move is designed to provide transparent and decisive action in a financial crisis. In September 2007, British bank Northern Rock sought and received a bailout from the Bank of England and was subsequently nationalised amid fear of collapse in February 2008. But the tripartite system whereby the Treasury, Bank of England and Financial Services Authority shared oversight of the UK financial system was criticised both for not anticipating the crisis and responding too slowly to it.
“In the aftermath of the financial crisis, it became clear there was no satisfactory answer to the question: who is in charge?” Chancellor George Osborne stated, introducing the bill to the UK parliament.
Aside from the extended powers, the government’s proposed overhaul of the current system remains largely unchanged from its July 2010 proposals, when it suggested establishing three new agencies – the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to replace the tripartite structure.
External to the Bank of England, the FCA will regulate how authorised firms conduct business. It will also be responsible for regulating exchanges, trading platforms such as multilateral trading facilities and wholesale market conduct.
While it is intended the Bank of England will be the competent authority for central counterparties and settlements systems, the FCA will occupy the UK voting seat on the European Securities and Markets Authority (ESMA), which is responsible for developing technical and enforcing standards for regulation across Europe.
The FPC (as the macro-prudential authority) and the PRA (providing micro-prudential regulation of firms which manage “complex risks on their balance sheets”) are to be positioned within the Bank of England, ensuring greater coherency in prudential regulation, systemic risk and information sharing between the agencies.
The move affirms recommendations from the government’s Treasury Select Committee and the Independent Commission on Banking (ICB), which was established in June 2010. Both organisations found that none of the institutions in the UK’s tripartite structure had the responsibility or tools to take action against systemic financial instability.
The ICB also advised that the breadth of the FSA’s remit across prudential and conduct of business regulation meant it could not focus on financial stability.
“Regulators failed to spot the enormous imbalances building up and proved incapable of dealing with the crisis when it first broke,” stated Osborne, of the tripartite’s failure to deal with the financial crisis of 2007-2010.
Subject to parliamentary approval, the Financial Services Bill is scheduled to pass by the end of 2012, with the new system operational in early 2013.