Osborne gives Bank control over regulation

 

Chancellor George Osborne announced the biggest shake-up of the regulatory landscape in 13 years on Wednesday as he pledged to give the Bank of England ultimate control over financial supervision.

The Financial Services Authority, the current supervisor created in 1997 when the previous Labour government took power, will cease to exist in its current form and the central bank will once again take charge of policing the City of London.

Outlining the formation of a new Financial Policy Committee that would have the power to tackle credit binges, Osborne also unveiled a new independent banking committee that would look at whether retail and investment banking needed to be split.

"What we are proposing is a new system of regulation that learns the lesson of the greatest banking crisis in our lifetime" he told the annual "Mansion House" dinner of the City of London's financial elite only a month after taking office.

"We will create a new prudential regulator, which will operate as a subsidiary of the Bank of England" he said.

FSA Chief Executive Hector Sants, who was due to leave in the summer, will stay on through the transition expected to last about two years.

He will be the first chief executive of the new body and a third deputy governor of the central bank, sitting on the Financial Policy Committee chaired by Governor Mervyn King.

Osborne said the FPC, which would mirror the Bank's Monetary Policy Committee will "have the tools and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability and (have) the tools to take effective action in response."

ALL-POWERFUL KING

Dismantling Britain's tripartite regulatory system and abolishing the Financial Services Authority, set up in 1997 by Labour's then chancellor Gordon Brown, had been a pledge for Osborne's Conservative Party before the May 6 election.

But an inconclusive election result on May 6, which has led to a coalition government and continuing market turmoil, had raised doubts about whether the FSA could or should be abolished, especially given current market turmoil.

The transition period should allow the process to run smoothly and bankers welcomed the moves.

"The industry will work with the government to ensure transition between regulatory authorities does not cause disruption to the financial system and is implemented swiftly and well" said Angela Knight, Chief Executive of the British Bankers' Association.

But some analysts have questioned whether too much power is being put into the hands of the Bank of England and its Governor Mervyn King.

Labour had created the FSA following a widespread perception that the Bank was not up to the job following the 1995 collapse of Barings, a venerable investment bank. King himself garnered much criticism in his initial approach to the credit crisis.

But the Lord Mayor, who represents the interests of the City of London, said it made perfect sense.

"It seems logical that the lender of the last resort should have greater authority in macro-prudential regulation and the Bank of England, with its clear remit for monetary policy, will strengthen the link between financial stability and macro-economic policy."

King, for his part, appeared delighted as he sat near Osborne at the bankers' dinner.

"I welcome those new responsibilities. Monetary stability and financial stability are two sides of the same coin."

"In peacetime, regulation can be conducted outside the central bank. But in a crisis, decisions must be made quickly and decisively and the central bank, working with government which is always responsible for any use of public money, needs to be in charge."