As has been widely reported, on 16 June 2010, the UK Chancellor of the Exchequer outlined his vision for the future regulatory architecture of the UK financial sector. He used the opportunity of the annual address that the Chancellor gives to the Lord Mayor's banquet at the London Mansion House to confirm, for the first time since the General Election last month, that the Financial Services Authority ("FSA") is to be abolished.
The Bank of England will sit at the head of the new regulatory structure with both the power and the authority to regulate monetary policy and financial stability, and will be in overall charge of macro-prudential supervision, as well as being responsible for the oversight of the micro-prudential supervision of individual institutions.
Most of the day to day supervision of the conduct of individual financial institutions that is currently handled by the FSA will move to a new body, the Consumer Protection and Markets Authority ("CPMA"), which will have responsibility for investor protection, day to day market supervision and regulation, and the overall business conduct of banks and other financial services providers.
Some of the FSA's current responsibility for the policing of economic crime such as anti-money laundering, insider dealing and, possibly, market abuse (although this is not entirely clear) will move to a new specialist body, the Economic Crime Agency. In addition, there will be two new committees. The Financial Policy Committee will be a permanent committee responsible for keeping under review the possible development of credit and asset bubbles and threats to financial stability. This committee will report directly to the Bank of England, so as to inform the Bank's decision-making. There will also be a powerful new Banking Commission, consisting of five high-profile members, which will investigate ways to reduce systemic risk in the banking system. It will report next year on the feasibility and advisability of splitting retail and investment banking.
The outline of this new structure is consistent with the promises made by George Osborne before the Election, and suggests that his views in this area have held sway over the less radical suggestions that had previously been made by his coalition partners.
There is, however, one less widely-predicted further proposal. The Government intends to create a new Prudential Regulatory Authority ("PRA") as a subsidiary of the Bank of England. The new authority will be responsible for micro-prudential supervision i.e. day to day oversight of bank safety and soundness. The PRA (or whatever it is eventually called) will be headed by Hector Sants, the current CEO of the FSA. This represents a late and sudden change of heart by Hector Sants, who had previously announced that he was stepping down from the FSA, and it may be, of course, that his decision and the decision to create the new authority are linked.
In any event, the development of the interaction between the role of the PRA and the role of the new CPMA in the day to day supervision and regulation of the conduct of banks will be a matter of great interest. In principle, prudential regulation can itself be an important tool in the regulation of the market conduct of banks, particularly in current circumstances where retail and investment banking may be carried out by the same organization. It may be pure coincidence but it seems, on first reflection, that the potential tensions between the respective roles of the PRA and the CPMA could be somewhat alleviated if the new Banking Commission happened to come to the conclusion that the activities of retail banking and investment banking should be split.
No doubt all these issues will be resolved over time. It is envisaged that the new structure will take effect in 2012.
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