The UK government has unveiled a shake-up of the countries system that will consolidate power within the Bank of England and eliminate the Financial Services Authority, long the main overseer of the nation's financial center, the City of London.
The new Conservative-led coalition government plans to splinter the FSA into three new agencies, including a bank-regulating subsidiary inside the Bank of England. The new regulatory approach was unveiled in a speech last Wednesday night in London by the UK's Treasury chief, George Osborne, who trumpeted "a new system of regulation that learns the lessons of the greatest banking crisis in our lifetime."
In the House of Parliament in London on Wednesday, George Osborne, trumpeted the 'new system of regulation.'
While more ambitious than expected, the structural changes are more functional than specific, leaving for a later date thorny questions over the appropriate structures of banks. The US is debating a range of rule changes that would impact the finance sector in much more extensive ways than Mr. Osborne's proposals. The European Union is pushing its own policies, including new oversight for hedge funds.
Forced to forge a coalition with the Liberal Democrats after a tight election, the Conservatives were expected to move more deliberately on their pledges of financial-system regulatory changes. But the Lib Dems are backing the government's attempt to make a clean break with a regulatory system tarred by the financial crisis, meaning that the changes are almost certain to come into effect.
At the heart of the proposed overhaul—which requires approval by Parliament and would be implemented by the end of 2012—is an empowered Bank of England. In addition to its current responsibility for monetary policy, the central bank will take charge of preventing systemic risks and of day-to-day supervision of the UK financial sector, including foreign companies that operate in the City of London, through a newly formed subsidiary, tentatively dubbed the Prudential Regulatory Authority.
The Bank of England's governor, Mervyn King, will become chairman of the expanded authority. He welcomed the changes as "the right direction of reform." He didn't address his past comments, specifically his argument that big banks should be broken up to separate risk-taking from utility banking, something the City has fiercely resisted.
The revamp has big implications for giant banks around the world, not just those headquartered in the UK. The FSA already has been getting tougher regulating overseas banks' London subsidiaries. The growing clout of Mr. King, who has talked openly of breaking up big banks, could subject the U.K. and foreign banks alike to more draconian oversight.
In the UK, the new agency within the Bank of England will inherit some of the powers of the FSA, which never fully recovered from its legacy of "light touch" regulation of London's financial community in the wake of the financial crisis. Further tarnishing the FSA in the eyes of many Tories, the previous Labour government established the agency in 1998 shortly after taking power, removing bank-regulatory oversight from the Bank of England.
While the FSA will cease to exist on paper, much of its current structure is likely to live on in the new prudential authority. Its supervisory staff is expected to remain largely intact, as is its newly muscular approach to policing banks, traders and insurers.
Even the agency's leader will be the same. The FSA's chief executive, Hector Sants, had announced plans to retire this summer, but Mr. Osborne persuaded him to take the helm of the new agency for three years. Mr. Sants will become a deputy governor of the Bank of England.
A restructuring will eliminate the UK's Financial Services Authority. Two of the FSA's other duties—consumer protection and law enforcement—will be assumed by new independent entities, including an agency focused on white-collar crime.
In addition to fulfilling a Conservative campaign pledge, the revamp of the regulatory system is intended to bring bank supervision under one roof at the central bank. The Tories blame a disjointed approach, in which officials from different agencies didn't coordinate with each other, for allowing the banking system to grow bloated with debt and for impeding the government's response when the crisis hit.
"Because central banks are the lenders of last resort ... they need to be familiar with every aspect of the institutions that they may have to support," Mr. Osborne said in Wednesday's speech, at a black-tie dinner attended by London's financial elite.
The new structure doesn't include a spot for the FSA's well-regarded chairman, Adair Turner, who is expected to remain at the FSA during a two-year transition. Lord Turner endorsed the shake-up Wednesday, saying it resolves the uncertainty surrounding the agency.
The planned overhaul is the product of weeks of negotiations and horse-trading that highlights the delicate nature of the coalition government. In order to win over Vince Cable, the Liberal Democratic business secretary who had opposed abolishing the FSA, Mr. Osborne let him pick at least two of the five members of a high-profile committee charged with making recommendations about the structure of the UK banking industry, according to a person familiar with the matter.
The proposed revamp is likely to prove controversial.
Some experts have said it risks distracting the Bank of England from its paramount role of setting monetary policy and controlling inflation at a particularly crucial time for the UK's struggling economy.
Mr. Sants himself was critical of the Conservatives' proposal to fold the FSA into the Bank of England. "There remains the possibility of tougher times to come for those we regulate," he said in a speech in November. "Now is not the time, therefore, to be diverting resource to looking at structural questions."
Bringing the FSA's supervisory infrastructure under the Bank of England's roof is likely to be especially tricky because of the two organizations' cultural differences.
For example, past and present officials at both organizations say the FSA tends to pay employees up to 50% more than the Bank of England. Senior FSA bank supervisors can pocket more than £300,000 ($444,000) annually, and the agency sometimes doles out lucrative bonuses. Mr. Sants received total compensation of £742,011 last year, more than double the £305,764 that Mr. King took home.
The FSA has argued that to police banks effectively, it needs to lure talent from them, which requires competitive pay packages. A lesser-paid civil-service culture pervades at the Bank of England.