In its consultation paper A new approach to financial regulation, the Treasury set out its plan to combine the FSA’s activities as the licensing authority for listed companies with the regulatory functions relating to company reporting, audit and governance overseen by the FRC.

 

“There is a strong case for a powerful companies regulator established with responsibilities for regulating corporate governance, corporate information and its disclosure, and the stewardship of companies by institutional shareholders,” the whitepaper argued.

 

The 2008 financial crisis uncovered “real and significant failings” in the UK’s tripartite regulatory framework, it explained.  The underlying problems that led to the credit crunch were never fully identified by regulators; they failed to deal with the problems that led to significant market; and couldn’t cope when the first signs of trouble broke.

 

Noting what FSA chairman Lord Turner  and Bank of England governor Paul Tucker described as regulatory “underlap”, the paper concluded: “No single institution has the responsibility, authority or powers to monitor the system as a whole, identify potentially destabilising trends, and respond to them with concerted action.”

 

Under the current framework, the FSA is expected to monitor and regulate both global investment banks and small, high-street financial advisers; the Bank of England’s role has been expanded to include responsibility for financial stability (without providing tools to enforce it); and the Treasury is responsible for maintaining the overall legal and institutional framework, but has no clear remit to deal with financial crises that can put tens of billions of pounds worth of public funds at risk.

 

As part of a package of institutional reforms, the government will set up a new Financial Policy Committee (FPC) within the Bank of England to take primary statutory responsibility for maintaining financial stability. Unlike the current system, the FPC will be given macro-prudential tools to ensure that systemic risks to financial stability are dealt with, the Treasury said.

 

The FPC will be comprised of 11 members, six of whom will come from the Bank and five from outside in a structure that echoes the rate-setting Monetary Policy Committee. The Treasury will have an additional non-voting representative to provide a direct link to the Bank's political masters.

 

The FPC will meet four times a year and publish minutes of each meeting within six weeks to explain any policy decisions taken.  Actions decided by the FPC will be implemented by the Prudential Regulation Authority (PRA), which will be responsible for supervising deposit-taking institutions, insurers and investment banks. It will be led by Hector Sants, chief executive of the FSA. The PRA will carry out much of the FSA's old remit, excluding the consumer protection element.

 

Also proposed is a new consumer protection and markets authority (CPMA) to look out for consumers’ interests and promote confidence in financial services and markets. The CPMA will therefore take on all the FSA’s responsibilities for conduct of business regulation and supervision of all firms, as well as arms-length oversight of the Financial Ombudsman Service, the Consumer Financial Education Body, and the Financial Services Compensation Scheme.

 

Under the current rules, the Office of Fair Trading (OFT) is in charge of consumer credit, including personal loans and credit cards, as well as debt collection and debt management, but  the FSA handles current accounts in credit and the OFT current accounts once they are in debit.  The FSA regulates 29,000 financial companies, 70,000 less than the OFT.

 

The outline of these reforms were set out earlier in the year in George Osborne’s Mansion House speech in June and subsequently in the Queen’s Speech. The government will bring forward more detailed proposals – including draft legislation – for further consultation early in 2011 and expects to secure Royal Assent for the reforms within two years.