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Treasury publishes reform proposals for financial markets  

UK Banks will face tougher regulation under proposals just published by the UK Treasury entitled reforming financial markets with Chancellor Alastair Darling giving the Financial Services Authority (FSA) more powers to deal with risk-taking in banks and penalise misconduct. The decision to effectively strengthen the existing tripartite system, involving the FSA, Bank of England (BoE) and Treasury sharing responsibility during a financial crisis, drew a withering response from opposition parties however – the Tories have said they would return supervision solely to the BoE, to all intents and purposes eliminating the FSA by setting up a separate consumer and markets regulator

Unveiling his regulatory reform proposals, UK Chancellor Alastair Darling said he wanted to see “a change of culture in banks and their boardrooms” and to ensure financial institutions were better managed in future. The continuation of the FSA and of the existing structures however suggest more of the same, rather than a complete overhaul, a view supported by Liberal Democrat treasury spokesman, Vince Cable who said “this is not so much a white paper as a blank paper”.

“Mr Darling should have used this opportunity to assert this authority over the banks, instead he is maintaining his passive role in UK Financial Investments (the governmental shareholding body for nationalised banks). There will be champagne corks popping all over the City …as this proves it really is business as usual”.

Shadow Chancellor. George Osborne, said he would “put the Bank of England in charge of the prudential supervision of banks, building societies and other significant financial institutions,” calling Darling’s proposals “an inadequate response” to the crisis.

A harsh conclusion perhaps but there were certainly no surprises in the reforming financial markets whitepaper, with many of the proposals well trailed beforehand.

The major proposals in the whitepaper cover:
• the establishment of a Council for Financial Stability, made up of the tripartite members each reporting to the body, which will meet regularly and report on systemic risks in the entire system [this mimics the European Systemic Risk Council (ESRC) proposed by the EC – see here].

• Executive pay will theoretically be constrained by the FSA reporting yearly on whether banks have met the new Code of Conduct on remuneration, and policies will be enacted to strengthen bank boards

• Tougher regulation with banks required to hold more capital to cover any future losses – the so-called counter-cylindrical accounting measures long mooted – and more power for regulators to take over failing banks, although interestingly BoE head Mervyn King’s attempt to gain sole supervisory power in this regard has failed.

• More consumer protection is on the way with the strengthened deposit protection scheme, covering up to £50,000, and a national money advice line confirmed

• Greater competition will be encouraged by the FSA and Office of Fair Trading ensuring new players can enter the market. This last proposal is obviously in response to fears that the wave of forced acquisitions caused by the financial crisis, such as LloydsTSB’s absorption of HBOS and Santander’s purchase of Alliance+Leicester and B&B, will decrease competition in the retail banking area, leaving us with “insufficient suppliers” as the whitepaper notes.

The government also says it plans to “examine the possibilities of new technology to further encourage new entrants” to the market, a likely reference to online, mobile banking and other non-traditional channels, including grocer Tesco’s move into retail banking via its UK stores using technology nous it developed with its ex-joint venture partner RBS. The idea is that any new regulations will not place any unnecessary barriers in the way of new entrants and centralised common platforms, such as payments systems for instance, should be open to all, or at least ‘interoperable’. As the whitepaper says regulators “should consider the impact on market access of all proposed changes and specifically address this issue when conducting its cost benefit analyses on new proposals, so that the impact on new entrants is taken into account”. The paper also calls for this approach to be matched on a European level. Sound judgement as there is indeed a need to ensure a globally co-ordinated approach to any regulatory moves post-crunch, as recognised by the EC’s de Larosiére report, draft Alternative Investment Fund Managers (AFIM) directive and many other initiatives (see here).

Responding to the UK whitepaper, the British Bankers' Association (BBA) commented that banks recognised the need for change and would continue to work with the authorities to ensure the “long-term success of the economy and the banking sector”. “We believe appropriate and effective regulation, capital applied according to risk and good quality supervision are the cornerstones of a vibrant banking community,” said BBA chief executive Angela Knight. She also said she welcomed the moves to create better coordinated financial stability, via the council.

• For the full proposals please view the Reforming financial markets whitepaper here

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