5/7/2010

By Neil Ainger

The Financial Services Authority (FSA), which has lost its high-level regulatory powers to the Bank of England (BoE) and will have a new structure in January 2011, is now losing some of its senior executives. Jon Pain, managing director of supervision, who joined in September 2008 has decided there won’t be a suitable role for him in the reduced organisation and Sally Dewar, managing director of risk, is also leaving next year.

Chancellor George Osborne laid out his plans for the UK financial services watchdog in his Mansion House speech and emergency budget in June when he revealed that the Bank of England will effectively replace the organisation, strengthening its responsibility for macro-economic policy and stability under the new Prudential Regulation Authority (PRA), which will regulate the banks and assess risks in future. The BoE will also over-see micro-prudential retail regulation too, under the new Consumer Protection and Markets Authority (CPMA) and run the Financial Services Compensation Scheme to protect consumers. Many of the employees will likely come from the scrapped FSA as the new body will actually conduct regulation and, according to Financial Secretary, Mark Hoban, take a “tougher, more proactive approach”.

The PRA will be chaired by Hector Sants, presently chief executive of the FSA of course, who was due to step down at the end of the summer but has now agreed to stay on and oversee the transition to a new regulatory environment. Mervyn King, governor of the BoE, will oversee the PRA as head of the Financial Policy Committee (FPC) and take the lead role, in consultation with the Treasury department of the government, in all future regulatory decisions. The final piece in the new UK regulatory jigsaw, which places the Bank of England at the centre, is a new single agency to tackle economic crime and coordinate the fight against fraud.

The demise of the old tripartite system in the UK was always on the cards after George Osborne, the new Chancellor said it had “failed spectacularly” in its mission to ensure financial stability during the run up to the credit crunch and promised changes after his party won the general election in May, forming a government in coalition with the Liberal Democrats.

Commenting on the moves, Hector Sants, the man responsible for overseeing the transition to the new regulatory environment, said: “Following the announcement that the FSA will be split in 2012 [forming the new bodies], Jon Pain, managing director of supervision, has decided that there will not be a suitable role for him in the new structure. So, it is with regret that I have to announce that Jon has decided to leave the FSA next year. However, he has agreed to carry on in his role until the switch over to the new structure within the FSA, which we hope to achieve in January 2011.

“I would like to express my appreciation for Jon’s outstanding contribution and strong leadership in his time at the FSA. He joined in September 2008 and he has been at the forefront of both managing the financial crisis and developing our new regulatory approach. I fully understand his decision to look for a new challenge once the reorganisation is complete and wish him all the best for the future both professionally and personally.”

In regard to the departure of Sally Dewar, managing director of risk, Sants said that she “had worked tirelessly and effectively for the organisation for eight years and has played a pivotal role in implementing our reform agenda… I wish her the very best for the future.”

Industry reaction
The new UK regulatory structure generally met with approval from most industry players, with Xavier Rolet, CEO of the London Stock Exchange Group, for instance, commenting that it appreciated “this strong decision from the new government…the City was looking for leadership and certainty on the issue of financial regulation”. Well, it now has it.

“We welcome the Chancellor’s moves to strengthen the system of banking regulation and to make it clearer and more effective,” said Angela Knight, chief executive of the British Bankers’ Association (BBA). “The industry will work with the government to ensure the transition does not cause disruption to the financial system.”

“In transferring the oversight of banks, insurers and building societies to the Bank of England and putting together the regulation of market conduct and consumer protection, the UK is creating a 'twin peak model' which reflects what is also happening in many other countries. We need strong markets and we have to get consumer protection right.”

“This now brings certainty into how the industry is going to be regulated in future. The key difference will be the macro prudential responsibility which means that the Bank not only has the powers to raise and lower interest rates but can also take other actions to stop bubbles, such as big rises in house prices. The eye must be kept on the ball of good supervision and we must also give confidence to the many overseas banks operating here.”

“There are still questions that need to be resolved, such as the relationship between the Monetary Policy Committee and the Financial Policy Committee and how the FPC will be accountable for its actions. Additionally, as there is no equivalent to the MPC interest rate target for financial stability, it will need to exercise considerable judgement over when to intervene.”

The consequences of the financial meltdown of recent years have finally come home to roost, with both a new government and a new regulatory environment now in place in the UK. Let’s hope they can do a better job of spotting risks in the future and protecting consumers to ensure that it’s at least another century and a half until we see another run on a bank, as we did with Northern Rock. Allied to the changes coming out of the G20, EU and the UK government’s plans for a £2.5bn banking levy (see HERE) and year-long commission to investigate breaking up the banks (see HERE), with a view to reintroducing more competition on the High Street, these new changes should finally mean the sector can draw a line under the mess of recent years and move on.