Financial Regulatory Forum

Britain’s financial reform faces carve-up threat

By Reuters Staff
November 18, 2009

Britain's Prime Minister Gordon Brown (L) and Leader of the opposition Conservative Party David Cameron walk through the Members' Lobby of the Houses of Parliament before the State Opening of Parliament, in central London November 18, 2009.      REUTERS/Dominic Lipinski/Pool    LONDON, Nov 18 (Reuters) – Britain’s opposition Conservative Party said it would ditch the core of a financial sector reform bill if it wins power next year, but lawyers expect other parts such as curbs on bankers’ pay would be introduced.

The government unveiled plans on Wednesday for a financial services bill in a speech delivered by Queen Elizabeth to open the last parliamentary session before an election to be held by June.

It seeks to improve how risk in the financial system is monitored, beef up enforcement powers at the Financial Services Authority, crackdown on excessive bonuses, and require banks to write “living wills” for use in case they fail.

The bill draws on lessons from the credit crunch to protect investors better and reduce the need for taxpayer bailouts.

At its core is a Council for Financial Stability that formalises and strengthens the existing “tripartite” committee of Treasury, Bank of England and FSA officials.

It was criticised for failing to spot risks that forced Britain to nationalise or take major stakes in Northern Rock, Lloyds and RBS banks.

“The Financial Services Bill in the Queen’s speech today will not help as it keeps the failed tripartite system in place,” said David Cameron, leader of the Conservative Party which is tipped by the polls to win the next election.

“That system needs to go and with a Conservative government it will,” Cameron told parliament.

The Conservatives had already said they want to scrap the FSA and put the Bank of England in charge of bank supervision.

“If the Conservatives are elected and want to go ahead with their plan to restructure the regulator, they will need to introduce a bill fairly soon in any event,” said Simon Gleeson of Clifford Chance law firm.

“Thus the new government will have a financial services bill in its first session come what may,” Gleeson said.

The bill also incorporates rules agreed by the G20 group of top countries in September to curb but not cap bonuses.

“The banks and financial institutions must understand that a return to their old ways is impossible,” British Prime Minister Gordon Brown told parliament.

“Our bill will automatically make any remuneration contract which contravene the rules void and nullified,” Brown said.

UK Financial Services Minister Paul Myners said the bill will not change existing pay contracts or give the FSA direct powers over existing contracts.

“The bill represents no threat to the major banks and investment banks that have confirmed their support for G20 principles. The UK will continue to be a good place in which to conduct financial transactions,” Myners told an awards event.

Financial lawyers expect the bill’s provisions on tougher enforcement and bonus curbs to become law whoever wins the next election.

“At least some of it looks as though it might be sensible, the enforcement powers reforms for example, and it is unlikely that any incoming government would simply rip it up,” Gleeson said.

Michael McKee, a partner at DLA Piper law firm, said the Labour government will focus hard on trying to get the bonus related law through as soon as possible.

“If they managed to do that I don’t think that the Conservatives would necessarily change the law because it would be unpopular to go easy on bankers,” McKee said.

There was little new on remuneration which stops short of capping payouts and comes too late to influence the 2009 bonus round that is settled by early 2010, lawyers said.

“We should be wary of the principle that the state should set an individual’s pay package, not the market,” said Maggie Craig, acting Director General of the Association of British Insurers.

Jacqui Hatfield of Reed Smith, said it would be too costly for the government to try an tear up existing pay agreements.

The British Bankers’ Association said banks were fully aware that pay should reward long term success and not encourage undue risk taking.

“We have already signed up to remuneration rules with the Financial Services Authority and support moves by the G20 to co-ordinate international agreements, necessary to keep talent in the UK,” the BBA said in a statement.

The FSA is expected to get new powers that will make it easier to pursue individuals and suspend future business activities as punishment for past breaches, a new departure.

“The financial services bill is a little bit oversold but enforcement is clearly going to be much tougher whoever wins the next election,” said Maxine Cupitt of CMS Cameron McKenna.

There were also some concerns over a provision to allow groups of consumers to be represented in a court.

“Pushing the UK toward a US litigation culture would create costs for consumers and businesses that far outweigh the benefits,” ABI’s Craig said.

(Additional reporting by Kirstin Ridley; Editing by Victoria Main and Toby Chopra)
((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 32 2 287 6817; huw.jones@thomsonreuters.com))

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