Draft UK bank law confirms tougher watchdog powers

November 19, 2009

Britain's Chancellor of the Exchequer Alistair Darling and his wife Margaret leave 10 Downing Street to attend the State Opening of Parliament, in central London November 18, 2009.       REUTERS/Suzanne Plunkett (BRITAIN POLITICS)By Huw Jones
LONDON, Nov 19 (Reuters) – Britain’s financial watchdog will have powers to claw back bank bonuses that breach globally agreed rules on remuneration and force hedge funds to provide data, a draft law published on Thursday showed.

The draft law’s main provisions were announced by the government on Wednesday and enforce pledges Britain and other members of the G20 group of leading countries made this year to apply lessons from the credit crunch.

“The bill we are introducing today is central to the government’s reform agenda that seeks to empower consumers and make sure that, in the future, taxpayers will not be called on to protect banks from the consequences of their actions,” Britain’s Finance Minister Alistair Darling said in a statement.

The Financial Services Authority (FSA) will have “information gathering powers extended to non-regulated firms, including hedge funds, where information is relevant to financial stability”, the draft law says.

Hedge fund managers are already required to register and provide data. The European Union is adopting a law with similar provisions.

The FSA will have a new, explicit objective of helping to ensure financial stability, giving it a bigger role in monitoring and assessing risk that could destabilise the broader financial system — a supervisory gap the credit crunch highlighted in many countries.

“The measures in the bill, particularly under the proposed financial stability objective, will give the FSA more powers to carry out its remit from parliament in a more effective manner,” an FSA spokesman said.

The opposition Conservative Party, tipped by pollsters to win the election due by June, has said it wants to abolish the FSA, saying its joint “tripartite” supervision of banks with the Bank of England and Treasury had failed.

“Instead we need to put the Bank of England back in charge because only central banks have the authority and the judgment that is needed,” the party’s treasury spokesman, George Osborne, said in the London Evening Standard newspaper.

Britain’s financial services minister Paul Myners said there were no plans for tearing up existing pay contracts.

“That’s an abrogation of legal contracts which governments should not contemplate,” Myners told Sky News television.

“What we are saying is that going forward all contracts have to comply with the framework specified by the FSA, and if a bank were to offer a contract which the FSA regarded as reckless… then that contract could be voided and penalties could arise,” Myners said.

He does not expect this to happen in practice and banks are keen on the provision as it will help them “manage better the greed they have been confronted” with.

Lawyers said firms will be able to get out of bonus payments by referring to regulatory obligations.

Paul Edmondson of law firm CMS Cameron McKenna said FSA powers on pay, living wills and enforcement won’t be restricted to banks but apply to all authorised firms and insurers.

“Firms will be concerned about inappropriate read across from the banking crisis,” Edmondson said.

The bill will also give the FSA powers to curb short-selling and require disclosure on short selling, a practice favoured by some hedge funds and blamed by policymakers for amplifying selloffs in bank shares at the height of the credit crunch.

Such measures have already been used by the FSA.

The watchdog will also have a duty to require firms to plan for their possible demise by drawing up “living wills” or recovery and resolution plans for a speedy wind down that avoids the need for taxpayer bailouts.

The G20 wants all major financial firms to draw up living wills by the end of 2010 and the FSA has already announced that several banks are taking part in a pilot scheme to complete first drafts of living wills in coming weeks.

The bill also contains provisions on pay in light of a UK government commissioned review by former top banker David Walker on how to strengthen corporate governance and make boards more accountable for a bank’s activities.

The final version of the Walker Review is published on Nov. 26 but the government has already said it backs the findings of a preliminary version released this year.

There will also be a new Financial Services Compensation Scheme to compensate British customers of overseas financial firms. Britain had to step in to safeguard deposits held by UK customers of failing Icelandic banks.

(Additional reporting by Avril Ormsby; Editing by Andy Bruce/Victoria Main) ((Reuters messaging: huw.jones.reuters.com@reuters.net; + 44 207 542 3326; huw.jones@thomsonreuters.com))

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