Financial Regulatory Forum

FACTBOX-UK fleshes out financial supervisory shake up

By Reuters Staff
July 26, 2010

July 26 (Reuters) – Britain detailed on Monday how its new financial supervisory regime will work from 2012 in a move that scraps the Financial Services Authority and turns the Bank of England into one of the most powerful central banks in the world.

Supervisors will be required to intervene more in day-to-day operations of banks, insurers and markets to nip risks in the bud before they destabilise the broader financial system.

The reform abolishes the discredited “tripartite” system of the FSA, the government and the Bank of England working together to supervise Europe’s biggest money centre.

The BOE will take the lead role but the government will have the final say on any use of taxpayer money for a bailout.

Who regulates consumer credit, Lloyd’s of London insurance market and whether criminal prosecution powers should be transferred to a new crime busting agency will all be subject to separate consultations.

FINANCIAL POLICY COMMITTEE (FPC)

* New body in the Bank of England to maintain financial stability. Chaired by BOE, have 11 members, six from BOE, five from outside, including CEO of the CPMA and a non-voting government representative.

* Meets four times a year and minutes published along with half yearly Financial Stability Report. External members will be recruited in same way as external member of Bank’s monetary policy committee.

* Can require the PRA to take action with respect to all firms, such as increasing capital held during an upswing, caps on leverage at firms, limits on lenders, and higher collateral requirements such as loan-to-value limits on home loans.

PRUDENTIAL REGULATION AUTHORITY (PRA)

* New subsidiary in BOE with its own board to authorise and carry out day-to-day regulation and prudential supervision of all deposit-taking institutions, insurers and investment banks, building societies, credit unions and friendly societies.

* Chaired by BOE governor and a chief executive, Hector Sants, who is currently FSA CEO, who will also be a deputy governor of the BOE.

* The PRA will supervise 1,500 to 2,000 firms and have powers to impose levies on firms to fund itself.

* BOE to take responsibility for supervising clearing and settlement houses.

CONSUMER PROTECTION AND MARKETS AUTHORITY (CPMA)

* New body — CPMA is a working title — to regulate the conduct of firms towards their retail customers and conduct of wholesale market participants

* Represents Britain on the new EU markets authority. CPMA chief executive will sit on the FPC.

* It will supervise most of the 20,000 firms currently supervised by the FSA. There are about 100 to 200 groups that will be supervised by the CPMA and PRA.

* FSA requirement to consider the global competitiveness of the industries they regulate may “need to be reconsidered in light of lessons learned from the financial crisis”.

* CPMA will regulate exchanges and other trading platforms, be responsible for enforcement of its conduct rules and be funded by fees on firms.

* Further consultation on whether to transfer responsibility for prosecuting criminal offences involving illegal market activity to a new Economic Crime Agency.

* The UK Listing Authority, currently part of the FSA, may be merged with Financial Reporting Council as part of wider efforts to improve corporate governance.

* The FSA currently regulates Lloyd’s of London insurance market and the government will consult further on how supervision will be divided between the new CPMA and PRA.

WHAT NEXT?

* The new bodies will be up and running in “shadow form” starting with the FPC from autumn this year, followed by the other bodies in first quarter 2011. Formal legislation mid-2011 and transition completed in 2012.

* Rapid shift to shadow forms aimed at minimising disruption and giving FSA staff clarity on new roles. Transitional costs will be 50 million pounds over three years.

* Further consultation on whether the Office of Fair Trading’s responsibility for consumer credit should be shifted to CPMA.

((Reporting by Huw Jones; huw.jones@thomsonreuters.com; + 44 207 542 3326))

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