FSA to be abolished by 2012

16 June 2010 | By Natalie Thomas

Speaking at Mansion House this evening, Osborne called the FSA “a narrow regulator, almost entirely focused on rules based regulation”.

He says no-one was controlling levels of debt, and when the crunch came no one knew who was in charge.

The decision to eliminate the regulator was not a reflection on the quality or dedication of the staff of the FSA, the Bank of England or the Treasury.

He says: “It is instead a reflection on what has gone wrong and what may continue to go wrong unless there is change.”

Osborne says at the heart of the crisis was a rapid and unsustainable increase in debt that our macroeconomic and regulatory system utterly failed to identify let alone prevent.

He says: “Inflation targeting succeeded in anchoring inflation expectations, but the very design of the policy framework meant that responding to an explosion in balance sheets, asset prices and macro imbalances was impossible.

“The Bank of England was mandated to focus on consumer price inflation to the exclusion of other things.

“The Treasury saw its financial policy division drift into a backwater.”

Osborne says because central banks are the lenders of last resort, the experience of the crisis has shown that they need to be familiar with every aspect of the institutions that they may have to support.

So they must also be responsible for day-to-day micro-prudential regulation as well.

He says it intends to give the Bank of England control of macro-prudential regulation and oversight of microprudential regulation and the Financial Secretary Mark Hoban will set out the details to Parliament tomorrow.

Osborne says: “What we are proposing is a new system of regulation that learns the lessons of the greatest banking crisis in our lifetime.

“I can confirm that the government will abolish the tripartite regime, and the FSA will cease to exist in its current form.

“We will create a new prudential regulator, which will operate as a subsidiary of the Bank of England.”

The new regulator will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.

The government will create an independent Financial Policy Committee at the Bank, which will have the tool and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability and take effective action in response.   

It will also establish a new Consumer Protection and Markets Authority and regulate the conduct of every authorised financial firm providing services to consumers.

The government will also create a single agency to take on the work of tackling serious economic crime.

Osborne says: “We take white collar crime as seriously as other crime and we are determined to simplify the confusing and overlapping responsibilities in this area in order to improve detection and enforcement.”

Hector Sants will remain at the FSA to oversee the transition and become the first new deputy governor and chief executive of the new prudential regulator.

The new government will also be establishing an independent commission on the banking industry.

It will look at the structure of banking in the UK, the state of competition in the industry and how customers and taxpayers can be sure of the best deal.

Osborne says the centrepiece of the new global standards for bank regulation will involve higher capital and liquidity requirements, and that bank capital requirements should respond to the cycle.

He says although this is what the G20 agreed to last year, the actual standards have not yet been agreed.

But Osborne says: “The markets are already anticipating what they might be, and the banks are building up larger reserves to prepare themselves.”

The government will also demand the highest levels of transparency from banks, and encourage published stress tests where they have not taken place.

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