Chancellor scraps Financial Services Authority

CHANCELLOR George Osborne last night announced the abolition of the Financial Services Authority in a shake up of City regulation aimed at avoiding a repeat of the banking crisis which led to the recession.

Making the biggest changes to the regulatory landscape in 13 years, Mr Osborne pledged to give the Bank of England ultimate control over financial supervision.

The move comes just days after Sir Nigel Rudd, former deputy chairman of Barclays Bank, speaking in Birmingham, criticised the FSA for being too weak to regulate the banking system.

The FSA will cease to exist in its current form in 2012 and will be replaced by a new Prudential Authority, operating as a subsidiary of the Bank of England.

Speaking at the annual Mansion House dinner of the City of London’s financial elite, Mr Osborne said a new Financial Policy Committee (FPC), with the power to tackle credit binges, would be created.

A new independent banking committee that will look at whether retail and investment banking needed to be split, will also be formed.

The “tripartite” system introduced by Gordon Brown in 1997, which shared responsibilities between the Bank, FSA and Treasury, had “utterly failed to identify, let alone prevent” the unsustainable increase in debt which led to the financial crisis, Mr Osborne said.

Mr Osborne told the audience: “What we are proposing is a new system of regulation that learns the lesson of the greatest banking crisis in our lifetime.

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

He said the FPC, which would mirror the Bank’s Monetary Policy Committee, will “have the tools and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability and (have) the tools to take effective action in response”.

FSA chief executive Hector Sants, who was due to leave in the summer, will stay on through the transition.

He will be the first chief executive of the new body and a third deputy governor of the central bank, sitting on the Financial Policy Committee chaired by Governor Mervyn King.

Dismantling the tripartite regulatory system and abolishing the FSA had been a pledge for the Conservative Party before the May 6 election.

Angela Knight, chief executive of the British Bankers’ Association, welcomed the news.

She said: “The industry will work with the government to ensure transition between regulatory authorities does not cause disruption to the financial system and is implemented swiftly and well.

But some analysts have questioned whether too much power is being put into the hands of the Bank of England and its governor Mervyn King.

However, Mr Osborne said only independent central banks like the Bank of England had “the broad macroeconomic understanding, the authority and the knowledge required to make the kind of macro-prudential judgements that are required now and in the future”.

Mr King welcomed the changes and said the Bank of England would focus on maintaining the stability of the banking system.

He said: “I welcome those new responsibilities. Monetary stability and financial stability are two sides of the same coin.

“In peacetime, regulation can be conducted outside the central bank. But in a crisis, decisions must be made quickly and decisively and the central bank, working with government which is always responsible for any use of public money, needs to be in charge.”