UK: Abolition of the FSA

Last Updated: 5 July 2010
Article by Daren Allen, Elisabeth Bremner and Michael McKee

As you will have read in your morning papers or heard on the news the Chancellor, George Osborne, announced last night that he will abolish the FSA creating a new Consumer and Markets Protection Agency, a new Economic Crime Agency and leaving the part of the FSA that supervises banks other substantial financial institutions as a Prudential Supervisor which is subject to the oversight of the Bank of England.  The Bank of England will also be given greater powers with regard to the management and oversight of financial stability issues.

All of this is consistent with Tory policy and manifesto commitments prior to the election but the rumour mill, prior to this announcement had, at first, suggested that the FSA would survive and the ambitious Conservative agenda would be slimmed down.

Both Lord Turner and Hector Sants have agreed to stay on to manage the transition with Hector Sants becoming a Deputy Governor of the Bank of England for a 3 year term running from July 2010.

In addition a Banking Commission has been created with Sir John Vickers as Chair.  He was formerly head of the Office of Fair Trading and, consequently is very familiar with Competition law issues.  The make up of the Commission (of 5 people) is mostly of people who have been critical of the banks during the current crisis.  They will consider, inter alia, whether or not the banks should be broken up.

The proposed changes will require legislation and are likely to lead to the most substantial financial services regulatory legislation since the Financial Services and Markets Act 2000.

Here are some initial thoughts on the plans:

Bank of England powers over Financial Stability

In a financial crisis there are really only two institutions in the public domain who can act to stem the panic: the finance ministry and the central bank.  This is because stemming the crisis depends principally on the judicious pumping of money and other forms of support into the system - both at the macro-economic level and to save individual institutions.  The only public players who have this money are the central banks and the taxpayer.

The crisis showed up the extent to which the Bank of England lacked formal powers to play this sort of role - although as a matter of practice it had a range of informal powers which allowed it to do this.  The Banking Act 2009 gave the Bank a legal responsibility for financial stability - but did not add to its powers, something the Governor highlighted in subsequent speeches.  Consequently giving the Bank of England additional powers with regard to financial stability makes sense.

Economic Crime Agency

Full details of what this will look like are still to appear - but it seems likely that it will have an impact on the Serious Fraud Office, SOCA and the parts of the FSA focused on financial crime and its enforcement.  The UK has had a perennial problem with finding the best way to tackle financial crime and certainly many would argue that there are too many overlapping agencies - but the jury is out as to whether this latest rearrangement will deliver any more successfully than predecessor agencies.

Consumer Protection and Markets Agency

Creating this new agency effectively sets up a "twin peaks" model for UK regulation - with prudential supervision at the Bank of England/new Prudential regulator and conduct of business supervision at the CPMA.  This model has been embraced by a range of other countries with Australia, the Netherlands and France (a new convert) being amongst the most prominent.

One would expect that this agency would have an even more heavily "retail" character than the FSA and one of the main concerns here is the fact that responsibility for the wholesale markets (and presumably supervision of exchanges) appears to be assigned to this agency.  This is likely, overall, to result in a much more intrusive regulatory intervention in the UK's international professional markets.  This, however, is in line with the trend of the various European legislative proposals and consultations which are emerging from Brussels at present.  It also appears to be in line with the legislation currently going through Congress in the USA.

Prudential Supervisor reporting to Bank of England

It appears that this will be what is left of the FSA after everything else is taken away and will involve the existing FSA supervision teams focused on banks, investment banks and, probably, major insurers coming under the aegis of the Bank of England.  It is not entirely clear what the structural nature of this will be - but as Hector Sants is to become a Deputy Governor of the Bank of England it seems to follow that this will actually be a division of the Bank.

Given the amount of time and IT spend which has been invested in developing the ARROW supervisory tool it is not anticipated that this would radically change in the short term and it is expected that ARROW visits would continue going forward - but probably with a greater focus on prudential rather than conduct of business issues.

These are some initial thoughts.  We would be interested in your own reactions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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