On 8 July 2009, HM Treasury's White Paper entitled 'Reforming financial markets' (the 'White Paper') was published. It is the long-awaited formal response from the Government to Lord Turner's Review (the 'Turner Review') released in March 2009. This briefing note looks at the main issues raised in the White Paper, which is partly a consultative document to which responses can be submitted up to 30 September 2009.

Political backdrop

This note does not cover in any detail the Conservatives' own alternative White Paper, published subsequently on 20 July 2009, in which proposals to abolish the Financial Services Authority (the 'FSA') and divide its responsibilities between the Bank of England and a new Consumer Protection Agency are set out. Despite the political tussles on the subject of financial regulation and the Tripartite Authority model in particular, the Labour Government's proposals still need to be considered as any conclusion of the "turf war" between the FSA and the Treasury will only be resolved after a general election. The Liberal Democrats have also made alternative proposals for regulation.

Three main themes

The White Paper is divided into nine chapters covering three main themes:

1 the causes of the financial crisis (similarly covered in the Turner Review);

2 what action has already been taken to restore financial stability; and

3 future regulatory reforms deemed necessary to deliver the Government's aims for reformed financial markets.

Chapter one

The first chapter highlights the importance of the financial services sector to the UK's economy and the pre-eminence of the UK as a leading global financial centre. It also looks at the critical role played by the existing regulatory 'framework' (established in 1997 with the creation of the FSA, the Financial Ombudsman Service (the 'FOS') and the Financial Services Compensation Scheme (the 'FSCS')) in stabilising markets, and the benefits of approaching supervision in an integrated manner, i.e. having a single financial regulator responsible for prudential supervision and conduct of business regulation for all financial services sectors.

The integrated approach to financial supervision continues to be supported by the Government. However, it is recognised in the White Paper that the FSA, the Treasury and the Bank of England will be required to hone their team playing skills with a new Council for Financial Stability.

Chapter two

The second chapter looks at the financial crisis in terms of describing some of the key events that have affected the global economy since 2007 and also sets out the Government's response to the more immediate challenges required to avert large scale banking collapse. The Government's own company, UK Financial Investments Ltd ('UKFI'), which invests in UK companies to protect taxpayers as shareholders, is mentioned in some detail.

Chapter three

The third chapter analyses the actual causes of the crisis, identifying three factors as being of particular importance:

  • first and foremost, market discipline failures such as corporate governance, risk management and remuneration policies, and failings by banks, boards and investors to understand fully the complexities of their own businesses;
  • the lack of understanding amongst regulators and central banks of the excessive risks some firms had taken on, and the concept of systemic risk; and
  • the failure of global regulatory standards to respond to major changes in financial markets which had become increasingly complex and risky.

From the list above, the Government identifies four key areas that regulatory reform must deal with:

  • strengthening the UK's regulatory institutional framework so it can deal with all firms, including global firms and markets;
  • dealing with high impact firms that may be seen as "too big to fail" through improved discipline and supervision;
  • identifying and managing systemic risk as it arises across different financial markets; and
  • working closely with international bodies to deliver a global response.

Chapter four

The fourth chapter sets out what the Government proposes to change with respect to governance, coordination and the UK regulatory framework, in order to implement a more macro-prudential approach to regulation.

  • A new Council for Financial Stability, made up of the Treasury, the Bank of England and the FSA, will be created. It will have statutory objectives and be chaired by the Chancellor of the Exchequer. Its role will be to analyse emerging risks to stability and to coordinate any relevant response. Top of the agenda for the first meeting is remuneration.
  • The FSA's own objectives and governance arrangements will be reviewed (for the first time since 2003) and strengthened in line with reforms set out in the Banking Act 2009. Financial stability will become an explicit new FSA objective under legislation and the regulator will need to understand the wider economic and fiscal costs of institutional failure; the Financial Services and Markets Act 2000 ('FSMA') will be amended to stipulate as such.
  • The FSA will have enhanced powers to support the new approach to supervision. These are examined in more detail below.
  • The FSCS, as it plays a key part in protecting depositors with UK banks and customers of other parts of the industry, is likely to have an expanded remit and will have to have its own governance structures reviewed, as will the FOS.

Chapter five

The fifth chapter looks at significantly systemic firms, i.e. those which have global operations and whose failure would pose a significant threat to financial stability. Once identified (an initial challenge in itself), the Government proposes the following strategies to deal with these firms:

  • stronger market discipline (corporate governance, (bolstered by the Walker Review) and remuneration policies);
  • enhanced FSA prudential supervision of big, complex firms;
  • stronger resolution arrangements for dealing with firms' own failures; and
  • improvements to market infrastructure in key areas.

There is some discussion in this chapter of the Glass-Steagall Act introduced after the 1929 stock market crash in the US essentially to divide commercial and investment banking operations, repealed by the Gramm- Leach Bliley Act in 1999. Similar legislation was never introduced in the UK, though certain concepts were adopted.

Chapter six

The sixth chapter looks at managing systemic risk in more detail and the tools that the relevant authorities have, and need, at their disposal with which to do this. The UK Government recognises that regulatory bodies need to work together with counterparts on a global level to manage the risks across markets which are, of course, joined up. Further action is required both to dampen excessive credit conditions and risktaking in the financial system and simultaneously make banks more resilient to economic 'shocks' during both upturns and downturns in the markets.

Chapter seven

The seventh chapter continues with the theme of European and international cooperation, highlighting the work of the G20 which has taken important steps to 'shape the future regulatory agenda'. As the crisis has been truly global in nature, it is recognised that the response must be internationally orchestrated.

Chapter eight

The eighth chapter focuses on consumers, many of whom have lost faith in the banking industry. The Government intends to support and protect them with:

  • measures to raise financial capability;
  • improvements to access to simple, transparent products;
  • enabling consumers to take group action for collective redress in the case of widespread complaints; and
  • improving depositor protection.

The protection of consumers is, unsurprisingly, high on the (political) agenda and we can expect to see the new Money Guidance service called Moneymadeclear rolled out nationally in the spring of 2010. Mortgage regulation and consumer credit are briefly mentioned in this chapter, as is the test case on bank overdraft charges, for which there are still more than one million unresolved complaints outstanding.

Chapter nine

The ninth chapter examines competition and choice in UK markets, and sets out what the Government proposes to do in terms of restarting healthy competition in the banking sector.


There are many initiatives and themes covered in the White Paper. Annexes A and B collate the various consultation questions relating to primary legislation proposals and further areas for discussion respectively.

Proposed new FSA powers

This area will be of particular interest to firms. The proposals include the following:

A new financial stability objective for the FSA. Following the banking crisis and events like the collapse of Northern Rock, the FSA now has an increased focus on prudential regulation. But over the past year, FSA staff have in practice already been focusing more on financial stability. The FSA has a specialist Financial Stability team which is in the process of being expanded. Firms will already have noticed that the FSA supervision teams are placing more emphasis on capital, liquidity and risk management. This new objective will make more express the FSA's responsibilities for financial stability, but this merely provides legislative support for the FSA's increased focus in this area - firms may not notice much difference.

Broadening the FSA's own initiative variation of permission powers (OIVoP) to enable that power to be used for any of its objectives. This is the power that enables the FSA to intervene in a firm or limit its business. The FSA already had a quite broad discretion under the existing legislation, but this amendment would significantly reduce the number of "grey" areas. The FSA is already using the OIVoP power more often and sometimes in a quasi-disciplinary context. Expect this power to be used more frequently and in more novel situations (for example in terms of requiring firms to take a particular course of action such as amending a financial promotion) rather than merely where the FSA has concerns about a firm's financial resources.

A power to suspend individuals or firms for misconduct, and a power to penalise individuals who perform a controlled function without the requisite FSA approval. Although the FSA has power to withdraw an individual's approval or exercise the prohibition power to ban them, after due process, it currently has no power to remove temporarily their regulated status. It is not clear whether the proposed suspension power would be used only for urgent or emergency situations or used more routinely. Nor is it clear what the safeguards would be - for example, would the FSA's Regulatory Decisions Committee be involved in these decisions?

The power to penalise individuals who perform controlled functions without the FSA's approval could be used in "shadow director" type situations where an individual has significant influence on the management of a firm without being part of the senior management, or where an individual is actually doing the job of another person who merely holds the title, for example acting as MLRO or compliance officer. This is potentially a far-reaching power and it will be important to understand how the FSA intends to use it.

Extended information powers - the Government will consider whether the FSA needs greater powers to enable it to focus on systemic risk across financial markets. This proposal appears to be aimed at participants currently outside the regulatory net such as structured investment vehicles (this is the example given in the White Paper). Existing firms may find that they are required to provide more information to the FSA on their relationships and dependencies with other firms. New firms operating on the edge of the financial markets may find that they are drawn into the FSA's orbit.

Giving the FSA powers to take emergency action in relation to short selling independent of the market abuse regime. The emergency measures introduced by the FSA during the financial crisis to promote orderly markets were introduced through the market abuse regime. These measures (and the related disclosure provisions) did not sit comfortably with the abusive conduct such as insider dealing and market manipulation that the market abuse regime is intended to deal with, so giving the FSA independent powers makes sense. This power will give clearer legality to the current situation.


The current Government and the opposition parties offer very different alternatives for the future regulatory structure. However, whichever party wins the next election, regulation will be tougher and more intensive.

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.