Breaking up the FSA – what the Financial Services Bill means for financial regulation

by Michael Izza on 25.04.2012 02:00

The Financial Services Bill, which breaks-up the Financial Services Authority, has been keeping us busy at ICAEW.


With around 25,000 of our members working in Financial Services, and with wider implications for the public, we see this Bill as critically important. We cannot afford a repeat of the financial crisis, especially as policy responses can have unintended consequences.


The Bill, which is aimed at replacing the ‘failed’ tripartite system of regulation, and breaking up the FSA into three new financial regulation watchdogs, also includes give financial sector regulators greater powers to discipline auditors of financial firms. It’s aimed at preventing future financial crises and creating responsible, well-regulated financial markets. And it gives much more power to the Bank of England.


Overall, we support the broad thrust of the proposals.


It is right to set up the Financial Policy Committee (FPC) at the Bank of England to conduct macro-prudential policy (pursuing economic and financial stability, and responding to a build-up of systemic risk), and to move micro-prudential supervision (daily regulation and supervision of individual financial firms’ financial soundness) to sit alongside the FPC in the Bank.


However, the FPC will face enormous challenges in seeking a more stable financial system. Macro-prudential policy will be a new departure for the UK, and there is little experience of what tools will be best used, or their impact. Furthermore, the data available currently falls short of what the FPC would ideally use to do its job. We also have concerns around the impact of the tools on wider economic growth – we need to make sure these tools do not harm already fragile growth. So overall it is vital that the FPC works in a particularly open way, seeking input from a wide range of external experts.


On the regulation of individual firms, we believe that the difference between success and failure turns particularly on the calibre of supervisory staff. To minimise crises in the future, regulatory staff must be  high quality, well trained and have regular exchanges with the private sector. We must not forget, though, that no matter what steps are taken, financial crises will never be completely prevented.


We agree with most commentators that greater scrutiny and accountability of the Bank of England and other regulators than the Bill currently envisages is necessary, and that members of the FPC and regulators’ Boards should be drawn from diverse backgrounds to help avoid group-think, and have the real-world experience to help them understand the impact of policy decisions.


We suggested nearly 40 changes to MPs in the House of Commons. 26 of those were discussed by the Committee, including 12 which were reflected in amendments.


With the Bill reaching its final stages in the House of Commons next week before entering the House of Lords in May, we will be calling on the government particularly to strengthen the accountability arrangements for the new bodies.


Currently we feel that the powers of these new bodies are not transparent or accountable enough to the public and to Parliament. At worst, that could undermine public support for the new arrangements.


We will be keeping you posted about future developments as the Bill enters the House of Lords. The Bill will become an Act later this year and will be implemented in the first half of 2013.