Where now for regulation?

Coming into power so soon after the financial crisis, regulation was high up the coalition government’s agenda, and the Treasury wasted little time in setting the course for change.

Despite initial speculation the status quo would be maintained, the path has now been laid for the FSA to be succeeded by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

The end of the tripartite regime will also see the establishment of the Financial Policy Committee within the Bank of England, which will be responsible for macro-prudential regulation.

However, the PRA and FCA will still be independent of the government and there is no sign yet of any parliamentary oversight, often a criticism of the current system.

Although the full divergence will not take place until Parliament passes a bill next year, a transitional system has already been set up within the FSA.

Elsewhere, the coalition dashed any hopes of a u-turn on the retail distribution review (RDR), maintaining the line that change was needed to prevent future misselling scandals.

Despite a surge in interest from backbench MPs, led by Mark Garnier and Harriett Baldwin, financial secretary to the Treasury Mark Hoban has avoided any intervention by pointing out the independence of the FSA.

The highlight of Hoban’s involvement in the arguments came in two parliamentary debates, the first in Westminster Hall, where he compared IFA qualifications to those of McDonald’s managers, and the second in the House of Commons, where he seemed to be the sole voice in favour of RDR.

Although extraneous to the government, the Treasury Select Committee’s report into the RDR will make for interesting reading, considering the criticisms put forward by members during evidence sessions, although it is unlikely to change
any minds in Whitehall or Canary Wharf.

In other areas of financial services, the coalition has initiated Project Merlin, which should see the major banks lower bonus levels. It has also made permanent the bank levy introduced by the previous government, which it expects will raise £2.5bn a year.

The future of regulation

Financial Policy Committee

• Sits within Bank of England
• Responsible for ‘macro-prudential’ regulation
• Headed up by governor of Bank of England (currently Mervyn King)

Prudential Regulation Authority

• Aims to enhance financial stability by promoting safety and soundness of authorised persons, including minimising the impact of their failure
• Operationally independent subsidiary of the Bank of England
• Headed up by Hector Sants

Financial Conduct Authority

• Responsible for conduct of business regulation across the entire spectrum of financial services
• Aims to enhance confidence in UK financial system by facilitating efficiency and choice in services, securing an appropriate degree of consumer protection, and protecting and enhancing the integrity of the UK financial system
• Headed up by Martin Wheatley