Uk bank regulatory reform

Published: July 8 2009 09:27 | Last updated: July 8 2009 21:28

If the equipment is bust, by all means fix it – if that reduces the likelihood of it breaking again. Britain’s financial regulatory system fell between the three stools of the Financial Services Authority, the Bank of England and the Treasury. And it needs repair: for all the regulations already devised by the FSA, the City of London watchdog, neither it nor the Bank of England reacted to the overleverage of banks in the UK in time. Yet the government‘s White Paper on reforming financial markets, released on Wednesday, suggests it wants to keep much of the existing regulatory tackle, just give it more oomph.

The paper’s new proposals boil down to a handful of measures. It wants more banking competition. It does not seek a Glass-Steagall style separation of investment and commercial banking activities, noting sensibly that even the failure of small lenders, such as Northern Rock, can have systemic consequences. It believes banks should behave counter-cyclically – building up capital buffers in the good times to cushion them during the bad. And it wants to create a Council for Financial Stability, a co-ordinating body that will push the regulatory stools closer together and then, presumably, sit on them.

READ THE TEXT BELOW AND FIND AN IDEA THAT BEST ILLUSTRATES THE CONTENTS OF EACH PARAGRAPH

1. The controversy between the Conservatives and the Labour is mainly about: a)the structure of regulatory system; b) the best response to the crisis; c) the functions of the FSA.

2. New system of financial regulation means: a) reporting on executives’ pay; b) more robust regulation of financial sector; c) better consumer protection.

3. The criticism from the opposition is mainly about: a) inadequate reforms; b) unclear lines of responsibility in new regulatory system; c) passive role of regulators.

4. Banking community and the general public: a) fully support the reforms; b) believe the reforms are inadequate; c) fully understand the need for change

Banks to face tougher regulation

UK banks will face tougher regulation and consumers will get more protection, under reforms to the financial system proposed by the chancellor.

1. Alistair Darling outlined a new council to oversee financial stability, but kept the current system of regulation. Shadow chancellor George Osborne said the government's reforms were an "inadequate response" to the crisis. He said the Conservatives would abolish the current system and give supervision powers to the Bank of England.

Mr Darling reinforced the tripartite regulation system between the Bank of England, the Financial Services Authority (FSA) and the Treasury, which was introduced by Labour in 1997.

In contrast, the Conservatives said they would get rid of the tripartite system. "We will put the Bank of England in charge of the prudential supervision of banks, building societies and other significant financial institutions," Mr Osborne said.

The party would create a separate consumer and markets regulator, effectively spelling the end of the FSA, the BBC's business editor Robert Peston said.

Consumer protection

2. In a statement to the House of Commons, Alistair Darling said the financial system needed to ensure robust regulation, and banks and financial institutions should be better managed. Some of the key proposals included:

• More help for consumers - a national money advice line funded by the banks and a strengthened deposit protection scheme

• Greater competition - the FSA and Office of Fair Trading to ensure that new players can enter the banking market

• Executive pay - the FSA to report yearly on whether banks have met the new code of conduct on remuneration, and bank boards to be strengthened

• Tougher banking regulation - banks required to hold more capital to cover any future losses and more powers for regulators to take over failing banks

• A new Council for Financial Stability - the FSA, the Bank of England and the Treasury to meet regularly and report on the systemic risks to financial stability.

Opposition criticism

3. Shadow chancellor George Osborne criticised the lack of clear lines of responsibility in financial regulation. He said instead of "clarity", Mr Darling's proposed new system would bring "confusion".

Liberal Democrat Treasury spokesman Vince Cable also expressed disappointment at the reforms.

"This is not so much a White Paper as a blank paper. "Mr Darling should have used this opportunity to assert his authority over the banks - instead he is maintaining his passive role in [the government's shareholding body] UKFI, which is just not good enough" .

'Empowering consumers'

4. The British Bankers' Association (BBA) said banks recognised the need for change and would continue to work with authorities to ensure the "long-term success of the UK economy and the banking sector".

"We believe appropriate and effective regulation, capital applied according to risk and good quality supervision are the cornerstones of a vibrant banking community", said BBA chief executive Angela Knight. "We welcome moves to create better coordinated financial stability jointly with the FSA and the Bank of England."

The consumers association Which? welcomed measures to increase protection for bank customers. "We're pleased that the government recognises the need to provide a better deal for consumers," said Which? chief executive Peter Vicary-Smith. "Warnings about risky products, universally available money guidance and more choice on the High Street will all help to empower consumers in their dealings with the financial world."

FOOD FOR THOUGHT

Below there is a blueprint for the US banking sector overhaul. Comment on the significance of each point, giving a score to each from 1 to 10. Support your ideas with arguments.

KEY US BANKING REFORMS

Tougher capital requirements for big banks

Regulation of securitised assets

Consumer mortgage protection

Powers to take over failing banks

Global regulatory standards

SUPPLEMENTARY READING

Fresh bank rules come into force

N Customers should get a better deal, the FSA says ew rules come into force on Sunday when the Financial Services Authority (FSA) takes over regulation of the way banks treat their customers. Communications with account holders will have to be fair, clear and not misleading. The FSA believes banks have been generating too many complaints about poor service and that the old system of self-regulation was not good enough. Now, banks could be fined if they break the rules. New regulations will put banking customers "in the driving seat" by setting down clear standards that people can expect from their institution, said Dan Waters, the FSA's director of conduct risk. These include things like speeding up payments between accounts, adequate notice of changes in terms and conditions, and smoothing the procedure for querying an unauthorised or unexpected transaction. "If firms fall short of these standards or fail to treat their customers fairly, the FSA will take action," he added. 'Full information' Previously, banks regulated themselves through a body called the Banking Code Standards Board (BCSB) which, crucially, did not have the power to levy fines for any breaches of its rules. T The big thing is a requirement of overall fairness Ray Cox, QC he new rules cover the day-to-day handling by banks and building societies of their customers, though not when they have unsecured loans, overdrafts or credit cards - those are still regulated by the Office of Fair Trading (OFT). The FSA's rules will cover the savings and instant access accounts of bank customers, notification of interest rate changes, unauthorised transactions, and direct debit payments. The regulator said this would ensure, among other things, that customers: • received full information on services and polices before they signed up for them, not just afterwards • would be told well in advance of any changes to the terms and conditions of their accounts, such as disadvantageous changes to interest rates • would be refunded money lost through an unauthorised transaction, unless there is a good reason to investigate the situation • would be credited with interest on current and instant access accounts as soon as money is received by a bank. Ray Cox, QC, a leading banking barrister, said the new rules - outlined in the FSA's Banking Code of Business - represented an important change for the banks. "The big thing is a requirement of overall fairness, which the banks had always resisted," he said. "They had more detailed rules which they said amounted to fairness." 'Big psychological shift' The changes have received the backing of the British Bankers' Association (BBA). "UK banks have supported statutory regulation so the move of the old Banking Code to the Financial Services Authority is something we are behind," it said. "The British Bankers' Association, the Building Societies Association and the UK Cards Association will now sponsor a refocused industry watchdog, the Lending Standards Board, which will oversee the operation of new industry standards - the Lending Code - which covers the credit and debt elements of the old Banking Code. " Earlier this month, UK banks agreed with the OFT that they would, by 2011, make their current account charges clearer and make it easier for customers to switch accounts. These changes will include an annual summary of account charges, and will make it easier for people to switch direct debit payments from an old account to a new one. Ray Cox, said the new rules should bring about a big change in attitude by banks. "Banks didn't have to worry that their FSA designated regulator would be on the phone to them about their charges," he said. "This will lead to a big psychological shift in banks as they will know the regulator is taking a close interest."