Under the proposals, the current tripartite system would be disassembled and the FSA’s main regulatory powers transferred to the Bank of England. Within the Bank of England a new Financial Policy Committee will be responsible for macro-prudential regulation of banks, building societies and other financial institutions, including insurance companies. It will exist alongside the Monetary Policy Committee that currently decides the interest rates in the UK. What remains of the FSA will become the Consumer Protection Agency, with part of the Office of Fair Trading being incorporated within it. The agency will focus on making consumer information more easily accessible, including making the information available on price comparison websites.
The FSA’s reaction to the proposals has been defiant. The FSA’s Chief Executive, Hector Sants, and Chairman, Lord Turner, used the FSA’s annual public meeting on 23 July 2009 to counter the arguments behind the proposals. They point out that the FSA is still a young organisation, having been established less than a decade ago, and argue it is still developing and adapting its approach and learning from past mistakes. It is argued that, should the FSA be disbanded, the knowledge it has gained will be lost.
Those in the FSA also question the Bank of England’s suitability to act as a regulator. They note that the FSA was born out of the Bank of England’s perceived failings in connection with the collapse of BCCI and Barings Bank in the early 1990s. Some also question whether it is appropriate for the same organisation to regulate banks and determine interest rates; conflicts of interest would inevitably arise.
Lord Turner believes the plan to split prudential regulation from conduct regulation affecting consumers would be detrimental due to the considerable overlap between the two. Lord Turner advocates a single body to regulate the industry as a whole, as the FSA currently does. The FSA also argues for retaining its methods of ‘risk-based regulation’ over the prudential and conduct regulation that the Conservatives would seek to introduce. Such differing philosophies towards regulation may cause tension if FSA staff are to be integrated with those at the Bank of England.
The Association of British Insurers has stated that there are significant issues for the insurance industry; the key concern being not who supervises them, but rather that they should not be regulated in the same manner as banking.
The Conservatives’ White Paper can be found by clicking here.
Lord Turner’s speech from the FSA’s annual public meeting can be found by clicking here.