The Treasury last week introduced its financial services bill, marking the start of the parliamentary scrutiny process for the new regulatory structure in the UK.
Under the new bill, the Chancellor of the Exchequer is now solely responsible for any use of public funds and has primacy over any Bank of England decisions. If public funds are at risk, the central banks Governor now has a statutory duty to notify the Chancellor.
The move is designed to provide transparent and decisive action in a financial crisis. In September 2007, British bank Northern Rock sought and received a bailout from the Bank of England and was subsequently nationalized amid fear of collapse in February 2008. But the tripartite system whereby the Treasury, Bank of England and Financial Services Authority shared oversight of the UK financial system was criticized both for not anticipating the crisis and responding too slowly to it.
Aside from the extended powers, the governments proposed overhaul of the current system remains largely unchanged from its July 2010 proposals, when it suggested establishing three new agencies the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) to replace the tri-party system.
The FCA will be responsible for regulating wholesale market conduct, including drawing up the Code of Market Conduct and identifying market misconduct and taking appropriate action (for example, imposing penalties for market abuse).
External to the Bank of England, the FCA will regulate how authorized firms conduct business. It will also be responsible for regulating exchanges, trading platforms such as multilateral trading facilities and wholesale market conduct.
While it is intended the Bank of England will be the competent authority for central counterparties and settlements systems, the FCA will occupy the UK voting seat on the European Securities and Markets Authority (ESMA), which is responsible for developing technical and enforcing standards for regulation across Europe.
The FPC (as the macro-prudential authority) and the PRA (providing micro-prudential regulation of firms which manage complex risks on their balance sheets) are to be positioned within the Bank of England, ensuring greater coherency in prudential regulation, systemic risk and information sharing between the agencies.
Commenting on the draft bill, Euroclear spokesperson Martin Gregson said: The only significant change for Euroclear UK & Ireland is that the Bank of England will in future regulate all clearing houses and settlement systems in the UK. The Bank already has regulatory oversight of UK payment systems under the Banking Act 2009 so this more streamlined approach to our regulation is to be welcomed.
One securities services provider, who preferred to remain anonymous, gave a more cautious response to the bill, saying that the new regulatory system could lead to more risks: While we all recognize the need to have stable, well regulated and well controlled market infrastructures, this model could potentially lead to a siloed and disjointed approach which may add to costs and a weaker FCA, at least with regards to supervision of the market infrastructure unless there is close coordination. If the three regulatory bodies do not cooperate well, then the risk exists that something will fall between the cracks.
Reporting by Bruce Love (The Trade) and Janet Du Chenne