Britain to scrap regulator and hand powers to central bank

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Britain will overhaul its system of financial regulation, handing new powers to the Bank of England and abolishing a watchdog blamed for failing to foresee the near-collapse of the banking system.

George Osborne, the new Conservative finance minister, said in a speech late Wednesday that the BoE would get powers to regulate individual financial firms, in addition to its remit to monitor the overall health of the economy.

The Financial Services Authority (FSA), which regulates the City of London but came in for heavy criticism for its failure to prevent the devastating global financial crisis, would be abolished.

Some of its responsibilities would be handed to the Bank of England, while others would be injected into new organisations.

The so-called "tripartite" system -- which shares responsibility for regulation between the BoE, the FSA and the Treasury -- will be ended, said the chancellor. It was set up by the previous Labour administration in 1997.

Speaking on BBC radio on Thursday, Osborne said that the old set-up had not allowed anyone to make "big judgement calls" in the run-up to the worldwide financial crisis.

He cited the example of Royal Bank of Scotland, which is now 83-percent state-owned. The group was felled by its leading role in a consortium takeover of Dutch bank ABN Amro at the top of the market, before the credit crunch hit.

"Britain had the world's biggest bank bailout with RBS," Osborne told the BBC. "RBS took over another bank, ABN Amro, just before the credit crunch got going.

"No one in the regulatory system said, let's have a look at RBS, let's have a look at its exposures to American subprime, let's look at its dependence on wholesale financing -- can it really take on this huge merger?

"No one was making the big judgement calls, there was plenty of regulation (but) the trouble was that no one was taking a step back and saying what is the big picture here.

Osborne said the financial crisis, which plunged Britain into its worst recession since the 1930s, showed powers to monitor both individual firms and the general state of the economy needed to be centralised at the BoE.

Giving the speech in central London, he added the proposals amounted to "a new system of regulation that learns the lessons of the greatest banking crisis in our lifetime."

Osborne revealed the shake-up at his first Mansion House speech, an annual high-profile address to business leaders.

Overhauling the regulatory system and handing new supervisory powers to the Bank of England was a key plank of the Conservatives' election manifesto.

But an inconclusive result at the May 6 election forced them into a coalition government with the smaller Liberal Democrat party, casting doubt on whether the Tories would get to push through all the reforms they had hoped.

Osborne, a cabinet minister in the new government headed by Conservative Prime Minister David Cameron, detailed the break-up of the FSA.

The part that monitors financial institutions would become a "prudential regulator" and would operate as a subsidiary of the BoE.

Some of the FSA's powers would be injected into a separate consumer protection and markets authority, while others would be put into an agency for fighting economic crime.

The chief executive of the FSA, Hector Sants, would stay on to oversee the transition which would be completed in 2012, said the chancellor.

Bank of England governor Mervyn King welcomed the reforms, saying the previous set-up had not been effective.

"In a crisis, decisions must be made quickly and decisively and the central bank, working with government which is always responsible for any use of public money, needs to be in charge," he said.

"That was one of our painful lessons."

© 2010 AFP

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