The biggest shake-up of financial regulation for 25 years takes place today which will position the Bank of England as one of the most powerful central banks in the world.
Britain’s financial watchdog, the Financial Services Authority (FSA), will be replaced with three new bodies – the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) as part of a radical overhaul of the system set up by former Chancellor Gordon Brown.
Slammed for being “asleep at the wheel” during the financial crisis, the Tripartite structure – comprising the FSA, the Treasury and the Bank of England – will make way for a new system to regulate the financial sector.
The Bank, which the new FPC and PRA will sit within, will take on vast new powers and responsibility for regulating lenders and spotting and warding off possible financial shocks.
The changes mark a return of regulatory powers to the Bank, which were taken away from it on gaining independence in 1997.
Chancellor George Osborne is hoping the shake-up will plug the gap that previously existed in the Tripartite system, with no one taking responsibility to monitor risks to the financial system as a whole, such as the lending boom.
He has previously criticised the structure for being “incoherent” and “without clear lines of accountability”.
It is hoped the new system will have more teeth than the self-proclaimed “light touch” regulation of the FSA, which failed to rein in the banks and has admitted mistakes were made in the run up to the collapse of Northern Rock.
The watchdog also appeared woefully inept in preventing banking scandals such as the Libor interbank rate-rigging affair and mis-selling of payment protection insurance (PPI) and interest rate swaps to small businesses.
The FPC will act as the pillar of the incoming regime, taking a broad overview of financial regulation. The PRA will ensure banks and insurers have enough capital and liquidity, while the FCA will protect consumers by promoting effective competition and regulating financial services firms.
PRA chief Andrew Bailey has promised a more intrusive approach to regulation of the 1,700 institutions under his remit.
His counterpart at the FCA, Martin Wheatley, also pledged to clean up the sector with new powers to suspend or ban products. The FCA, which will sit outside the Bank, can also issue fines to firms.
He warned: “Firms need to ensure they are putting the consumer and the integrity of markets at the heart of their business models and strategies. There is no room for the poor behaviour of the past. We will take action early and decisively when we see evidence of poor practices.”
The overhaul has sparked concerns that the Bank, which also has responsibility for monetary policy in the UK, could become too powerful. The former head of Germany’s central bank, Axel Weber has warned the changes risk impacting its independence.