In July 2009 the Government published a White Paper which was entitled Reforming Financial Markets. In this White Paper the Government set out its analysis of the causes of the financial crisis, the action taken to restore financial stability and the regulatory reforms it felt necessary to strengthen the financial system for the future.
The proposed reforms included:
- More effective prudential regulation and supervision of firms. This included proposals to provide the FSA with a formal, statutory objective for financial stability, and to extend its rule making powers to give it clearer legal authority to set rules for the purpose of protecting wider financial stability.
- Greater emphasis on monitoring and managing system-wide risks. The Government felt that the UK’s institutional framework (the FSA responsible for conduct of business and prudential regulation for all financial services firms, the Bank of England responsible for financial stability) was the right one but that this framework should be strengthened by giving increased powers to both institutions.
- The Government proposed the creation of a Council for Financial Stability whose membership would consist of the Treasury, the FSA and the Bank of England. One of the key issues that the Council would look at would be remuneration.
- More action to ensure that the particular problems posed by 'high impact firms' are better managed. The Government's approach was fourfold covering: (1) stronger market discipline with guidance on standards of discipline in corporate governance and remuneration being provided by the Walker Review and the FSA's Code of Practice on Remuneration (2) more stringent regulation of systemically significant firms (3) managing failure with all firms having detailed, practical resolution plans for dealing with their own failure (4) better market infrastructure with derivatives being, as far as possible, standardised, liquid and having price transparency, and being cleared through central counterparties.
- Greater protection for the taxpayer when an institution needs to be resolved.
In the White Paper the Government stated that it would bring forward in the next legislative session a Bill to make provision in those areas where primary legislation was required.
The Financial Services Bill
Yesterday in the Queen's Speech there was a broad outline of the Financial Services Bill:
"My Government will continue to reform and strengthen regulation of the financial services industry to ensure greater protection for savers and taxpayers. Legislation will be brought forward to enhance the governance of the financial sector and to control the system of rewards."
The main elements of the Bill are:
- Establishing a new statutory Council for Financial Stability to replace the Standing Committee, chaired by the Chancellor and comprising the Treasury, the Bank of England and the FSA.
- Strengthening the FSA, including through providing explicit objectives, formalising its international work, and expanding the remit of the Financial Services Compensation Scheme.
- Taking action, nationally and internationally, on remuneration.
- Tougher requirements on systemically important financial firms to set up recovery and resolution plans (living wills), that will make banks easier to wind down in the event of a future crisis.
- Enabling the roll-out of a national money guidance service, to be delivered by a new Consumer Financial Education Body.
- The creation of better routes for consumer redress, including enabling a representative to bring an action through the courts on behalf of a group of consumers, and streamlining the FSA's powers to order a review of past business and secure compensation if there have been legal or regulatory breaches.
- Banning unsolicited credit card cheques, to prevent financial institutions from encouraging customers to borrow more than they can afford.