Treasury published the long-awaited White Paper on reforming financial markets on 8 July. It wants to make changes that will:
- give more effective prudential regulation and supervision of firms;
- place greater emphasis on monitoring and managing system-wide risks;
- improve confidence that regulators are equipped to deal with crises; and
- give the taxpayer more protection when the Government has to take action in respect of a financial institution.
It plans to do this in a number of ways:
- giving FSA more powers, including making financial stability a statutory objective and enhancing its powers to deal with individual institutions and market misconduct and letting it get more information from unregulated institutions. This can help determine threats to stability and whether other institutions should fall under FSA’s regulatory remit;
- retaining the framework of BoE contributing to financial stability with FSA supervising all institutions. But strengthening the framework, already started through the Banking Act 2009. BoE will have to identify specific risks and actions in its Financial Stability Report and co-ordination between authorities must improve. The Government plans legislation that will create a Council for Financial Stability of which the Tripartite Authorities will be members. It will have statutory duties to consider and report on matters of financial stability. The Government intends the new Council to consider remuneration at its first meeting;
- building on the approach of the Banking Act to failures: the Government wants stronger market discipline (including through the Walker Report reforms to Corporate Governance and FSA’s Code of Practice), more stringent regulation of systemically important firms (including their required capital and liquidity levels), requiring firms to have plans for managing their own failure and a better market infrastructure (particularly for securitisations and specific derivatives). It wants derivatives to be standardised so far as possible, and to clear through CCPs. The Government believes this approach is better than limiting firms’ activities in a Glass-Steagall style approach, or placing arbitrary limits on the size of banks;
- pre-funding FSCS deposit-taking class, so industry can contribute to the costs of a failure before it happens. It also thinks FSCS should be the single point of contact in the UK for other Member States' guarantee schemes and should act as agent for UK customers; and
- introducing consumer help, such as improving advice on capability and access to simple products. It also wants to improve how to deal with widespread complaints.
The consultation poses around 60 specific questions and wants responses by 30 September. In his speech announcing the consultation, the Chancellor stressed the need to maintain competitive markets in the UK to allow new entrants including non-banks. He said he would require FSA to report on compliance with its remuneration code and would expect boards and investors to be involved in risk management, with a greater role for NEDs.