The UK’s new chancellor of the exchequer, George Osborne, announced plans to abolish the Financial Services Authority, and restructure regulation in response to the financial crisis.

In a speech at The Lord Mayor’s Dinner for Bankers & Merchants of the City of London, Osborne said that his government will abolish the FSA, giving prudential regulation to the Bank of England, and setting up a new conduct regulator.

Osborne plans to create a new prudential regulator, which will operate as a subsidiary of the Bank of England, to carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies. It will also create an independent Financial Policy Committee at the Bank, which will have the tools and the responsibility to look across the economy at the macro issues that may threaten economic and financial stability.

The governemtn will create a new Consumer Protection and Markets Authority to regulate the conduct of authorixed financial firms providing services to consumers. It will also be responsible for regulating the conduct of firms in the UK’s retail and wholesale financial services business.

It also plans to create a single agency to take on the work of tackling serious economic crime that is currently dispersed across a number of government departments and agencies.

The regulatory restructuring process will be completed in 2012, he said, adding that he has asked Hector Sants to remain at the FSA to oversee the transition and become the first new deputy governor and chief executive of the new prudential regulator.

Additionally, Osborne said that he will introduce a bank levy and demand further restraint on pay and bonuses at the country’s banks. It is also establishing an independent commission on the banking industry to look at the structure of banking in the UK, the state of competition in the industry, and how customers and taxpayers can be sure of getting the best deal.

FSA welcomes proposed changes

In response to the announcement, the FSA released a statement from its chair, Lord Adair Turner, welcoming the proposed changes. “The FSA now has the clarity of direction and timescale as well as the leadership that we need to meet the challenges ahead,” he said.

“The crisis demonstrated the need for new regulatory approaches and more intense supervision, and the FSA has already implemented major change,” Turner said.

“On retail customer protection, the FSA has recognized the need for a shift in our past approach, moving to the more interventionist approach which we set out in our recently published Retail Conduct Strategy. The new Consumer Protection and Markets Authority will have a strong focus on this challenge, while also maintaining strong focus on conduct issues in wholesale products,” he added.

He noted that the crisis also demonstrated, “the need to bridge the gap between macro-prudential policy and the supervision of individual firms.” And, he said, “The chancellor’s proposals for prudential regulation will enable us to do that, while building on the major changes we have made over the last few years. The timescale will enable us to manage the transition in a smooth and orderly way.”

Turner noted that there are important issues still to be resolved — such as the arrangements for its enforcement activities and for markets activities that relate to exchanges, clearing infrastructure and prudential issues. “We look forward to working closely with the government in considering the relative merits of different possible arrangements for these. But the overall future shape of financial regulation is now much clearer and we are in a strong position to create a future regulatory system which builds on the FSA’s achievements over the last few years of major change,” Turner concluded.

IE