UK: delayed disclosure of liquidity support - FSA consultation

The UK's Financial Services Authority has published a consultation paper in which it proposes amending the Disclosure and Transparency Rules (DTR) in order to clarify that, in a limited set of circumstances, financial institutions admitted to trading on a regulated market and in receipt of liquidity support from the Bank of England can delay disclosure of this fact.

There is unlikely to be unanimous support for this proposal, not least because of the argument that the proposal (which is clearly designed to support financial stability) undermines the transparency of the market. The FSA nevertheless states in its consultation paper that its proposal is consistent with Article 3 of the European Market Abuse Directive (2003/124/EC) which recognises certain circumstances in which delayed disclosure can be justified. These circumstances are reflected in the current version of DTR 2.5. 

For further information see:

FSA press release | FSA newsletter | FSA consultation paper | Online response form | 

UK: financial regulation reform - Parliamentary statement

The Financial Secretary to the Treasury delivered a statement to the House of Commons yesterday on the Government's proposals for financial regulation reform: see here. The statement provides further information on the new institutional structure and the responsibilities of the Bank of England, Financial Policy Committee, Prudential Regulation Authority and Consumer Protection and Markets Authority.

UK: financial regulation reform - reactions

Lord Adair Turner, the chairman of the Financial Services Authority, was interviewed this morning on Radio 4's Today programme about the changes announced yesterday: listen here. The Chancellor was also interviewed: listen here. The Governor of the Bank of England, Mervyn King, welcomed the new responsibilities being given to the Bank of England in his speech last night at the Mansion House: see here.

UK: the abolition of the FSA and the new financial regulation framework

Last night the Chancellor of the Exchequer, the Rt Hon George Osborne, delivered his first Mansion House speech - see here - and outlined, in general terms, significant changes to the structure of financial regulation in the UK. The Financial Services Authority will be abolished in its current form and a new prudential regulator, a subsidiary of the Bank of England, will be created.

Other changes are outlined in the following extract from the Chancellor's speech (further information will be provided in Parliament later today by the Financial Secretary to the Treasury, Mark Hoban MP):

... the Government will abolish the tripartite regime, and the Financial Services Authority will cease to exist in its current form. We will create a new prudential regulator, which will operate as a subsidiary of the Bank of England. It will carry out the prudential regulation of financial firms, including banks, investment banks, building societies and insurance companies.

We will 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 and take effective action in response. We will also establish a powerful new Consumer Protection and Markets Authority. It will regulate the conduct of every authorised financial firm providing services to consumers. It will also be responsible for ensuring the good conduct of business in the UK’s retail and wholesale financial services, in order to preserve our reputation for transparency and efficiency as well as our position as one of the world’s leading global financial centres.

I can also confirm that we will fulfil the commitment in the coalition agreement 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. We take white collar crime as seriously as other crime and we are determined to simplify the confusing and overlapping responsibilities in this area in order to improve detection and enforcement.

I have thought longer and harder and spoken to more people about all these issues than almost any other issue to have crossed my desk. We do not undertake these reforms lightly, and we do so only because we believe they are absolutely necessary. We will handle the transition carefully, consult widely and get this right. The process will be completed in 2012".

UK: Tripartite authorities publish "financial stability and depositor protection" consultation paper

The Tripartite authorities - the Bank of England, Financial Services Authority and HM Treasury - have today published a consultation paper titled "Financial Stability and Depositor Protection". This consultation paper builds on the Authorities' earlier consultation and the responses thereto. It also outlines the Government's proposals, including:

Providing the Bank of England with a statutory responsibility for contributing to the maintenance of financial stability.

Improving the policy instruments available to the Bank of England in support of financial stability.

Legislating for the creation of a Financial Stability Committee to support the Governor and Bank of England, drawing upon external expertise.

Giving the Court of the Bank of England a formal role in overseeing the Bank of England’s performance on financial stability.

Legislating to facilitate the FSA obtaining and sharing information that the Bank of England and the Treasury require for purposes related to financial stability.

Providing the Bank of England with statutory immunity from liabilities in damages arising from acts or omissions in carrying out its responsibilities in relation to financial stability and other central bank functions.

Legislating to formalise the Bank of England’s role in the oversight of payment systems to ensure the robustness of payment systems which, if a disruption in the operation of the system were to occur, would be likely to lead to systemic and system-wide consequences.

Legislating to introduce a 'special resolution regime', comprising a set of new, and existing, tools to permit the Authorities to take control when a bank is judged to be failing, and all other options have been deemed insufficient.

UK: The Queen's speech - the Financial Services Regulation Bill

Today saw the State Opening of Parliament by The Queen. The Queen's speech - available here - set out the Government's legislative programme. A Financial Services Regulation Bill is proposed, the purpose of which is to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation: see here.

It's fair to say that the exact boundaries of responsibility between the Financial Services Authority and the Bank of England under the proposed regime will remain uncertain until further information is provided by the Government, not least because the terms 'macro-prudential' and 'micro-prudential' lack a precise definition and have changed over time. Further discussion of the meaning of 'macro-prudential' appeared in the March 2010 edition of the Bank for International Settlements Quarterly Review: see here (pdf).

UK: the Bank of England and banking regulation

The Chancellor, Alistair Darling, has written to the Treasury Select Committee explaining his proposals for banking regulation reform and the governance of the Bank of England. In his letter, the Chancellor explains that financial stability will become a statutory objective of the Bank of England. The Bank's role in this regard will be overseen by a new Committee of the Bank's Court of Directors. Changes to the Court are also proposed: its size will be limited to a maximum of 12 members, the majority of whom will be non-executive.

UK: the Con-Lib coalition agreement and financial regulation

The Conservative-Liberal Democrat Government has published its coalition agreement: see here (pdf). With regard to financial regulation (with overlaps into the governance field) the agreement states:

The parties agree that reform to the banking system is essential to avoid a repeat of Labour’s financial crisis, to promote a competitive economy, to sustain the recovery and to protect and sustain jobs. We agree that a banking levy will be introduced. We will seek a detailed agreement on implementation.

We agree to bring forward detailed proposals for robust action to tackle unacceptable bonuses in the financial services sector; in developing these proposals, we will ensure they are effective in reducing risk. We agree to bring forward detailed proposals to foster diversity, promote mutuals and create a more competitive banking industry.

The parties wish to reduce systemic risk in the banking system and will establish an independent commission to investigate the complex issue of separating retail and investment banking in a sustainable way; while recognising that this would take time to get right, the commission will be given an initial time frame of one year to report. The parties agree that the regulatory system needs reform to avoid a repeat of Labour’s financial crisis. We agree to bring forward proposals to give the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation".

UK: election 2010 - the Conservative Party's manifesto

The Conservative Party published its election manifesto yesterday: see here (pdf). Corporate governance is not specifically discussed but the Conservatives continue to support major reform of the tripartite regulatory structure governing banking and financial services by giving the Bank of England greater responsibilities.

A central theme in the manifesto is Conservatives' intention to create a "society with much higher levels of personal, professional, civic and corporate responsibility". It is, however, difficult to work out what is meant by corporate responsibility in this regard.

The manifesto also contains the pledge to "reduce the number of forms needed to register a new business – moving towards a ‘one-click’ registration model – to make britain the fastest place in the world to start a business".

UK: Lib Dems - "A New Deal for the City"

The UK Liberal Democrat Party has today published a manifesto titled A New Deal for the City, which outlines proposals for the reform of financial regulation. With regard to the role of the Bank of England and the FSA, the manifesto states:

"One lesson from the past is that there has to be a clearer line of responsibility in crisis situations. We would argue that the Bank of England should have primary responsibility, ultimately accountable to Treasury Ministers, and the FSA could be a freestanding agency within and subordinate to the governance structure of the Bank".

With regard to corporate governance, the manifesto states:

"There is a need for reform in the City to stop entrepreneurs' natural animal spirits creating a culture of greed and gambling. One route is through strengthened corporate governance arrangements under which senior executive pay packages are subject to shareholder approval at AGMs (and not just scrutiny, as at present) though this approach would be helpful only for PLCs and there are many institutions which contribute to systemic risk".

UK: the Financial Services Bill

In today's Queen's Speech - containing the Government's legislative programme for the months that remain before a general election must be called - was mention of the Government's heavily trailed proposals for the financial sector. A Financial Services Bill is proposed, the main elements of which include (to quote from a short overview of the Bill prepared by the Government):

• Establishing a new statutory Council for Financial Stability (‘the Council’), to replace the Standing Committee, chaired by the Chancellor and comprising the Treasury, Bank of England and the Financial Services Authority.
• Strengthening the Financial Services Authority, 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 (ie ‘living wills’), that will make banks safer and 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.
  

The devil will, of course, be in the detail and for this we will have to wait. The Guardian newspaper reports that the Bill will be published in full tomorrow. This raises the question how the Government will implement the Walker Review final recommendations, which will be published next week. In a speech delivered earlier this month, the Chancellor said that the Government would "legislate to make further reforms [to the financial regulation framework], including the implementation of Sir David Walker’s report on corporate governance in the financial sector".

UK & US: Financial Services Regulatory Reform

Reform of the regulatory framework for financial services is being considered in the UK and USA. In the UK, the Financial Services Authority has published the results of its internal review concerning the manner in which it regulated Northern Rock. This makes many recommendations for improving the way in which the FSA supervises firms. These recommendations are in addition to those being considered as part of the review of the way in which the tripartite authorities - the Bank of England, the FSA and Bank of England - cooperate to ensure financial stability.

In the US, SEC Chairman Cox has stated (in press release 2008-53, March 29):

"Recent events have provided further evidence, if more were needed, that financial services regulation in the United States needs to be better integrated among fewer agencies, with clearer lines of responsibility. Just as systemic risk cannot be neatly parceled along outdated regulatory lines, the overarching objective of investor protection can't be fully achieved if it fails to encompass derivatives, insurance, and new instruments that straddle today's regulatory divides. The proposed consolidation of responsibility for investor protection and the regulation of financial products deserves serious consideration as a way to better address the realities of today's markets".

Postscript (25 April 2008): The US Treasury's "Blueprint for a modernised financial regulatory structure" is available here.

Postscript (28 April 2008): The FSA has now published its internal report titled "The supervision of Northern Rock: A lessons learned review".

UK: Financial Services Bill receives second reading in House of Lords

The Financial Services Bill received its second reading in the House of Lords yesterday and now proceeds to Committee stage for more detailed consideration of its clauses (the date for which has not yet been set). The debate at second reading can be read in Hansard here and watched here (note that debate began at 4.14 pm).

The speeches were wide-ranging but common themes included: the effectiveness of the tripartite system of regulation; the desirability of the proposed new consumer financial education body; the issues associated with introducing a mechanism for collective proceedings in respect of financial services claims; the proposed duty on the FSA with regard to firms' remuneration policy; and the power given to HM Treasury in clause 9 to make Regulations concerning the preparation of executive remuneration reports.

With regard to clause 9, Lord Myners, for the Government, stated that a draft copy of the Regulations would be available before Committee stage.

A copy of the Bill, as brought forward from the House of Commons, is available here (html) and here (pdf). Further information about the Bill is available here.

UK: financial regulation - Conservative Party's reform proposals

The Conservative Party has published, at the start of its conference in Birmingham, a policy document titled "Reconstruction - our plan for a strong economy". The proposals are many and wide-ranging; they cover the tax system, consumer credit regulation, the housing market and the role of the Bank of England and Financial Services Authority. Amongst the proposals are the following (to quote directly from the report):

• Improve the system for regulating banks by asking the FSA to tackle irresponsible bonus structures. Institutions that use massive bonuses to encourage short-term reckless risk-taking will have to hold more capital to offset their higher risks. 
• Improve the quality of regulation by matching the FSA’s new responsibilities with new funding. Financial institutions will have to contribute more funds and skilled secondees to the FSA so that the regulator is more equal to the regulated.
• Introduce more transparency into the regulation of complex financial instruments and off balance sheet vehicles.
• Make DBERR the clearing house across Whitehall for all legislation which has a regulatory impact.

UK: banking reform - Treasury Committee report published

The House of Commons Treasury Committee has today published its Banking Reform Report (HC 1008) - available here (PDF) and here (HTML). The report makes many recommendations, against the background of the Government's proposals, with regard to depositor protection, the proposed Financial Stability Committee of the Bank of England and the operation of the Financial Services Authority with regard to failing financial institutions. A summary is available here.  

With regard to the functioning of the Tripartite Authorities (the Bank of England, HM Treasury and the FSA) the report notes:

New legislation must not be seen as a panacea for the failings within the Tripartite arrangements. Practical steps must be taken in parallel with the creation of the new legislative framework. In particular—

• The FSA must continue to strengthen its capacity to regulate to reduce the need for the use of the Special Resolution Regime;
  
• The Tripartite authorities must develop an effective external communications strategy to help to secure public and market confidence in the exercise of their new powers; and
  
• Depositor protection arrangements must be developed which will function smoothly and effectively in the event of a bank failure, including in the event of the failure of a European Economic Area (EEA) bank with a branch or branches in the United Kingdom".
  

Elsewhere there has been criticism of the Government's proposals: see here and here.