Darling gives FSA power to rein in the activity of City firms
THE FINANCIAL Services Authority (FSA) will share formal responsibility for financial stability with the Bank of England, under a raft of measures included in chancellor Alistair Darling’s white paper on financial regulation.
The chancellor rejected Conservative calls for the Bank of England to be given primary responsibility for monitoring dangers to the economy, instead opting to task the FSA with taking a systemic approach to regulatory supervision.
The watchdog will gain powers to impose higher capital and liquidity requirements on systemically risky banks, subject to co-ordination with other international financial powers. The authorities will attempt to find a way to make banks put more aside during booms to ensure that economic cyclces are smoothed and to build up reserves ahead of busts.
The regulator will also gain greater rule-making powers to suspend or penalise firms and individuals deemed guilty of misconduct.
The FSA will be mandated to ensure that banks have procedures in place to allow them to be more easily wound down in the event that they fail, in effect the “living wills” described last month by governor of the Bank of England Mervyn King.
And while the Treasury will not make any direct attempt to downsize banks, the chancellor believes that capital and liquidity requirements will give banks an incentive to be smaller and less complex, thus removing “moral hazard”.
However, the government will not attempt to separate retail and “casino” investment banking, opting instead to consult on giving the Bank special resolution powers to nationalise investment banks.
On remuneration, the government wants the FSA to report annually to the Treasury on whether firms are complying with the regulators’ code of practice on remuneration, which demands that compensation is linked to long-term growth. Banks that don’t may have to hold more capital.
The Treasury will introduce a new Banking Act in the autumn to formalise the proposals and is inviting consultation until 30 September.
The white paper also outlines areas for discussion with a view to introducing further measures. Ongoing consultation will see the government work with the Bank and the FSA to decide how to classify institutions by how much of a systemic risk they pose. There will also be discussions on how to overcome barriers preventing potential new players from entering the market – and on making it easier for consumers to change bank.
SUMMARY
Concrete plans
• FSA given a formal remit to monitor financial stability alongside the Bank of England.
• Large, complex banks deemed particularly risky by the regulator will have to hold higher levels of better-quality capital and maintain greater liquidity. Capital requirements to be determined by firms’ economic activity on a case-by-case basis.
• Capital requirements to be stringent enough to encourage banks to abandon their riskiest activities of their own volition, removing “moral hazard”.
• New Council for Financial Stability (CFS), made up of representatives from the Treasury, Bank of England and the FSA, to monitor emerging systemic risks. The CFS will be chaired by Alistair Darling and will hold regular meetings to discuss potential systemic pitfalls.
• FSA to be given greater powers to suspend and penalise firms and individuals who are found guilty of misconduct. More powers to vet key staff.
• Financial Services Compensation Scheme to be partly pre-funded via a levy on banks from 2012.
• Banks will also pay into a national money guidance service, offering impartial advice to financial consumers and more financial education.
• FSA’s power to ban short selling to be extended for a further three years.
• Banks will be required to put in place procedures to help regulators wind them down in the event that they collapse.
• FSA to report annually on those firms who do not comply with its code of conduct on remuneration.
To be discussed
• International rules on capital levels, capital quality and cyclical adjustments, to prevent variation arising between different jurisdictions.
• Implications of the Walker review on corporate governance, due on 16 July, and the FSA’s code of practice on remuneration to be taken into account.
• Strengthening mutuals and increasing competition in the financial marketplace, by making access to the market easier, boosting product information and helping customers to switch between banks.
• Possibility of placing restrictions on certain loan products, such as imposing caps on the loan-to-value ratios of mortgages. FSA paper in October.
• International and domestic moves to regulate leverage at the lagest hedge funds, as well as requiring an information disclosure regime.
• Caps on bank leverage ratios, to provide a “backstop” at financial institutions, ensuring that minimum capital levels are maintained.
• The “originate and distribute” model of securitisation. UK likely to support EU proposals that issuers retain five per cent of the risk being securitised.
• Changes to the principles behind residential mortgage-backed securities, as are being considered by the European Securitisation Forum (ESF).
• International efforts to standardise the derivatives market, make derivatives more liquid, increase price transparency and introduce clearing through a central counterparty, especially in CDS market.
• Accounting reforms aimed at improving the valuation of financial instruments across firms, to be co-ordinated internationally.