December 11, 2012 5:39 pm

Financial watchdogs gain more teeth

UK watchdogs have been given new powers to stabilise or shut down failed clearing houses and investment firms and to oversee market benchmarks including Libor as part of the final version of the bill to revamp UK financial regulation.

The House of Commons approved the final version of the financial services bill late on Monday night, despite warnings from some MPs that problems with governance at the Bank of England have not been fully addressed.

The bill now heads to the Queen for royal assent, paving the way for the partition of the Financial Services Authority into a “twin peaks” supervisory system that will officially open its doors in April 2013.

The Prudential Regulation Authority – a new arm of the BoE – will take charge of supervising banks and insurers for safety and soundness and the independent Financial Conduct Authority will supervise markets and protect investors. The BoE will also get a new Financial Policy Committee that will seek to spot and defuse threats to the financial system.

Discussion stretched late into the night as MPs debated whether to accept amendments proposed by the House of Lords that broaden the mandates of all of the regulatory bodies and impose some governance changes on the BoE, which is gaining many new powers.

The government also gave the FCA new regulatory authority over benchmarks, particularly the troubled London interbank offered rate, which has been the subject of a huge manipulation probe.

The BoE was granted broader discretion to use its special resolution powers, created for banks after the collapse of Northern Rock, to wind up or rescue failing clearing houses, financial holding companies and investment firms. Regulators had previously warned that the lack of a wind-up regime could prove problematic.

“The financial services bill replaces a regulatory structure, which palpably failed when tested by crisis. The bill sets out a comprehensive regulatory framework designed both to counter future risks to financial stability and to ensure that consumers are treated fairly,” said Greg Clark, financial secretary to the Treasury.

But some MPs expressed ongoing concerns that the BoE’s board, known as Court, and a subgroup known as the oversight committee were still not strong enough to provide a check on the power of the governor.

“It might be more appropriate if he were to call this a ‘hindsight committee’ rather than an oversight committee because as things stand I do not think there is a sense in which this is a proper check and balance within the governance of the Bank of England,” said Chris Leslie, Labour’s shadow City minister.

Mr Clark promised MPs they would get a chance to make further changes to financial regulation when parliament takes up the banking reform bill – legislation planned for next year to force banks to ringfence their retail operations.

“We are now legislating in a huge rush to get this on the statute book by the end of the year in order to meet an entirely arbitrary deadline,” said Andrew Tyrie, chairman of the Treasury select committee, which has held extensive hearings on the bill.

The House of Lords’ changes include new instructions to the FCA, to “have regard for . . . the ease with which consumers, including those in areas affected by social or economic deprivation, who may wish to use [financial] services, can access them”.

This addition is on top of the FCA, which will mainly focus on protecting consumers, policing markets and promoting competition. The FCA will also gain regulatory authority over consumer credit, including payday lending, in 2014.

The FPC and PRA, meanwhile, were both told that they needed to keep in mind the effect of their work on economic growth and the PRA was told to be mindful of competition.

The bill also changes what happens to fines meted out by the watchdog – previously, the FSA kept them and used them to reduce the annual industry levy that funded them.

Now the FCA will keep enough to cover their enforcement costs, but the rest will go to the Treasury so that taxpayers rather than industry will benefit (£35m this year to support the armed forces).

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