UK’s Financial Services Authority undermined by financial crisis

Date: Friday, June 18, 2010
Author: Investment Executive

The UK’s new government has decided to dismantle the Financial Services Authority in an effort to better monitor risk in the financial system, but the move is not without risks of its own.

On Thursday, the new chancellor of the exchequer, George Osborne, announced a series of reforms to financial regulation in the UK, including abolishing the FSA and handing prudential regulation to the Bank of England, while creating a new body to oversee conduct.


“The announcement also marks the end of the tripartite system of financial regulation spearheaded in 1997 by then chancellor Gordon Brown, whereby the Bank of England, FSA, and Treasury shared responsibility for financial oversight. The tripartite system of regulation was heavily undermined by the financial crisis that hit the United Kingdom in 2007–09, with the FSA bearing the brunt of the blame for its failure to foresee the problems,” observes IHS Global Insight in a research note.

IHS says that when it was in opposition the Conservative Party was a strong critic of the tripartite system, “claiming that by fragmenting responsibility to such a high degree, there was no accountability.”

“This position was supported by the financial crisis, when none of the three regulatory bodies claimed responsibility for the events that led to a run on U.K. bank Northern Rock and its subsequent nationalisation,” it adds. “A further problem of tripartite regulation highlighted by the crisis was the fact that rapid decision-making was nearly impossible given the complicated nature of the system, which depended on consensus.”

In addition to the break up of the FSA, IHS notes that the British government is also planning to introduce a tax on banks, and is demanding further restraint on bankers’ pay; and, a new independent commission will be created to investigate whether big banks should be broken up and their investment and retail branches separated.

“The changes being enacted come at a pivotal moment for global financial regulation as countries around the world seek to strengthen market rules, especially on banking capital and the derivates sector,” it says.

“There are, however, potential pitfalls for the new regulatory system presented by the government, despite the discrediting of the tripartite system,” IHS cautions.

“Centralising responsibility for micro and macroprudential oversight in one body has the potential to limit information flows on law-making while also reducing the willingness of the organisation to experiment with new and perhaps untested regulation. Furthermore, the Bank of England’s ability to create a mechanism to act as an early-warning system for potential market and financial risks remains highly dubious,” it says.

“The government is eager to ensure that the transition to the new regulatory system is smooth and conducted with minimum disruption to the financial services industry. However, the task of strengthening regulation will now fall to the Bank of England, which will have to tread a fine line between tightening oversight of financial bodies and not undermining the competitiveness of the important financial services industry,” it concludes.