31 Aug 2012 07:00am

Will Financial Services Bill reforms help prevent another crisis?

Two experts go head-to-head

Chris Leslie MP, Shadow financial secretary, HM Treasury

Five years on from the start of the global credit crunch, you might have thought news of banking reform would have subsided. Sadly, the questions of depositor safety and taxpayer protection have been compounded by an anti-corruption agenda ranging from Libor to tighter money laundering prevention.

The Financial Services Bill currently in its finishing stages in parliament falls short of the reforms needed – which is why we are now back at the beginning with the parliamentary inquiry ahead of a Banking Reform Bill in 2013. Labour agrees with the move towards enhanced prudential oversight, the concept supposedly at the heart of the Bill. Unfortunately, the propensity of ministers in this government to make policy on the hoof is evident in their failure to consider how these convoluted new regulatory structures will make this concept a reality. The government refused to accept a single amendment in the Commons and allotted insufficient time for thorough debate.

They then had to U-turn on some key issues on which we had pressed them months ago, for example, the need for the new financial policy committee (FPC) to mirror the monetary policy committee (MPC) and have regard to wider economic and growth objectives.

There are flaws in this new architecture; the grey area between the governor of the Bank of England and the chancellor when it comes to decision-making in a crisis; the membership of the FPC not reflecting the real economy and the accountability deficit between the Bank and parliament.

This Bill fails to think ahead about the safeguards we need for consumers and the taxpayer. In particular, the new regulatory arrangements fail to take account of the European supervisory system which will overrule UK decisions and ought to be shaped more effectively by UK policymakers. Even Andrew Tyrie, the respected chairman of the Treasury Select Committee, has described this Bill as “defective in a number of respects”. There are major doubts about the ability of the new system to cope with, or even prevent, another crisis.


Lord Sassoon, Commercial secretary, HM Treasury

The effect of the financial crisis, which started in 2007 and is still being felt globally, remains one of the biggest issues this government has to tackle. But as well as dealing with the fall-out from the last crisis, we need to reform our financial services regulation to anticipate and address future risks to financial stability before they become crises.

The 2007 financial crisis wasn’t a direct result of a failure of the UK financial services regulatory regime. However, flaws in the regulatory structure contributed to the severity of the consequences for the UK’s financial system in three ways.

First, no single institution had the responsibility or tools to monitor the system as a whole, identify potentially destabilising trends, and respond to them. This meant the risks posed by imbalances such as unsustainable levels of debt were not identified or addressed. Second, the FSA’s approach to micro-prudential regulation relied too much on “tick-box” compliance with detailed rules at the expense of proper risk analysis. And third, the lack of clarity and co-ordination between the Bank, the FSA and the Treasury meant the authorities struggled to act decisively in the run-up to the financial crisis.

The new system the government is establishing through the Financial Services Bill will remedy these shortcomings. A new FPC in the Bank of England will have oversight of wider risks to the stability of the system, with macro-prudential tools it can use in response to the risks it identifies.

Two new focused regulators for micro-prudential regulation (the Prudential Regulatory Authority) and conduct of business regulation (the Financial Conduct Authority) will have clear remits, placing responsibility for financial stability firmly with the Bank of England. The chancellor will retain overriding responsibility in a crisis for protecting public money and the public interest.

We cannot prevent threats to financial stability. However, these changes give the regulatory regime the mandate, tools and authority to identify and manage such threats much more effectively.