Britain has unveiled sweeping changes to its system of financial regulation, handing more power to the Bank of England (BOE) and abolishing the framework set up by the last government.
Chancellor of the Exchequer George Osborne said in a speech late on Wednesday that the BOE would get powers to regulate individual financial firms, in addition to its remit to monitor the overall health of the economy.
The Financial Services Authority (FSA), which regulates the City of London but came in for heavy criticism for its failure to foresee the near-collapse of Britain’s banking system, would be abolished.
Some of its responsibilities would be handed to the Bank of England, while others would be injected into new organizations.
The so-called “tripartite” system — which shares responsibility for regulation between the BOE, the FSA and the finance ministry — would be ended, the chancellor said. It was set up by the previous Labour administration.
Osborne said the financial crisis, which plunged Britain into its worst recession since the 1930s, showed powers to monitor both individual firms and the general state of the economy needed to be centralized at the BOE.
“Because central banks are the lenders of last resort, the experience of the crisis has also shown that they need to be familiar with every aspect of the institutions that they may have to support,” he said.
“So they must also be responsible for day-to-day microprudential regulation as well,” he said.
Giving the speech in central London, he added the proposals amounted to “a new system of regulation that learns the lessons of the greatest banking crisis in our lifetime.”
Osborne revealed the shake-up at his first Mansion House speech, an annual address to business leaders that is one of the most high-profile in the finance minister’s calendar.
The decision to concentrate oversight powers at the Bank of England was aimed at better coordinating responses to future crises, he said.
“When the crunch came, no one knew who was in charge,” he said.
The part that monitors financial institutions would become a “prudential regulator” and would operate as a subsidiary of the Bank of England. Some of the FSA’s powers would be injected into a separate consumer protection and markets authority, while others would be put into an agency for fighting economic crime.
FSA chief executive Hector Sants would stay on to oversee the transition which would be completed in 2012, Osborne said.
Bank of England Governor Mervyn King welcomed the reforms, saying the previous set-up at the FSA had not been effective.
“In a crisis, decisions must be made quickly and decisively and the central bank, working with government which is always responsible for any use of public money, needs to be in charge,” he said. “That was one of our painful lessons.”
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