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With permission Mr Speaker, I wish to make a statement on the Government’s plans to reform the institutional framework for financial regulation.
The tripartite system of financial regulation failed spectacularly in its mission to ensure financial stability and that failure cost the economy billions. The British people rightly ask how this Government will stop it happening again.
This is why our Coalition Agreement committed us to reform the regulatory system for financial services in order to avoid a repeat of the financial crisis.
Today, Mr Speaker, I would like to set out in detail the changes to the regulatory architecture that will make this possible.
At the heart of the banking crisis was a rapid and unsustainable increase in debt. Our macroeconomic and regulatory system utterly failed to correctly identify the risk this posed, let alone prevent it. No one was controlling levels of debt, and when the crunch came no one knew who was in charge.
So we need a macro-prudential regulator that has a more systematic and detailed knowledge of what is happening not only in individual firms, but across the financial system as a whole. Only central banks have the broad macroeconomic and markets understanding, the authority and the knowledge required to make macro-prudential judgments.
We will therefore place the Bank of England in charge of macro-prudential regulation by establishing within the Bank a Financial Policy Committee. And we will also create two new, focused regulators:
- a new prudential regulator under the Bank of England, headed by a new Deputy Governor and
- a new Consumer Protection and Markets Authority (CPMA).
All the new bodies will be accountable to Parliament and their remit will be clear so that never again can someone ask who is in charge and get no answer.
Firstly Mr Speaker, we will legislate to create the Financial Policy Committee in the Bank of England. It will have the responsibility to look across the economy at the macroeconomic and financial issues that may threaten stability and it will be given tools to address the risks it identifies. It will have the power to require the new Prudential Regulation Authority to implement its decisions by taking regulatory action with respect to all firms.
The FPC will be accountable to Parliament in two ways: directly, as is the case with the MPC; and also indirectly, through its accountability to the Bank’s Court of Directors.
The Governor will chair the new Committee. Its membership will include the Deputy Governors for monetary policy and financial stability, the new Deputy Governor for prudential regulation, the Chair of the new Consumer Protection and Markets Authority, as well as external members and a Treasury representative.
An interim FPC will be set up by this autumn, in advance of legislation.
Secondly, we will legislate to create a Prudential Regulation Authority (PRA) as a subsidiary of the Bank of England. It will conduct prudential regulation of sectors such as deposit-takers, insurers and investment banks.
The PRA will be chaired by the Governor of the Bank of England, and the new Deputy Governor for Prudential Regulation will be the Chief Executive. The Deputy Governor for Financial Stability will also sit on the PRA board.
Thirdly, Mr Speaker, a new Consumer Protection and Markets Authority will take on the FSA’s responsibility for consumer protection and conduct regulation. The CPMA will regulate the conduct of all firms, both retail and wholesale - including those regulated prudentially by the PRA - and will take a proactive role as a strong consumer champion.
It will have a strong mandate for ensuring that financial services and markets are transparent in their operation, so that everyone - from someone buying car insurance to a trader at a large bank - can have confidence in their dealings, and know that they will get the protection they need if something goes wrong.
The CPMA will regulate the conduct of every financial service business, whether they trade on the high street or trade in high finance. We need to ensure that this body has a tougher, more proactive approach to regulating conduct and its primary objective will be promoting confidence in financial services and markets.
The CPMA will maintain the FSA’s existing responsibility for the Financial Ombudsman Service (FOS) and oversee the newly created Consumer Financial Education Body (CFEB), which will play a key role in improving financial capability. The CPMA will also have responsibility for the Financial Services Compensation Scheme, but given the important role it plays in crises, it will work closely with the FPC and PRA.
We will also fulfil the commitment in the coalition agreement to create a single agency to take on the work of tackling serious economic crime that is currently dispersed across a number of Government departments and agencies.
Mr Speaker, before we set up these new bodies in their permanent form, we will conduct a full and comprehensive consultation process and will publish a detailed policy document for public consultation before the summer recess.
Our goal is to radically improve financial regulation in the UK, strengthening the prudential regime by placing it in the Bank of England, and delivering the best possible protection for consumers.
During the period of transition to the new regime, the Government will also be guided by the following four principles:
- minimising uncertainty and transitional costs for firms
- maintaining high quality, focused regulation during the transition
- balancing swift implementation with proper scrutiny and consultation and
- providing as much clarity and certainty as possible for FSA, Bank and other staff affected during transition.
In order to do this, we will ensure the passage of the necessary primary legislation within two years.
I am delighted that Hector Sants, the current CEO of the FSA, has agreed to stay on to lead transition and become the CEO of the PRA. He will be supported by Andrew Bailey from the Bank of England as his deputy in the new regulator. This is a strong team to ensure a smooth transition.
Mr Speaker, the financial crisis has cost taxpayers dearly. The regulatory system needs radical reform to make the sector more stable and stronger.
The last Government could not do this because it was caught up in a structure designed by the former Chancellor and Prime Minister.
The fundamental flaws in its architecture contributed to the failure in the banking sector and ultimately undermined economic stability. The continuing financial and economic uncertainty across the Eurozone strengthens the urgency with which we must equip ourselves with better tools and arrangements to tackle any future financial instability.
We have already paid a high price for the previous Government’s failings; and we must do all we can to prevent this happening again.
I commend this statement to the House.