The timing of the Gordon Brown's far-reaching shake-up of financial supervision was unexpected but his intention to sweep away the present, unloved system of self-regulation had been well flagged. More of a surprise was his decision to remove banking supervision from the Bank of England.
Mr Brown said yesterday: "It has long been apparent that the regulatory structure introduced by the Financial Services Act 1986 (FSA) is not delivering the standard of supervision and investor protection that the industry and the public have a right to expect."
Alistair Darling, Chief Secretary to the Treasury, added: "The distinctions between different financial institutions were becoming increasingly blurred. A regulatory system based on old market structures was becoming increasingly inappropriate."
The Government had trailed in opposition its view of the need for statutory regulation rather than self-regulation. It also felt it was unsatisfactory to have different regulators responsible for different parts of each financial institution.
"The system was becoming too cumbersome, there was too much red tape and it has become too expensive," Mr Darling said.
The Consumers' Association welcomed the move, saying it had been calling for the replacement of the current two-tier regulatory system with a single watchdog body for some time.
"This announcement is good news. We are pleased to see the end of the current two-tier system which we regard as unwieldy, at times incomprehensible and not easily understood by consumers," a spokesman said.
In a statement in the House of Commons yesterday, Mr Brown outlined plans to fold the Securities and Futures Authority (SFA), Personal Investment Authority (PIA) and Investment Management Regulatory Organisation (Imro) into their current umbrella regulator, the Securities and Investment Board (SIB). A new financial services act, covering these changes, is expected in the next session of Parliament, while the Bank of England Bill will pass within the next year.
Howard Davies, Deputy Governor of the Bank, chosen to head the new super- regulator after SIB's current chairman Sir Andrew Large steps down, said: "I am honoured to have been called to take up this challenge. It is an opportunity to build a new regulatory structure which will meet the changing needs of the financial services industry and its customers."
Scandals such as the mis-selling of personal pensions to hundreds of thousands of people convinced Mr Brown while Labour was in opposition of the need for a root-and-branch reform of the supervision of the financial services industry.
Under the current regime, a bank is supervised by the Bank of England. But its stockbroking, asset management, retail financial services advisory arm and unit trusts operation are each supervised by a different agency.
"You cannot ensure the success of British financial services in the 21st Century without modernising arrangements for the protection of investors," Mr Brown said.
"My reforms are essential to ensure the future confidence of investors large and small, and the future success of the increasingly integrated financial services industry," he added.
The move follows the Chancellor's surprise announcement a fortnight ago of independence for the Bank of England in setting interest rates, which he reaffirmed in his statement to the Commons yesterday.
The Chancellor confirmed that the Bank will have two new deputy governors, to be appointed after the Bank of England Bill has been passed. Eddie George, Governor of the Bank, the two deputies and two other Bank executives will be members of the Monetary Policy Committee which will meet each month to set interest rates.
Mr Brown will announce four outside members of the committee in time for its first meeting in early June.
Mr George attempted to play down the perception that Mr Brown had stripped him of an important part of his previous powers. He said: "What matters is not the Bank's position but the whole structure of financial regulation and what is best both for depositor, investor and policyholder protection, on the one hand, and for systemic stability on the other."
In a letter to Sir Andrew Large, Mr Brown outlined plans to establish SIB as the single financial services regulator. He said SIB would have the full range of powers and discipline, established in statute, that are now available to the self-regulatory bodies under contract law.
In a statement, SIB welcomed the proposed changes: "Clearly we have a major task ahead of us. We and our fellow regulators will be starting work immediately with a view to reporting back to the Chancellor as requested by the end of July."
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