Britain's current growth crisis is the hangover of a "debt-fuelled binge", Chancellor George Osborne said in an address to UK business leaders at the World Economic Forum in Davos, as he unveiled sweeping new government powers to intervene in the financial sector.
Launching the Financial Services Bill, a wide-ranging set of proposals targeted at giving government more power over the finance industry, he said that the wanted to avoid "the paralysis and confusion that did so much damage when the latest crisis hit."
With the previous system "Everyone was so focused on ticking off a regulatory check-list that nobody felt it was their responsibility to use their judgement," Osborne said. "The astonishing result was that RBS was allowed to take over ABN Amro when the credit markets had already frozen up. And crucially it was unclear who was in charge in a crisis when taxpayers' money was at stake.
"We are putting in place clear lines of accountability, and restoring that crucial element of judgment," he said.
The bill will give the Treasury power to veto decisions made by the Bank of England, and will abolish the Financial Services Authority (FSA), the regulator that currently oversees much of the City's activities.
In the FSA's place, the Bank of England will house three new bodies - the Financial Policy Committee (FPC), which will be responsible for financial regulation and the systemic risks to the economy; the Financial Conduct Authority (FCA), which will be responsible for consumer protection and enforce rules against individuals in the financial sectorial; and the Prudential Regulation Authority (PRA), which will be charged with the regulation of individual firms.
In a press statement, Mark Hoban, the financial secretary to the Treasury, said "This Government has taken the necessary action to tackle the difficult and dangerous legacy left behind by the financial crisis, including a tripartite structure not fit for purpose. We’ve listened to the views of stakeholders following an unprecedented period of consultation, and are determined to strengthen the financial system in a way that safeguards financial stability and protects consumers.”
The new structure replaces the "tripartite" system left by the labour government, which saw responsibility for financial regulation shared between the Bank of England, the FSA and the Treasury.
The crisis rules, however, which allow the chancellor to overrule the Bank of England "where public money is at risk" show that the balance of power will shift more to government and less to the Bank during times of stress.
The new FPC will be in a position to have a direct impact on the supply of credit and to the rules governing risk-taking in financial markets, Michael McKee, the head of financial services regulatory at law firm DLA Piper warned. It might also undermine the regulatory certainty that has made the UK a favoured jurisdiction for financial services firms.
"It does create issues in the financial markets. The less a transaction can be interfered with, the more legal certainty there is with that transaction. If two parties are buying a derivative or selling something on an exchange, the more they can feel the legal jurisdiction that is applying gives certainty, the more comfortable they are with that," McKee said.
"The crisis powers… they to some degree interfere with that certainty. As a consequence of that crisis, although the UK is a very strong legal regime for financial services transactions, it is not quite as interference free as it once was."
The FCA also seems likely to take some powers from the Office of Fair Trading in the regulation of consumer finance.
In an emailed statement, Sarah Brooks, director of financial services at the consumer group Consumer Focus, called the bill a "once in a generation opportunity to reform our financial regulation", and said that it was important that the bill made the responsibilities of each department clear.
"The clarity of the FCA objectives on promoting competition is significant. Competition is not an end in itself, it must deliver benefits for consumers. The detail in the Bill gives some hope that this has been recognised and the new regime will work towards promoting effective competition to make sure consumers get a better deal," Brooks said.
The ability of the new FCA to pre-emptively ban financial products has also been welcomed, with analysts noting that it could have prevented the large-scale mis-selling of payment protection insurance (PPI).
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