CML news & views

A few days before the emergency Budget, the financial secretary to the Treasury, Mark Hoban, outlined the coalition government’s plans for reforming financial regulation. Changes were needed following what he described as a “spectacular failure” of the tripartite system to ensure financial stability.

Mr Hoban argued that at the heart of the financial crisis was a rapid and unsustainable increase in debt. “Our macro-economic and regulatory system utterly failed to correctly identify the risk this posed,” he said. What was needed, he argued, was a macro-prudential regulator with systematic and detailed knowledge not only of individual firms but of the financial system as a whole.

The new government intends to put the Bank of England in charge of macro-prudential regulation, under the control of a newly formed financial policy committee. It also wants to install:

• a new prudential regulatory authority (PRA) under the Bank of England, headed by a new deputy governor; and
• a new consumer protection and markets authority (CPMA).

The financial policy committee will have responsibility for looking across the economy at macro-economic and financial issues that may threaten stability. It will have the power to require the new PRA to implement its decisions in regulating all firms. The PRA “will conduct prudential regulation of sectors such as deposit-takers, insurers and investment banks,” said Mr Hoban.

The financial policy committee will be chaired by the Bank’s governor, and its members will include the deputy governors for monetary policy and financial stability, the new deputy governor for prudential regulation (already confirmed as Hector Sants, the current chief executive of the FSA), the chair of the new CPMA, as well as external members and a Treasury representative.

The CPMA will take on the FSA’s responsibility for consumer protection and the regulation of firms’ conduct. According to Mr Hoban, it will regulate the activities of all firms, both retail and wholesale – including those also regulated prudentially by the PRA – and will be expected to adopt a proactive role and act as a strong consumer champion. Its primary objective will be the promotion of confidence in financial services and markets. 

The CPMA will maintain the FSA’s existing responsibility for the Financial Ombudsman Service and oversee a newly created consumer education body, which will play a key role in improving financial capability. The CPMA will also be responsible for the Financial Services Compensation Scheme.

Finally, the coalition government intends to create a single agency to oversee work tackling serious economic crime.

How each of these new bodies is set up and operates will have significant consequences for lenders and borrowers. The financial policy committee will shape the wider macro-prudential environment for all types of firms. But the PRA, the CPMA and other consumer protection and education bodies, and the agency overseeing work on financial crime will all have a profound impact on the operating environment as well as the day-to-day activities of lenders.

The proposals outlined by Mr Hoban confirm the coalition government’s plans for a wholesale reformation of the FSA, with which we have worked closely on mortgage regulation and other issues. So, how might the new regulatory structure assume responsibility for the FSA’s statutory objectives, as set out by the Financial Services and Markets Act 2000? Those five objectives are:

• Maintaining confidence in the financial system. Most of this broad remit appears logically to lie with the Bank and the new authorities created under it. But the CPMA, with a specific responsibility for promoting confidence in financial services and markets, and the new agency overseeing the fight against financial crime are likely to contribute to this broad objective.
• Promoting public understanding of the financial system. The CPMA appears most likely to assume the main responsibilities here.
• Protecting and enhancing the UK financial system. Again, this is a broad remit, apparently most logically overseen by the Bank, but with the CPMA and financial crime agency in support.
• Securing an appropriate degree of protection for consumers.  Logically, responsibility for this appears to lie mainly with the CPMA.
• Reducing financial crime. The new financial crime agency is likely to lead in delivering this objective. We await details of how this body would work with the existing National Fraud Authority, established only recently to build on the 2006 Fraud Review, and the City of London police force, similarly also recently identified as the main police resource for co-ordinating work on financial crime.

We intend to represent the views of all types of lending institutions in contributing to consultation on the new regulatory framework, and in working with the coalition government and new regulatory authorities in the months and years ahead. 

Meanwhile, as far as the mortgage market review is concerned, it remains business as usual – and we will continue to represent lenders’ views as the FSA continues to develop its proposals.