RTTNews - Wednesday, the Chancellor of the Exchequer Alistair Darling announced proposals to strengthen regulation of the UK financial system and to adopt measures to protect consumers. The Financial Services Authority and the Bank of England were granted additional powers.
In a statement to the Parliament, Darling said, The world economy has been hit by a severe financial crisis, resulting in the worst economic downturn for well over 60 years. Its origins lie in failures in the banking system around the world.
Irresponsible pay practices made banks take unnecessary risks, insisted Darling.
The proposals are meant to create a financial system that is open, competitive and effective, inspires trust and confidence among consumers, ensures strict regulation to prevent failures and extends effective mechanisms for dealing with the failure of financial institutions if they do occur.
The chancellor proposed the introduction of a national money guidance service to ensure free impartial financial advice to consumers. A levy is to be imposed on the financial sector to help fund this service, he said.
Darling is also seeking to improve arrangements for depositor protection, including legislation to pre-fund and expand the role of the Financial Services Compensation Scheme.
Citing a dearth of firms providing financial services in recent times, the chancellor said the Financial Services Authority or FSA and the Office for Fair Trading will promote a competitive market than allows new entrants, which can include non-banking firms.
Regarding better management of banks and financial institutions, Darling said there is a need for change of culture in the banks and their boardrooms, with pay practices that are focused on long-term stability and not short-term profit.
Under the new reforms, the FSA is required to report every year to the chancellor about financial firms' compliance with its new Code of Practice for remuneration, and how the agency will deal with firms that do not comply. Bank boards and institutional investors must also become better equipped to do their jobs and understand their businesses, the chancellor said.
The chancellor noted that David Walker, a senior adviser at U. S. bank Morgan Stanley, will report on measures, next week, that will deliver improved corporate governance at financial institutions - ahead of his final report in the autumn.
Darling also plans to make banks keep more capital, which mirrors the possibility as well as the cost of failure. Further, the FSA and the BoE are to make institutions put in place practical resolution plans that can be deployed in the event they get into difficulties.
The chancellor also proposed the creation of a new Council for Financial Stability, comprising of the BoE, the FSA and the Treasury. This council is expected to monitor system-wide financial stability and respond to long-term risks as they emerge, on a formal statutory basis.
Referring to the need to explore further counter-cyclical measures to prevent the build-up of risks in the system, Darling said, The principle of leaning against the cycle is easy to agree. Deciding what action to take, and when, is far more complex. He noted that there is not clear consensus on the matter at present, but believes central banks will have an important role to play.
Welcoming the moves to create better coordinated financial stability jointly with the FSA and the BoE, the British Bankers' Association said, Banks recognize the need for change and will continue to work positively with all the relevant authorities to ensure the long term success of the UK economy and the banking sector.
We believe appropriate and effective regulation, capital applied according to risk and good quality supervision are the cornerstones of a vibrant banking community.
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