Financial Regulation Moving to Central Bank Like `Old Wine in New Bottles'

The U.K. government plan to abolish the Financial Services Authority and give most of its power to the Bank of England won’t change how banks are regulated as the European Union assumes a larger role, lawyers say.

Chancellor of the Exchequer George Osborne last night said he would replace the regulator with three bodies over the next two years. Osborne blamed the old system set up by Gordon Brown in 1997 for failing to prevent the worst financial crisis since the Great Depression, which led to bailouts of Royal Bank of Scotland Group Plc and Lloyds Banking Group Plc.

The European Union is planning a revamp of financial regulation that will see the creation of three pan-European regulators for banks, securities and insurance. The new European regulators may dictate to national agencies the future direction of bank supervision, lawyers said.

“It is incapable of making any difference because the fundamental rules are being driven by Brussels,” said Simon Morris, a lawyer with CMS Cameron McKenna in London. “It’s simply a rebranding, it’s like pouring old wine in new bottles.”

A Financial Policy Committee at the bank and a consumer protection and markets agency will also be created, Osborne said in a speech in London’s financial district last night. Legislation will be in place by 2012 to create the new system, he said.

Photographer: Chris Ratcliffe/Bloomberg

U.K. chancellor of the exchequer George Osborne speaks at Mansion House in London. Close

U.K. chancellor of the exchequer George Osborne speaks at Mansion House in London.

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Photographer: Chris Ratcliffe/Bloomberg

U.K. chancellor of the exchequer George Osborne speaks at Mansion House in London.

A Prudential Regulatory Authority to oversee U.K. banks will be set up as a subsidiary of the central bank.

‘Alphabet Soup’

The FSA’s enforcement unit, which prosecutes insider trading and market abuse, will be combined with the Serious Fraud Office and the Office of Fair Trading to create an economic crime agency.

“What George Osborne is offering is a return to the alphabet soup of 15 years ago, where you have a multiplicity of regulators,” Morris said. “One hopes that the next crisis will be sufficiently distant so that the architect is not still redrawing the plans when the thunderclouds break.”

The EU said last year that it would propose three financial regulatory agencies with broad powers to cope with the financial crisis. The European Supervisory Authorities would have the ability to overrule national regulators by asking the European Commission in Brussels, the EU’s executive arm, to rein in those that don’t comply with their recommendations.

The UK regulator’s role will be to implement and police the EU directives, Morris said.

No ‘Big Changes’

“It’s not going to make big changes to the laws and regulations, most derive from European Union directives, which the U.K. has to be compliant with anyway,” said Arun Srivastava, a partner at Baker & McKenzie in London. “It may bring about the alignment of macro prudential and micro prudential supervision, and it may bring about a change in the culture of regulation and supervision.”

Hector Sants, the chief executive officer of the FSA, will stay on to head the new Prudential Regulatory Authority.

Adair Turner said his role as FSA chairman will cease to exist when the regulator disappears and that he doesn’t expect to go to the Bank of England. The restructured body has to do a better job of taking on institutional views about the economic outlook, Turner told BBC Radio 4’s “Today” show.

Osborne’s plan scraps Brown’s tripartite system of regulation -- in which the central bank, FSA and Treasury shared responsibilities -- and places most of the onus on Bank of England Governor Mervyn King.

King will “take a much more proactive hand in monitoring and policing the banks’ behavior,” said Andrew Lim, an analyst at Matrix Corporate Capital LLP in London.

“King is proactive, he is going to be completely on top of everything,” Lim said. “It is like having a matron at hand.”

To contact the reporter for this story: Lindsay Fortado in London at lfortado@bloomberg.net.

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