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Government response to the Joint Committee re Draft Financial Services Bill

On 19 December 2011 the Joint Committee on the draft Financial Services Bill published its report on the Government's proposals. The Committee made a series of general recommendations:

- Successful regulation depends more on the regulatory culture, focus and philosophy than on structure.

- To be successful the reforms will have to change the regulatory culture and philosophy. It is through a change in culture and philosophy that the relevant authorities can best ensure both financial stability and good conduct of business. A key aspect of the cultural change needed will be a shift towards forward looking supervision. This will require staff with appropriate experience, approach and attitudes. A change in culture is not something that legislation can guarantee but legislation can influence the culture of a regulator by:

1. setting objectives
2. allocating and aligning powers and responsibilities
3. establishing appropriate systems of accountability.

- Without significant changes to clarify objectives, allocate appropriate powers and create proper accountability the Bill as currently drafted will not guarantee a change in regulatory culture. This report makes recommendations to address these weaknesses.

The government has published its response as part of its white paper: A new approach to financial regulation. Some selected points:

- The Government welcomes the Joint Committee’s focus on international issues and its recommendations in this area.

- The Government will continue to work to ensure that there is adequate flexibility in European legislation regarding capital requirements and the ability for individual economies to go above Basel III requirements as necessary.

- The Government requires the new regulators to be empowered to use their judgement to examine firm’s business models and determine their viability, not just in the present, but with a view to future risks.

- The Government states that preventing excessive or inadequate growth of credit will be an important part of the way that the FPC meets its objective.

-  The FPC’s objective features a stronger growth element than that of the MPC.

- Importantly the government states that "Macro-prudential judgements are such that the FPC may need to make unpopular decisions – for example, to limit the availability of credit to address an unsustainable asset bubble. It is vital that such decisions can be taken independently of political influence. However, the Government agrees with the Joint Committee’s assertion that where the FPC does not agree with the Treasury’s recommendations, it should make its concerns public".

The new regulatory regime will take shape as thus:

- A macro-prudential authority, the Financial Policy Committee (FPC) will be set up within the Bank of England to monitor and respond to systemic risks;

- Micro-prudential regulation of firms that manage complex risks on their balance sheets goes to the new Prudential Regulation Authority (PRA) established as a subsidiary of the Bank;

- The Financial Conduct Authority (FCA) will ensure that business across financial services and markets is conducted in a way that advances the interests of all users and participants.