U.K. Moves to Rebuild Bank Regulation

By Scott, Mark | International Herald Tribune, March 13, 2013 | Go to article overview

U.K. Moves to Rebuild Bank Regulation


Scott, Mark, International Herald Tribune


By splitting the duties of the Financial Services Authority, policy makers hope to improve the monitoring of banks and the policing of financial markets.

After the financial crisis, countries like the United States adopted wide-ranging changes to their banking regulation.

Yet Britain was the only major economic power to go a step further by completely overhauling its regulators. And the new structure is set to begin next month.

Taking the place of the current regulator, the Financial Services Authority, will be two new bodies created to oversee the country's banks, hedge funds and other financial institutions. The Prudential Regulation Authority will monitor Britain's largest banks, while the Financial Conduct Authority will be responsible for consumer protection and dealing with market abuse. They will take over in April.

"Britain has gone for a complete overhaul," said James Smethurst, a regulatory partner at the law firm Freshfields Bruckhaus Deringer, in London. "It's a big task to ensure everything will work the way it should."

By splitting the duties of the Financial Services Authority, policy makers hope to separate the daily monitoring of banks' financial health from the policing of illegal activity like insider trading. The goal is to allow the separate regulators to focus on their own areas, instead of trying to cover widely differing categories like banks' capital buffers and market abuse.

It is the second time since the late 1990s that Britain has carried out a major regulatory revamping. In response to the growing complexity in the financial industry, the Financial Services Authority was created through a process that started in 1997 of progressively combining nine smaller agencies. The authority also took over control of banking regulation from the Bank of England.

Yet as the financial crisis left British banks on a knife-edge, politicians began to doubt whether the sole regulator could keep on top of the wide-ranging problems facing the country's financial institutions.

"When a system of regulation fails so spectacularly, people are going to ask what replaces it," George Osborne, the chancellor of the Exchequer, said in a speech in 2010 announcing the most recent major overhaul.

The task awaiting the new regulatory bodies will not be easy.

A series of recent scandals has tarnished London's reputation as a global financial center. The wrongdoing raised questions about why regulators had failed to spot a glut of risky lending by British banks, money laundering for drug cartels and other illicit activity that has cost consumers around the world billions of dollars.

Further scandals, including a $2.3 billion loss from illegal activity in London by a former UBS trader, Kweku M. Adoboli, and a $6 billion trading loss at a London-based unit of JPMorgan Chase, have heaped further pressure on British regulators.

"When we look back, last year will be seen as the low point," said Martin Wheatley, who will take control of the Financial Conduct Authority after six years with the Securities and Futures Commission of Hong Kong. "The time is right; we can rebuild from here."

After earning a philosophy and English degree from the University of York, Mr. Wheatley, 54, worked for the London Stock Exchange for almost two decades before becoming a regulator.

His counterpart at the Prudential Regulation Authority will be Andrew Bailey, a Cambridge-educated economist.

Mr. Bailey, 53, who has spent more than 25 years working at the Bank of England, will oversee 1,300 regulatory personnel based in a building in the City, London's historic financial district, just around the corner from the British central bank.

"We are holding institutions to higher standards than before the crisis," he said.

In an odd twist, the regulators will work from the desks formerly used by one of the banks they regulate -- JPMorgan Chase. The authority leased the building when JPMorgan moved its staff to Canary Wharf last year and the new tenants bought much of the furniture in the building. …

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