* Two new watchdogs replace the FSA in a "twin peaks" system
* A third regulator will monitor broad threats to stability
* Old "light touch" system discredited by financial crash,
* Real test of new structure will come when boom times
By Huw Jones
LONDON, April 2 Britain launched its new system
of financial supervision on Tuesday, hoping that two new
regulators will succeed where a single one failed in preventing
banking crises and protecting consumers from getting fleeced.
Experts say the real test of the new system will not come
until boom times return and regulators get a chance to prove
they have the mettle to rein in excesses.
The reform scraps the 12-year-old Financial Services
Authority, which took the blame for failing to head off the 2008
financial meltdown or to prevent the misselling of products to
customers leading to billions of pounds in compensation claims.
It is replaced by two new bodies formally launched on
Tuesday, a Prudential Regulation Authority (PRA) to make sure
banks are sound, and a separate Financial Conduct Authority
(FCA) to ensure they do not mistreat customers.
"The changes coming into effect today are the start of
resetting the system of financial regulation in our country,"
British Finance Minister George Osborne said on Tuesday.
"They represent a fundamental change in how financial
services will be regulated in the future."
The PRA, a subsidiary of the Bank of England, will ensure
that banks, insurers and building societies hold enough capital
and abide by rules to curb bonuses and monitor risk.
The FCA, a standalone body which will be based in the former
FSA's building in London's Canary Wharf, will supervise
behaviour at all financial institutions and will go after
misconduct with tougher powers and higher fines.
Britain was forced to pump 65 billion pounds into Royal Bank
of Scotland and Lloyds to keep them afloat
during the 2007-09 financial crisis, prompting public outrage
and calls for reform.
British banks have also been hit in recent years by huge
settlements over their misbehaviour, from ripping off customers
with inappropriate products, to manipulating the LIBOR benchmark
interest rate, to lax standards in preventing money laundering.
The hope is that the new "twin peaks" system will be able to
sound the alarm on risky activities much earlier to shield
taxpayers in future.
Sceptics say that a new system would not automatically
provide better supervision. Since 2007, the FSA has already
ditched its discredited - and then government-sanctioned -
"light touch" approach to become one of the world's toughest
regulators, using its existing structure.
"If one goes back to 2008 and considers whether this would
have made a real difference, that is debatable," said Peter
Snowdon, a financial services lawyer at Norton Rose.
"The new system is designed to deal with the problems that
happened yesterday. No regulatory system has managed to be
entirely successful in any crisis," Snowdon said.
FIGHTING THE LAST WAR
In addition to the two new bodies, the restructuring also
gives the Financial Policy Committee at the Bank of England
formal authority to set the direction for supervision and look
out for risks to stability, such as property bubbles.
The committee is chaired by the central bank governor and
includes the heads of the two new regulatory bodies.
Last week it ordered Britain's main banks to swell their
capital buffers by a further 25 billion pounds.
The new bodies are expected to bring in a more
interventionist, judgement-led style of supervision aimed at
improving culture and standards.
The FCA has said it will examine how much money banks make
from products to make sure customers are not being ripped off.
"The big difference from today will be that firms will place
a greater focus on collaborative relationships with customers,
which involves them from start to finish in financial product
design," said David Kenmir of consultancy PwC.
Some FPC members say their real test will come when boom
times return and there is a need to take away the punchbowl from
the party by calling for tighter credit. They will have to
resist political pressure to back off.
Some of the FPC's hardliners have just been replaced with
new members, who are seen by critics as being more friendly to
banks and business.
Banks say it is time to move on from banker bashing.
"The new posse of regulators has been welcomed by the
industry, but the challenge for them is to ensure they don't
damage the interests of the economy by going too far fighting
the last war," Anthony Browne, chief executive of the British
Bankers' Association, told the Telegraph newspaper on Tuesday.
Lawyers say the new system's success will hinge on how well
the new regulators work together not just in a crisis but also
day-to-day to avoid bureaucracy and unnecessary costs.
The PRA will supervise 1,700 banks, insurers and building
societies. The FCA will supervise behaviour at the same firms
and will have oversight of 26,000 firms in total, including
brokers, investment advisers and money managers.
"Unfortunately we have already seen evidence of overlap and
duplication," said Iain Pickard, a partner at RSM Tenon advisory