The Financial Services Bill

Written by Colin Breed and published in House Magazine on Wed 6th Jan 2010

The Financial Services Bill seeks to address weaknesses in the regulatory system that were exposed during the recent banking crisis. It is obvious that parts were inadequate, uncoordinated and in some cases inappropriate to the challenges of an expanding Financial Services sector. When the Financial Services Authority (FSA) was established ten years ago the Government set up a tripartite arrangement with the Treasury, Bank of England and the FSA charged with responsibility for overseeing financial stability under a Memorandum of Understanding. Concerns were raised at the time that this arrangement was too weak and ill defined. In particular, it did not identify "who" was in charge (it now appears that all were responsible) and in practice it failed to meet the requirements necessary to identify emerging problems or take any meaningful decisions. This was a crucial finding of several reports most notably that of the Treasury Select Committee following the demise of Northern Rock.

The current Bill is an attempt to reform the tripartite by creating a statutory Financial Stability Council (FSC) albeit with the same membership but given some formality and more defined purposes. It has been called a mere "rebranding" exercise, at a time when more far reaching reform is necessary. The Conservatives believe that returning banking supervision and responsibility for financial stability to the Bank of England would provide a more certain and credible option, while the Government counters that every developed country with a financial services sector operates a tripartite organisation in one form or another. The Liberal Democrats share the Government's view that a tripartite is the appropriate body, but believe the proposals for the FSC as set out in the Bill are far from satisfactory in addressing the lessons which should be learned from previous experiences.

I would like to see a more independent, transparent and accountable Council setting its own terms of reference, publishing its own minutes and Reports and developing its own credibility in the Financial Markets. The Government wishes it to remain almost a sub-committee of the Treasury with all the functions of the Council being channelled through the Treasury. Clearly, the Council should not be man-managing the regulatory system, which is the role of the FSA, or involving itself in fiscal policy, which is the Treasury's remit, but it must take account of both.

Unfortunately debating these issues whilst we are still in the midst of the crisis does not help. The Council needs to be ready to receive accurate and timely information, monitor domestic and international markets and take early action to head off the sorts of problems experienced over the last two years. If it has to sort out another crisis, then it has failed in its duties and responsibilities.

The proposals on the tripartite, like the Bill itself, are a small but useful contribution to the legislative framework. This Bill, though, is unlikely to be the last.