Draft Report of the Joint Committee on
the Draft Financial Services Bill
CHAPTER 1: Introduction
1. The Financial Services Bill will reform the
system of financial regulation by abolishing the tripartite system
comprised of the Treasury, the Bank of England and the Financial
Services Authority. This will be replaced with a new 'twin-peaks'
model under which the Bank of England will be responsible for
macro-prudential regulation through a new Financial Policy Committee
(FPC) and micro-prudential regulation though a new subsidiary
body called the Prudential Regulation Authority (PRA). In addition
there will be an independent conduct of business regulator called
the Financial Conduct Authority (FCA).
2. The draft Bill makes substantial and wide-ranging
amendments to the Financial Services and Markets Act 2000. A consolidated
version of that Act, showing all the proposed amendments, has
been published by the Treasury.[1]
The draft Bill also makes amendments to the Bank of England Act
1998 and the Banking Act 2009.
3. We were appointed as a Joint Committee to
"consider and report on the draft Bill by 1 December 2011".
Our appointment followed a motion of the House of Commons on 18
July 2011 and a motion of the House of Lords on 20 July 2011.
In order to be able to give proper consideration to this large
piece of draft legislation we sought, and were granted, an extension
to 16 December 2011.
4. Publication of the draft Bill followed two
rounds of consultation by the Treasury. An initial consultation
was launched on 26 July 2010 with the publication of a document
entitled 'A new approach to financial regulation: judgement,
focus and stability'. A second round was launched in February
2011 with the publication of 'A new approach to financial regulation:
building a stronger system'. We had access to the responses
to these consultations as well as the responses to the Treasury's
consultation following publication of the draft Bill itself.
5. The House of Commons Treasury Committee has
also taken a close interest in these reforms and has published
one report on preliminary consideration of the proposals[2]
and one report on the accountability of the Bank of England in
light of the proposals.[3]
It is currently conducting an inquiry into the FCA. We have sought
to keep in close contact with the House of Commons Treasury Committee
throughout this inquiry in order that the two committees complement
each other's scrutiny. Two members of that committee are amongst
our number.
6. Steps are already underway to give effect
to the plans for reform of the regulatory structure. These steps
were taken before the publication of the draft Bill. An interim
FPC has begun to meet inside the Bank of England; the Bank and
the FSA have held industry-wide events to explain the approach
of the PRA and the FCA and appointments have been made to the
positions of Chief Executive of the PRA and FCA. This formed part
of the context of our considerations.
7. In September this year the final report of
the Independent Commission on Banking (ICB), chaired by Sir John
Vickers, was published. The ICB was appointed in 2010 to consider
structural and related non-structural reforms to the UK banking
sector to promote financial stability and competition, and to
make recommendations to the Government. The ICB made wide ranging
recommendations including proposals for ring-fencing the retail
activities of banks. The Government has accepted in principle
the recommendations of the ICB and is committed to legislating
in this parliament. Towards the end of our inquiry the Chancellor
of the Exchequer announced that this Bill will not after all be
used to enact the ICB recommendations on ring-fencing and higher
capital requirements.[4]
Given that these reforms will have a direct impact on the work
of the regulatory bodies established by this legislation we have
considered the draft Bill in the context of the ICB recommendations.
8. We were disappointed not to be able to consider
the Government's formal response to the ICB (due to be published
at approximately the same time as this report) or see any draft
clauses aimed at enacting ICB recommendations. The ICB recommendations
are key to reform of financial services and must be scrutinised
in detail. The ICB recommendations on ring-fencing and higher
capital requirements are extremely important. Parliament must
consider the substance and get the detail right in the legislation
that enacts the recommendations. We urge the Treasury to confirm
that legislation will be subject to pre-legislative scrutiny in
parliament. The legislation enacting the ICB recommendations on
ring-fencing should be brought forward during the 2012-13 Session
in order to give banks a clear framework to work to. The ring-fence
should be implemented as soon as possible. There is a good case
for allowing time to rebuild capital requirement adequacy.
(see para 185).
1 Error! Bookmark not defined. Back
2
House of Commons Treasury Committee, 7th Report (2010-12) Financial
Regulation: a preliminary consideration of the Government's proposals
(HC 430-I). Back
3
House of Commons Treasury Committee, 21st Report (2010-12) Accountability
of the Bank of England (HC 874). Back
4
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