02 Jul 2008, Victoria Pennington, Operational Risk & Regulation
LONDON – In the continuing fallout from the Northern Rock debacle, HM Treasury, the Financial Services Authority (FSA) and the Bank of England today published proposals for strengthening the framework for financial stability and protecting depositors.
The proposals build on a consultation document published in January. They focus on five key objectives, which have received widespread support from stakeholders in the financial services industry and consumer groups, namely: strengthening the stability and resilience of the financial system in the UK and internationally; reducing the likelihood of individual banks facing difficulties – including regulatory intervention and liquidity assistance; reducing the impact if a bank gets into difficulty; providing effective compensation arrangements in which consumers have confidence; and strengthening the Bank of England, and ensuring effective co-ordinated actions by authorities, both in the UK and internationally.
Launching the consultation document, the chancellor of the exchequer, Alistair Darling, said: “No system of regulation can or should prevent the failure of each and every institution, but we must do everything possible to prevent problems which could pose a wider threat to stability. The challenge is to ensure that the authorities can act quickly and decisively where necessary to support financial institutions. These proposals will give the authorities the full range of powers they need. They do so by entrenching the model established a decade ago – the FSA responsible for individual institutions, the Bank of England for the stability of the financial system as a whole – but by providing each institution with new powers, and improving co-ordination between them.”
The industry has welcomed the new rules. Commenting on the proposals, John Cridland, CBI deputy director-general, says: “The CBI welcomes the Treasury’s further consultation on banking reform and protecting depositors. We support the suggestions not to move to a pre-funding of the depositor protection scheme, at least at this stage, as this would take ages to build up to an amount which would deal with a failure of any size. The existing US scheme has been in place since the 1930s, but only has sufficient funds to deal with a Northern Rock event, and the failures it has been directed to have been quite small banks. The UK’s current £35,000 scheme limit covers over 96% of deposits by number and is in line with limits elsewhere, and we did not therefore see an overriding need to increase the limit significantly.”
“The proposal to give the FSCS [Financial Services Compensation Scheme] access to immediate liquidity through the National Loans Fund is entirely sensible,” he adds.
The proposal will now be the subject of a further period of consultation, before the introduction of legislation in the autumn.