Sassoon report suggests folding FSA into the Bank of England

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LONDON - A new report commissioned by the shadow chancellor George Osborne and written by James Sassoon, former managing director as the UK Treasury, has recommended giving most of the powers of the UK Financial Services Authority (FSA) back to the central Bank of England.

The study, which Osborne described as "powerfully argued", states that the tripartite system of regulation in the UK, comprising the Treasury, the FSA and the Bank of England, had "failed" and should be overhauled.

Writing in the Financial Times, Sassoon said: "The UK's tripartite financial stability regime needs fundamental reform. The Bank of England has admitted this, the Financial Services Authority has admitted this and, last week, the government admitted it, too. Together, the tripartite authorities were supposed to ensure financial stability. However, they not only failed to mitigate the current financial crisis, they also failed to deal adequately with the immediate crisis once it broke. We need a better system."

In the report, Sassoon puts forward five key possible reforms:

œ The FSA, which currently has divisions for retail and wholesale, should be reorganised with one part focusing on the "prudential" watchdog function and the other on conduct of business.

œ The Bank of England is given new powers to intervene in the reformed FSA if it believes that a failing institution is threatening overall market stability.

œ The FSA is abolished and replaced with two separate regulators, one for prudential micro-regulation (of institutions) and the other for conduct of business. This would mirror the "twin peaks" model used in Australia and the Netherlands.

œ The Bank of England is handed powers to step in over the head of the new prudential micro-regulator in exceptional circumstances after the FSA has been split up.

œ The new micro-regulator of banks, or the whole financial sector, is part of the Bank of England
The report is now being considered by Osborne and the leader of the opposition Conservative party David Cameron before any proposals are made before the end of the year.