UK government moves to resolve supervisory turf war

The 176-page document, Reforming financial markets, comes after weeks of speculation about an escalating turf war between the Bank of England (BoE), the Treasury and the Financial Services Authority (FSA), which were given specific responsibilities for financial supervision and policy in 1997 by then-Chancellor Gordon Brown.

"The framework of 1997 established the FSA as the single regulator responsible for supervising all financial institutions, and gave the Bank of England responsibility for contributing to the maintenance of the stability of the financial system as a whole. This replaced the old system of several different bodies all acting with different powers and legal authority," wrote Darling. "New arrangements need to be put in place to strengthen the co-ordination of the authorities generally, including formal and transparent evaluation of the risks identified by the BoE, and assessment of the necessary actions that need to be taken."

The paper extends the FSA's power to set rules whose purpose is the protection of financial stability, and gives it a mandate to gather information from unregulated institutions such as structured investment vehicles to determine whether they pose a threat to stability.

As for the Bank of England, the Treasury wants to enhance the value of its biannual financial stability review (FSR) so that it points out systemic risks to the UK financial sector and economy, recommends specific actions needed to counter those risks and suggests whether those actions should be implemented by the BoE, the FSA or the Treasury.

While co-ordination between the tripartite authorities is currently addressed by a standing committee, the Treasury wants to create a Council for Financial Stability in its place. Chaired by the Chancellor, it will include representatives from all three authorities and will meet regularly to discuss systemic risks identified by the FSR or the FSA's annual financial risk outlook and actions needed to address them.

On the subject of systemically important financial institutions, or those considered too big to fail, the Treasury said they should be subject to tougher regulation and higher capital requirements, with the FSA being responsible for determining the appropriate level of capital based on the potential cost and likelihood of failure.

The Treasury has opened its proposals to a public consultation and hopes to enact them as formal legislation later this year.

See also: UK guarantees AAA RMBS in bid to jump-start lending
Turner: Capital and liquidity are core of bank regulation
Bank of England reveals £75 billion asset purchase programme