BANK OF ENGLAND TO LOSE CONTROL
OF U.K. BANKING SUPERVISION
By:
Anthony J. Coleby
London
On Tuesday, May 20, 1997, Gordon Brown, Chancellor of the Exchequer in the newly elected Labour administration, announced that the Bank of England is to lose its responsibility for the prudential supervision of U.K. banks. This change forms an integral part of the most radical reform programme for the regulation of U.K. banking and financial services since the introduction of the Financial Services Act 1986.
A Bank of England Act will be enacted this year to transfer the Bank's prudential supervisory role to The Securities and Investments Board ("SIB"), currently the head supervisory body in the self-regulatory pyramid upon which the U.K.'s financial services regulatory regime rests. In addition, the same Act will enshrine the new independence of the Bank of England (announced by the new administration during its first week in power) in its responsibility for monetary policy (i.e., the maintenance and setting of short-term bank interest rates). The Government's goal is to cast the Bank more clearly in a role of central bank along European lines in anticipation of the arrival of European Monetary Union.
It is important to see these changes of function for the Bank of England in the context of the overall reform of the regulatory regime now under way. Comparisons are made to the U.S. structure for the supervision of the financial sector. In fact, the new SIB (possibly destined to take a different, more general, name) will combine, under one roof, the analogous roles of the Securities and Exchange Commission, the Federal Reserve Board and the Comptroller of the Currency. The three existing U.K. "self-regulatory organisations," or "SROs" (the Investment Management Regulatory Organisation ("IMRO"), the Securities and Futures Authority ("SFA") and the Personal Investments Authority), responsible for different sectors of the financial services industry, will be subsumed within the new SIB. So may the free-standing Building Societies Commission, responsible for the building and friendly societies that have remained as mutual investment entities, the functions of the Department of Trade and Industry in overseeing the short-term insurance industry and even the presently independent Lloyds insurance market. Other financial products, such as mortgages, permanent health insurance, home annuity contracts and long-stay disablement care provision (which are at present policed by non-statutory codes of conduct) may also come under the supervisory umbrella of the new monolith. The details have yet to be embarked upon, but the new regime, to be brought into effect by a new Financial Services Act, should be in place by the end of 1998.
Two principal reasons explain why such wide-ranging change is now proposed. First, banks provide a far wider range of services and products than they did even as recently as five years ago; in response to the market deregulation that followed in the wake of the U.K.'s "Big Bang," the enactment of the original Financial Services Act in 1986, and also, simply, competition, both from within the U.K. and from other member states of the European Union. Second, it had become widely perceived that "self-regulation" failed to deliver in terms of investor protection. An unfortunate succession of well-publicised scandals ßBCCI, Maxwell and Barings, to name perhaps the most prominent ß served to strengthen that perception. Two of the three SROs had come in for strong criticism in their handling of the Maxwell case, IMRO, and the Barings case, SFA. Further, the Bank of England had been left, under the self-regulatory regime, in the role of lead regulator, with the ultimate prudential supervision of Barings and all its financial services subsidiaries and was, thus, caught in the cross fire of public opprobrium for failing to carry out tasks not envisaged for it when its supervisory role was first put on a statutory footing by the Banking Act 1979.
When the new regulatory regime is in place, the Bank of England will return to its responsibilities pre-Banking Act 1979ßas monitor of monetary policy (although now independent of the Treasury), and to its role as "lender of last resort," the provider of money-market stability and liquidity. It will be interesting to see to what extent the Bank maintains two other non-statutory functions related historically to this latter responsibility, its role as provider of the "life boat" to banks in financial difficulties and as guardian of the "London Approach," a set of non-statutory principles, sponsored by the Bank, and applied by banks in the prospective rescue of financially distressed companies in the U.K. economy.
The next 18 months will, in summary, see great change in the supervision of the U.K.'s financial sector and the roles of those responsible for it, including the Bank of England. The hope is that these changes will result in a more efficient and accountable system for the regulation of that sector, one better equipped to deal with the climate of ever increasing globalisation, sophistication and competition.
