The UK government has just published proposals for wide-ranging changes to financial regulation. Although the measures will be intrusive, bankers are generally supportive. Writer Michael Imeson

What is it?

A raft of legislation that will reform the financial system.

Who dreamed it up?

Her Majesty's Treasury. Its Reforming Financial Markets white paper published in July proposes radical changes in the way banks are regulated, the aim being to reduce the risks they present to the economy and to provide greater protection for consumers. A bill will be introduced soon.

What are the main provisions?

- New powers for the Financial Services Authority (FSA) to place higher capital requirements on banks that pose bigger risks to the system.

- Measures to deal with the failure of large institutions.

- Steps to help consumers make better informed choices, including a national money guidance service funded by a levy on the financial sector and a new independent consumer education body.

- A strengthened regulatory framework to improve financial stability and deal with system-wide risks. This will include setting up the Council for Financial Stability, which will bring together the Bank of England, the FSA and the Treasury to monitor system-wide stability.

The white paper comes on top of the Banking Act 2009 and the Turner Review - not to mention the EC's plans for financial supervision. So lots of red tape is on the way, but many bankers - conscious of the damage they have inflicted on the economy - accept they must be more heavily regulated.

What's in the small print?

The UK government wants to introduce a pre-funded element to the Financial Services Compensation Scheme, which guarantees to repay depositors if a bank goes bust. Banks currently only need to pay into the scheme once a bank has failed.

What does the industry say?

Interested parties have until the end of September to respond. The British Bankers' Association has given a cautious welcome. "We believe appropriate and effective regulation, capital applied according to risk, and good quality supervision are the cornerstones of vibrant banking," says chief executive Angela Knight.

However, Simon Hills, a BBA executive director, says: "We continue to be sceptical about the relevance of a pre-funded deposit guarantee scheme."

The Futures and Options Association is also supportive of the white paper, but chief executive Anthony Belchambers believes that, within the Council for Financial Stability, the Bank of England should be given the final say on macro-prudential supervision and managing systemic risk, and the FSA given clear responsibility for the day-to-day supervision of firms. The white paper fails to make such a clear allocation of responsibilities.

How much will it cost?

According to the UK Treasury, the highest cost will be the proposed national money guidance service for consumers and the education body, which could cost financial firms £2.68bn in levies. That cost would be spread over 52 years (yes, fifty-two), and the Treasury estimates the net benefit over the same period would be £24.25bn.

What do the legislators say?

"Our central objective must be to ensure that we reform and strengthen our financial system and rebuild it for the future - with consumers that are better informed, financial institutions that are better managed, and markets that are better regulated," says chancellor of the exchequer Alistair Darling.

And what about the law of unintended consequences?

The BBA's Ms Knight warns that allowing the FSA to impose higher capital requirements on banks would threaten their ability to lend to households and businesses.

Could we live without it?

Yes... but only if we are prepared to live with the constant threat of another major financial crisis.

cp/60/RAGEOMETER.jpg

Rage-OMeter

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter