Britain fleshed out its plans for sweeping reform of financial supervision on Monday, starting with a new macro watchdog in the autumn, and warned the European Union against meddling too much in domestic banks.
The coalition government was launching a public consultation on its plans to scrap the Financial Services Authority regulator and hand the bulk of its powers to the Bank of England.
It said the new Financial Policy Committee (FPC) to spot broader risks in the economy would start operating later this year and a separate Consumer Protection and Markets Authority (CPMA) would follow.
Both would operate in "shadow form" until legislation, anticipated in mid-2011, is approved.
"Good regulation is the bedrock that prevents the ground from caving in," Britain's Financial Services Minister Mark Hoban told a packed financial audience at the London Stock Exchange.
The Office of Fair Trading's powers to regulate credit may be folded into the CPMA, Hoban said.
He said supervision of clearing and settlement houses for securities transactions will be shifted to the Bank, making it one of the most powerful central banks in the world.
Angela Knight, chief executive of the British Bankers' Association, said making the BoE responsible for clearers has a "logic" and that moving credit supervision to the markets regulator has been a longstanding request of the association.
Further work was needed to ensure Britain has a strong voice in European and international rulemaking during the switchover, and the government should also say who will head the CPMA, even on a temporary basis, she added.
The Investment Management Association said it was worried not all retail products would be supervised in the same way.
There is also a need for an efficient and effective mechanism for the investor voice to be heard, particularly in the BoE's new regulation arm, the IMA said.
NEW MACRO TOOLS WANTED
Membership of the FPC, which will monitor risks that could destabilize the wider financial system, will include the governor of the BoE and the chairman and chief executive of the Financial Services Authority in the interim period.
The committee will have "ultimate authority to identify imbalances, risks and vulnerabilities in the financial system and take decisive action to mitigate these in order to protect the wider economy," the government said in a document on the public consultation.
Still up for discussion is exactly the kind of tools the new committee will have to engage in so-called macro-prudential regulation.
The government is looking at countercyclical capital requirements which would add a "buffer" to capital requirements based on the current cyclical position of the economy. For example, when private sector credit is growing rapidly, banks might be forced to hold additional levels of capital.
The FPC, which will meet four times a year and publish minutes, might also gain the power to limit mortgage lending by imposing collateral limits.
Although the Bank will become a powerful regulator, Hoban said the government would have the final say in a crisis.
Banks worry the reforms will create disruption at a time of major regulatory changes in Europe and globally, but Hoban stuck to the previously announced deadline of having everything up and running in 2012.
Hoban also sent a warning to the European Union, which is in the final stages of creating a set of new pan-EU supervisory bodies, which some EU lawmakers want to have powers to intervene directly in a national bank, insurer or market.
"We believe the new European supervisory authorities should reinforce the single market... It should not regulate institutions directly," Hoban said.
The new FPC may end up being overshadowed by a similar macro watchdog being set up by the EU and hosted by the European Central Bank in Frankfurt to monitor the bloc's 27 countries.
Hoban conceded that getting the two new systems working together was "not going to be a perfect match."
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