FSA Abolished

Just when the Financial Services Authority (FSA) seemed to be getting their act together and people began to achieve their FSA compliant qualifications, it has been disbanded in a move which strikes as much more political than economic.

In July last year David Cameron promised to abolish the main City regulator, the FSA, and today his chancellor did just that.

George Osborne said the FSA will lose its name and powers, which will be split among several new regulators, chiefly the Bank of England.

The FSA will continue until 2012, by which time many of its staff will have transferred to one of two new Bank of England supervision units, with the remainder decamping to a consumer protection and markets agency and a financial education body.

Supervision will be split between the Bank of England and the consumer protection agency.

Within the Bank, Britain’s banks, building societies, insurers and other financial companies will be regulated, with a second body given overall charge of watching for trends in the industry that could trigger another financial crisis.

Hector Sants, the current boss of the FSA, will take on the role of chief executive of the first overseeing agency, which will be called the Prudential Regulatory Authority. It be separately constituted as a subsidiary of the Bank of England.

The second, more overarching, body, the Financial Policy Committee, will be firmly within Threadneedle Street. Sants will be a key figure on the body along with his new deputy, Andrew Bailey, the Bank’s chief cashier.

However, the governor of the Bank, Mervyn King, will chair both the committee and the prudential authority, and is expected to exercise ultimate control over all areas of supervision.

In effect, the FSA will be subsumed within the Bank of England and its senior staff will report to committees under the ultimate control of the governor.

Even the FSA’s offices in Canary Wharf are under threat. The Bank has about 500 staff working behind its austere high walls, sandwiched between the Royal Exchange and the old NatWest headquarters on Lothbury. It is understood that King is uncomfortable that the majority of his new staff will be several miles away on the Isle of Dogs and will be seeking ways to bring them into the City, if not to Threadneedle Street.

King said he was delighted Sants had agreed to tear up his resignation notice, which he offered earlier this year, and agreed to join him at the Bank. “In the new regime, regulation will reflect two different, though complementary, perspectives,” he said.

“The first, as now, is a bottom-up perspective, focused on setting institution-specific capital requirements. Those would be fixed requirements that banks could not breach.

“The second is an overall perspective, with a set of system-wide capital requirements that vary over the economic cycle. Judgments on the level of these capital buffers will be part of the remit of the new Financial Policy Committee.

“The prudential regulator, with its micro-prudential responsibilities, and the Financial Policy Committee, with its macro-prudential responsibilities, will need to work closely together, and that is one reason why it is sensible that they are both in the central bank,” King said.

Only weeks before the election, the City minister, Mark Hoban, was telling bankers that a new Conservative government would spend at least six months listening to their views before making a decision on whether to scrap the FSA.

But the chancellor, George Osborne, said further debate on the overall structure was unnecessary and he was ready to push ahead with radical reform.

Behind the revamp are several key figures, including Sir James Sassoon, the Eton and Oxford-educated former SG Warburg banker, who was an adviser to Labour until 2008 when he quit to join the Tories. He wrote a document last year calling for the FSA to be abolished. Sassoon, who became a Treasury minister in the new government, is expected to play a key role in pushing through the reforms.

Cameron said last year that the decisions that led to the financial crisis represent “a policy crisis of historic proportions” and “in the United States, they have called on the Federal Reserve, and it is time to call on the Bank of England”.

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