What’s in store under the new Financial Services Bill?

In the Queen’s Speech in November the UK Government introduced to parliament a draft banking reform Bill designed to give stronger financial regulation and make banks safer and more secure in the future.

The Financial Services Bill will put into law a number of measures already announced by the government and agreed with the G20 on reform to the global financial system.

Chancellor of the Exchequer Alistair Darling said: “Along with governments around the world, we have learned important lessons about the weaknesses of global banking. In the past too many banks failed to fully understand the risks they took. When the crisis hit, far too many firms found themselves short of capital and without any plan for managing through turbulent times.”

The Bill will hand powers to the Financial Services Authority (FSA) to act against banks, monitor macroprudential risks as well as regulate “non-regulated firms” such as hedge funds. Hedge funds also face new rules on disclosure from the European Commission. And short sellers, widely blamed for driving down stock prices at the height of last year’s crisis, will be forced to disclose their positions.

Tougher rules on pay and bonuses are also included in the white paper so that remuneration policies do not contribute to excessive risk taking

The government plans to introduce a new Council for Financial Stability, chaired by the Chancellor and including the Chair of the FSA and the Governor of the Bank of England, to focus on managing systemic risk and protecting financial stability, both in the UK and internationally.

Other measures included in the Bill give powers for consumers to collectively challenge banks in court, and the requirement for them to have “living wills” to ensure they can be wound down in future crises without excessive taxpayer support.

The Conservatives, who are widely expected to win next year’s election, have pledged to scrap the FSA. The institutional provisions therefore appear to have a short life span but it seems likely that the tough-talking Conservatives will replicate the new regulatory powers in their regime.

Key features of the Bill

Stronger financial regulation and corporate governance
• A new Council for Financial Stability, chaired by the Chancellor and including the Chair of the Financial Services Authority (FSA) and the Governor of the Bank of England, to focus on managing systemic risk and protecting financial stability, both in the UK and internationally.
• A new, explicit financial stability objective for the FSA, enabling it to place greater emphasis on monitoring, assessing and mitigating macroprudential risks in its supervisory and regulatory approach.
• Enhanced powers for the FSA:
o Rule-making powers may be used by the FSA for any of its objectives (not just consumer protection as at present);
o Information-gathering powers extended to non-regulated firms (including hedge funds), where information is relevant to financial stability;
o Strengthened powers to take action where firms and individuals are guilty of misconduct;
o Ability to place restrictions on short selling and to require disclosure of short selling.
• Legislative provisions on pay that follow Sir David Walker’s review of corporate governance (to be published 26 November 2009) and the G20 agreement on remuneration, including:
• A duty for the FSA to make binding rules which implement the G20 pay agreement following further detail from the FSB in Spring next year;
• FSA powers to void any individual contract that contravenes specified rules, and to make provision for the recovery of payments made under that contract contrary to those rules;
• An end to multi-year guaranteed bonuses, or large bonuses paid out as a cash lump sum at year-end, and all bonuses subject to clawback;
• A new FSA duty to require firms to produce Recovery and Resolution Plans (RRPs) or living wills. RRPs will ensure institutions have robust recovery plans to deal with periods of stress without recourse to support from taxpayers. By removing barriers to effective resolution of failed firms, RRPs will help protect against system-wide risks and reduce the need to draw on taxpayers’ funds to ensure financial stability in the future.
Greater protection and support for consumers
• New measures to enable consumers to collectively seek redress and compensation where there has been widespread detriment, including:
o Allowing a representative to bring an action through the courts on behalf of a group of consumers;
o Streamlining the FSA’s powers to order a review of past business and to secure compensation if there have been legal or regulatory breaches.
• A ban on unsolicited credit card cheques, preventing financial institutions from encouraging customers to borrow more than they can afford.
• A new independent consumer financial education body will be established by the FSA, to increase financial education and awareness among consumers. The new body will roll out a national Money Guidance service from 2010 (currently being joint-piloted by the FSA and the Treasury) that will deliver accessible, impartial financial guidance.
• New authority for the Financial Services Compensation Scheme (FSCS) to act as an agent to deliver compensation to UK customers of financial firms based overseas, improving depositor protection.
The Financial Services Bill will enact proposals set out in the ‘Reforming Financial Markets’ paper published by the Government in July. The following documents have also been published today alongside the Bill:
• Public responses to the ‘Reforming Financial Markets’ consultation paper
• HM Treasury response to the consultation
• HM Treasury response to the Treasury Select Committee Report ‘Banking Crisis: Regulation and Supervision’
• Impact Assessment for the Financial Services Bill.