Lords condemn Financial Services Authority

Jun 2 2009 by Iain Laing, The Journal

THE supervisory system for managing bank crises needs to be overhauled and more responsibility given to the Bank of England, the House of Lords has said.

The Tripartite Authority – made up of the Bank, the Treasury and the Financial Services Authority (FSA) – failed to maintain stability because it was not clear who was in charge in a crisis, according to a Lords report.

The Economic Affairs Committee said the Government should re-examine the system “as a matter of priority with the aim of ensuring a sharper focus on financial stability”.

Decision-making powers should be assigned among the tripartite authorities in areas currently ambiguous to “avoid ambivalence or dispute“, it added.

Although peers said there was “no need to rush“ towards all-embracing legislation, they also called for the Bank of England to be given executive responsibility for supervising the wider health of the financial system.

“Without a clear executive role, the Bank can do no more than talk about financial stability. This exposes it to reputational risk without generating any clear benefit,” the report said. The Bank also needed information on specific institutions to be able to respond effectively to a crisis. The Government should “carefully consider“ putting the Bank in charge of more detailed supervision of individual banks. the report argued.

This would leave the FSA only with responsibility for “conduct-of-business“ regulation over areas such as protecting consumers and tackling insider trading. “The committee believes the FSA focused on its consumer protection role and failed to take sufficient steps to alleviate risks to the financial system caused by excessive debt and banks’ ventures into complex and opaque financial instruments,” peers said.

The new Bank of England Financial Stability Committee, created by the recent Banking Act, should also be given executive powers – like the rate-setting Monetary Policy Committee – to prevent it lacking focus. The Act gives the Bank legal responsibility for financial stability, but Governor Mervyn King said in its annual report last month he regretted the lack of new power to match the new responsibility.

The tripartite framework was established in 1997 after Gordon Brown became Chancellor, but the run on Northern Rock in 2007 raised doubts over how it coped with a crisis.