The FSA will play a key role in the Treasury Committee's plans for improving financial stability following the Northen Rock crisis.
In a new report released today, ‘Banking Reform’, the Committee makes a series of recommendations on the work undertaken by the FSA in relation to potentially failing financial institutions, depositor protection and the proposed Financial Stability Committee of the Bank of England.
The Report says that ‘heightened supervision', sometimes referred to as the amber zone of regulation, should be considered a distinct and separate state of supervision, segmented from both normal supervision and from the Special Resolution Regime.
It recommends the FSA be placed under a statutory duty to prepare and consult on a Code of Practice for Heightened Supervision and agrees with the current proposal that the FSA be granted the sole responsibility for the ‘pulling of the trigger' to make an individual firm subject to the Special Resolution Regime.
However, it wants the Bank of England be given a power enshrined in primary legislation to recommend to the FSA that a financial institution be brought within the Special Resolution Regime.
Committee chairman John McFall says: "As the regulator, the FSA should have the sole authority to place firms in the Special Resolution Regime. However, the Bank of England must have the power to recommend that the FSA pull the trigger to bring an individual institution into that Regime. The system we propose maintains a clear line of authority, while ensuring that the Bank of England has a reason to engage with individual institutions."
On the depositor protection scheme, which was heavily criticised during the Northern rock crisis, the Committee identifies the priorities for reform of the Financial Services Compensation Scheme (FSCS).
- the Tripartite authorities must stand firm in their determination to introduce tough deadlines for processing compensation payments;
- the authorities must ensure that a bank's inability to calculate individual compensation payouts immediately does not jeopardise the proposed seven-day payout target;
- the FSA must seek a resolution to the unreasonable difficulties faced by consumers having to know whether their bank has an individual, or shared, banking licence.
The Report reiterates the Committee’s support for an element of pre-funding of the FSCS, but recommends such a scheme should be flexible enough for contributions to be suspended at times of economic crisis. It also recommends contributions vary according to the FSA's assessment of each bank's risk profile.
On deposit protection for UK deposits held with banks from the European Economic Area (EEA), the Committee condemns current arrangements as too complex. It wants the FSCS to provide compensation to these depositors on the same basis as for those of UK-authorised banks, and then seek to reclaim compensation itself from the foreign deposit-protection scheme concerned.
McFall says: "There has been much focus on whether the appropriate compensation limit should be £35,000, £50,000 or £100,000. This is irrelevant if we do not possess a deposit protection system that actually works. It is far more important that banks be able to identify who their insured depositors are, and that the FSCS be able to process compensation claims quickly.
“The overarching priority for the FSCS must be to design a simple and confidence-boosting scheme, which does not rely on consumers having an unrealistic knowledge of banking licences, European directives and foreign compensation schemes."
The Committee also concludes that in order to strengthen the Bank of England's role in financial stability, the proposed Financial Stability Committee should be established in statute with a status comparable to that of the Monetary Policy Committee (MPC).
Meanwhile, the Treasury Committee warns the Tripartite Standing Committee should not become “a sleepy backwater in normal situations, only for it to begin its work from scratch in a time of crisis”.
“We see a need for the Committee to assume a central and continuing role in the financial stability work of the authorities at all times, supported by a small, full-time, secretariat.,” the report says.
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