British new coalition government on Thursday revealed how its reformed financial regulator will work, Xinhua reported.
On Wednesday, chancellor George Osborne, the finance minister, announced radical changes in the way banks and financial institutions were regulated, ripping up the regulatory structure created by former prime minister Gordon Brown 13 years ago.
Osborne and the new coalition government felt the structure of regulation was partly to blame for the severe impact the financial crisis had on the British banking sector and he wanted to reform it so that it could not happen again.
Osborne outlined on Wednesday that he would be scrapping the current Financial Services Authority (FSA) and bring its functions back into the Bank of England (BoE), the central bank, where they were before Brown hived them off in 1997 at the beginning of his term as chancellor.
A key role will be played in the new regulatory system by a new committee in the BoE, the Financial Policy Committee (FPC).
On Thursday treasury minister Mark Hoban revealed to the House of Commons how the FPC will work.
Hoban said the FPC would be responsible for overseeing at macro- economic and financial issues that could threaten stability in the future.
Osborne revealed on Wednesday that a new Prudential Regulation Authority would be set up as a subsidiary of the BOE, and carry out its orders. It would regulate retail and investment banks, building societies and insurance companies.
The third part of the reform is the creation of a new Consumer Protection and Markets Authority, which will regulate the conduct of all authorized financial firms providing services to consumers.
Hoban told the House of Commons that the reforms were necessary to prevent a second financial crisis.
He said, "At the heart of the banking crisis, the rapid and unsustainable increase in debt, our macro-economic and regulatory system utterly failed to correctly identify the risk this posed, let alone prevent it.
"No-one was controlling levels of debt and, when the crunch came, no-one knew who was in charge."
The result is that the central bank, the BoE, will become very powerful with these new, additional roles complementing its current roles of setting interest rates and overseeing monetary policy.
The FSA will be wound up by 2012. Its current boss Hector Sant was to quit the post this summer, but he has been persuaded to remain and oversee the dismantling of the FSA. He will also become a deputy governor of the BoE.
Tackling the record public sector deficit of 156 billion pounds (about 245 billion U.S. dollars) is the principal task of the coalition government. It has so far announced 6.25 billion pounds of cuts in current budget spending.
Osborne will deliver an emergency budget on June 22, which will set the tone for the next four or five years of government spending. It is expected to contain tough spending cuts, and may also include some tax increases in a bid to halve the deficit over the next five years.
"Our country has the highest budget deficit of any country in Europe, with the exception of Ireland," Osborne said on Wednesday
He added, "Dealing with this inheritance from its predecessor is the single greatest economic challenge the new government faces. "
Osborne is chancellor for the new coalition government, formed by the right-wing Conservative party and the left-of-center Liberal Democrats, which came together just over a month ago in the wake of the inconclusive May 6 general election.
The scrapping of the FSA represents a victory for the majority Conservative part of the coalition over the minority Liberal Democrat wing, which had wanted to keep it.