Summary
The Government intends to take control of the UK’s current financial crisis by creating a new regulative committee.
The document ‘A New Approach to Financial Regulation: Judgement, Focus and Stability’ (Cm. 7874) outlines the new Financial Policy Committee’s (FPC) responsibility to manage the UK’s fiscal deficit and encourage stability in the system with macro-prudential tools.
Macro-prudential objectives intend to:
- Achieve an improved financial system by addressing risks and vulnerabilities viewed as potential threats.
- Enhance macroeconomic stability by addressing cyclical imbalances through the financial system, e.g. by damping the credit cycle.
The past government operated a tripartite system made up of three authorities collectively responsible for financial stability: the Bank of England (the Bank), the Financial Services Authority (FSA) and the Treasury.
However, this system failed to:
- Identify the problems that were building up in the financial system.
- Take steps to mitigate them before they led to significant instability in financial markets.
- Deal adequately with the crisis when it did break, especially during the first part of the crisis in the summer of 2007.
The new FPC will be set up within the Bank and will be made up of a strong team of the Bank’s Court of Directors to take charge of macro-prudential regulation, to be co-ordinated with the prudential regulation of individual firms.
A key development in this system is the Consumer Protection and Markets Authority (CPMA) with a primary statutory responsibility to promote confidence in financial services and markets. Protection of consumers will be delivered though a strong consumer division within CPMA.
This report also outlines:
- the issue of market regulation;
- co-ordination of the regulatory bodies in a potential crisis; and
- the next steps, including public consultation, legislative passage and operational implementation.
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