Chancellor sets out wide-ranging reforms for banking

Author: By David Hughes and Craig Woodhouse, Press Association

He also told MPs that banks will be required to build up better capital
reserves as a buffer against failure.

But he ruled out legislation to split up large and complex institutions,
arguing this was a “simplistic solution” that failed to take into
account the realities of the modern financial system.

A new national money guidance service will give consumers “free impartial
financial advice” and will be paid for by a levy on the financial
sector.

“Consumers will also get more protection, along with a greater right of
redress and access to compensation if things go wrong,” he said in a
Commons statement.

The Government will legislate to expand and pre-fund the Financial Services
Compensation Scheme and improve depositor protection arrangements.

The Financial Services Authority will be required to produce an annual report
on banks’ pay policies.

“We need a change of culture in the banks and their boardrooms, with pay
practices that are focused on long-term stability and not short-term profit.”

The FSA will be given a new role in maintaining financial stability, with “tougher
powers and penalties against misconduct”.

Shadow chancellor George Osborne said the proposals in the new White Paper
were a “totally inadequate response to what has happened ion the last
two years”.

Setting out the causes of the crisis, Mr Darling said: “Financial institutions
in many countries simply took on too much risk.

“They became over-reliant on wholesale funding, too exposed to particular
products and irresponsible pay practices made banks take unnecessary risks.

“It’s also clear that some financial institutions had little appreciation of
what was going on inside their businesses.”

Setting out his three-pronged strategy, Mr Darling proposed measures to:

* Allow tougher regulation of individual firms.

* Deal with potential failures of firms which could have a significant impact
on the economy.

* Strengthen the framework for financial stability to cope with system-wide
risks in the global market.

The FSA’s new statutory objective for financial stability will allow it to
expand regulation, potentially covering systemically important hedge funds.

While international work would be needed to cope with the collapse of
multinational institutions “at home we can better deal with these risks by
ensuring safeguards are in place – for example by making banks hold capital
at a higher level that reflects not only the possibility, but also the cost
of failure”.

Ruling out a separation of banks’ investment and commercial arms, as
implemented by the US Glass-Steagall Act in the 1930s, Mr Darling said: “I
believe that this is a simplistic solution and fails to take into account
the complexity of today’s financial systems.

“It is not only large banks but small ones too that can threaten financial
stability, as in the case of Northern Rock.”

Both retail and investment banks had failed, and the crisis was not only
confined to the banking sector, Mr Darling said as he highlighted the
failure of insurance giant AIG.

Mr Darling said he would set up a new Council for Financial Stability,
bringing together all parts of the tripartite regulation system – the FSA,
Bank of England and Treasury.

“This will not just deal with immediate issues but also monitor system-wide
financial stability and respond to the long-term risks as they emerge,” he
said.

Mr Darling said as a result of the turmoil in the sector there was less
competition in the UK financial services market than before.

He wanted to see greater competition, with a bigger role for mutuals and
building societies and the possibility of non-banking institutions entering
the market.

The part-nationalised banks will be returned to the public sector “in a way
that brings best value to the taxpayer, promotes competition and maintains
stability”.

Proceeds of the sale of the taxpayers’ stake would be used to cut Government
debt, he said.

“We are empowering consumers, supporting better corporate governance and we
are strengthening regulation so our financial sector can continue to be an
engine of prosperity,” he said.

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