City lawyers unimpressed by banking regulation overhaul, arguing FSA should have a chance to reform

Chancellor George Osborne's banking regulation shake-up has been met with a cool reception from City lawyers as many raise doubts about the move to largely abolish the Financial Services Authority (FSA).

The overhaul, which was announced last week (16 June), will see a major increase in power for the Bank of England, which will take on a new remit to police market risk.

The FSA will lose some of its powers to a new Consumer Protection and Markets Authority. The rump of the FSA will become a new agency, dubbed the Prudential Regulatory Authority, to be in place by 2012. This body, which will take on responsibility for day-to-day supervision of banks and financial services groups, will operate as a Bank of England subsidiary.

The new regime will replace the tripartite system introduced by former Chancellor Gordon Brown in 1997, which effectively split fiscal, monetary and regulatory policy between the Treasury, the Bank of England and the FSA.

The announcement ends months of speculation regarding the FSA's future after the Conservative Party last year pledged to abolish it following widespread criticism of its role in the run up to the banking crisis.

However, the incoming coalition Government had since floated the idea of largely maintaining the regulator and many in the City, including financial services lawyers, had argued that the FSA should be given a chance to reform itself rather than risk further upheaval.

Clifford Chance partner Simon Gleeson (pictured) said: "The announcement does have a shuffling-of-deck-chairs feeling to it. It might not have all that much impact on most financial services firms, which may not even notice a change. What will be interesting to see is how the new system will correspond with the European Union regulatory model."

Denton Wilde Sapte financial markets and regulation head Robert Finney added: "The Chancellor's new approach is a halfway house between the unpopular (in the City) proposal to dissolve the FSA and replace it with regulation by the Bank and a consumer protection agency, and on the other a face-saving formula of charging the Bank with clear responsibility for financial stability and macro-prudential supervision, but largely leaving the FSA be.

"The new approach has the disadvantage of fomenting instability at the FSA, yet potentially achieving little."

Osborne was able to offset some criticism of the move with the surprise announcement that the FSA's chief executive, Hector Sants, had been persuaded to stay on for three years to oversee the creation of the new agency.

Berwin Leighton Paisner financial services head Sidney Myers added: "These changes will mean more work for regulatory lawyers. It is good that Sants is staying on because it will aid continuity. The biggest fear is the instability that this shake-up could create given that the markets are still volatile. Breaking up the FSA will be a difficult thing to achieve but the setting up of a separate economic crime agency is a very good idea."

Norton Rose City partner Jonathan Herbst – the only lawyer on the Tory committee put together to discuss the FSA overhaul while the party was still in opposition – said: "Everyone recognised that the regulatory system did not work properly. I support these changes but what will be most important now is working out the details of how it is going to work. It could be a very positive thing, and if it is done properly there is no reason why it should be disruptive."

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