Chancellor: reform of financial system will “rebuild for the future”

July 8, 2009 at 5:43 pm Leave a comment

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The Chancellor of the Exchequer Alistair Darling told MPs today that he intends to reform and strengthen the UK’s financial system and “rebuild it for the future.”

“The world economy has been hit by a severe financial crisis, which has resulted in the worst economic downturn for well over 60 years,” he said.

“Its origins lie in failures in the banking system around the world.

“Financial institutions in many countries simply took on too much risk.

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

“It is also clear that some financial institutions appeared to have little appreciation of what was going on inside their own businesses.

“However, regulators and Governments too must learn from the events of the last two years, and understand better the risks that come from rapid globalisation in the financial system.”

Mr Darling said that his reforms would lead to consumers that are better informed, financial institutions that are better managed, and markets that are better regulated.

“The proposals that I will set out today build on our previous reforms to provide a new settlement that is open, competitive and effective and able to meet the needs of both business and families; that inspires trust and confidence on the part of businesses and consumers; that ensures robust regulation that reduces the likelihood of failures without preventing innovation; and that provides effective mechanisms for dealing with the failure of financial institutions should they occur,” he said.

“I want to take steps to help consumers make better informed choices. To ensure that they are given access to free impartial financial advice, we will legislate to introduce a national money guidance service and impose a levy on the financial sector to help fund it.

“We will also legislate to consolidate Financial Services Authority resources to provide separate independent consumer education, setting up a lead provider of consumer information and personal finance education.

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

“We will also improve arrangements for depositor protection, including legislation to pre-fund and expand the role of the Financial Services Compensation Scheme.”

The proposals focus on significant reform of the way banks are regulated, with more emphasis put on the risks financial firms can present to the economy and greater protections for consumers.

They include:

* New plans for the FSA to place higher capital requirements on firms that present greater risks to the system and measures to deal with the potential failure of institutions that could have a significant impact on the economy

* Steps to help consumers make better informed choices, including a national money guidance service funded by a levy on the financial sector and a new independent consumer education body

* A strengthened framework for financial stability, to deal with system-wide risks in today’s more complex and global markets.

This will include legislating to set up a new Council for Financial Stability – which will bring together the Bank of England, the FSA and the Treasury to monitor system-wide financial stability and respond to long-term risks as they emerge.

“Today’s global market for finance means that new measures can be effective only if they are implemented on a broad international basis,”  Mr Darling told the Commons.

“So under our presidency of the G20 we will continue to press for measures to strengthen the international regulatory architecture, building on the proposals agreed in April.

“In Europe, too, we will argue for enhanced monitoring of system-wide risks, while retaining the crucial link between national regulators and Governments.

“By working internationally, our efforts can help us deliver more effective supervision of global banks, stronger international standards, and a more responsible global financial services sector.

“We intervened to stabilise the banking system, while retaining a clear view that banks are best managed and owned commercially and not by the Government.

“We intend to return our stakes in the banks to the private sector, in a way that brings best value to the taxpayer, promotes competition and maintains stability, and we will use the proceeds to cut Government debt.

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

“I commend this statement to the House.”

Shadow Chancellor George Osborne said there are some elements of the White Paper that his party welcomes: “the improved consumer advice; David Walker’s report on corporate governance, to which we look forward; a much better resolution regime for failed banks, which is clearly necessary; and the Chancellor’s remarks on pay and bonuses, although he could have set a better example with the pay and bonus package for the chief executive of RBS.

“However, in most part, this White Paper is a totally inadequate response to what has happened over the last two years.”

Mr Osborne accused the government of ducking “every difficult question that needs to be addressed if we are to protect our society and our economy from a repeat of the mistakes that have caused such trouble.”

“How do we replace the failed tripartite regime?” he asked.

“What tools do we need to stop the excessive debt levels that did so much damage to our economy?

“How do we ensure that we have a banking system that competes across the world, and offers families and small businesses in this country the services that they are currently denied in this credit crunch, without the British taxpayer picking up the bill for the mistakes that are made?

“None of those difficult questions is properly addressed today; every single one is left to the next Government to deal with.

“It is more of a white flag than a White Paper—a complete surrender of this Government’s responsibility to fix the system for regulating the City that they created and which so spectacularly failed.”

Lib Dem Treasury spokesman Vince Cable welcomed many of the proposals in the White Paper.

“The Chancellor is looking over the distant horizon at necessary reforms, but may I suggest to him that key problems exist today?” he asked.

“The publicly owned banks are not responding to the borrowing needs of sound British companies, and the bonus culture is being reinstated in publicly owned banks that are owned by the taxpayer.

“There is a complete lack of direction, and I suspect that a central reason for that is that the Government are so desperate to get the publicly owned banks back into the private sector quickly that too little attention is being given to defining the public interest.

“I suspect that the White Paper will be received in the City with a great sigh of relief.

“It is yet another indication that we are getting back to business as usual.”

photo: uliharder@flickr.com

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