Tories set to scrap the FSA

The Conservatives have today outlined plans to abolish the Financial Services Authority and pass regulation of insurers onto the Bank of England.

The plans were outlined by deputy leader David Cameron and shadow chancellor George Osborne in the policy White Paper on Banking.

The paper sets out Conservative policy to:

• abolish the Financial Services Authority and abolish the Tripartite regime it operated with the Bank of England and the Treasury;

• create a strong and powerful Bank of England with the authority and powers necessary to ensure financial stability;

• create a powerful Consumer Protection Agency that will bring together in one place the consumer powers currently and confusingly split between the old FSA and the Office of Fair Trading;

• and demand that banks set aside much more of their own money, or ‘capital', for their risky lending as a form of insurance policy.

The Conservatives said the party would also appoint a Treasury Minister with special responsibility for "fighting our corner in Brussels so that European regulations are right for the City of London"; and ask the Office of Fair Trading and the Competition Commission to conduct a focused examination of the effects of consolidation in the retail banking sector.

Launching the paper Mr Cameron said: "Last autumn, our financial system suffered its most destructive crash since the 1930s, taking an economy already in recession and plunging it further into the mire. Ten months on, the banking system remains broken, held together by billions of pounds worth of taxpayer loans and government guarantees. The public finances are awash with red ink, burdening every child born today with £22 500 worth of debt.

"And businesses are still going bust, houses are still getting repossessed and unemployment queues are still rising at an unprecedented rate. The decisions that led to this crisis represent a policy failure of historic proportions. We now need deep, wide-ranging reform that matches both the magnitude of the crisis and the scale of the hardship inflicted on the British public.

"That reform must be based on a clear understanding of what went wrong in the first place - and a clear determination to put it right."

Mr Cameron added: "We need to make sure the financial sector serves the long-term interests of the economy, not just its own short-term interests. So we will abolish the Financial Services Authority, and will give the Bank of England the power to regulate pay structures, riskiness and complexity and size of all our banks, building societies and other significant financial institutions.

"That which puts financial stability at risk will be penalised. So if bonus structures are irresponsible, banks will be made to hold more capital against them - akin to a tax. And we should encourage claw back, where bonuses paid out for short-term gains are paid back in the event of long-term losses.

"The financial sector must understand that it cannot behave like this crisis never happened."

Mr Osborne continued by commenting:: "Never before has an opposition party in this country produced such a thorough plan for reforming our financial system - and never before has such a plan been more needed.

"The contrast with the last change of government in this country is striking - then a new Chancellor forced through rushed changes to the regulatory system, kept secret when he was Shadow Chancellor, with almost no consultation or discussion.

"He removed the historic role of the Bank of England in keeping an eye on overall levels of debt in the financial system. Britain is living with the consequences of those ill-considered changes today.

"We will give the Bank responsibility for the prudential regulation of all of our banks, building societies, and other significant financial institutions including insurance companies.

"Crucially, this will bring together the operation of monetary policy with regulation of the banking system. The last two years have shown what happens when you try to separate central banking from an intimate involvement and knowledge of the banking system - and around the world people recognise that was a mistake.

"Above all, the culture and experience of a central bank gives it the confidence not just to insist that rules are followed but to exercise judgement."

Mr Osborne also said that like the Obama administration in the US, the Conservatives will force financial institutions to be more transparent about their retail consumer charges, providing information to consumers in a standardised way so that they can see if they would be better off switching provider.