Yesterday, Britain’s newly-formed coalition government released details on several of the compromises arranged between the ruling Conservative party and the third-place finisher, the Liberal Democrats. While the Conservatives garnered the most votes and more seats than any other party in last week’s election, they failed to win a clear majority. They are now working feverishly with the Lib Dems to retain sufficient support to control Parliament.
Included in the list of agreements, was a formal arrangement that has the Bank of England assuming overall responsibility for regulating the financial industry. The Financial Services Authority (FSA) will now provide day-to-day supervision of individual lenders and is expected to report to the Bank.
This is a marked change to the Conservative party’s former position when it argued last summer for the outright dismantling of the FSA with some of its resources channeled into a new agency to be called the Serious Fraud Office. This move had been opposed by the Lib Dems who believed reducing market risk could be best achieved by forcing lending institutions to separate their investment banking from their deposit-taking activities. The Lib Dems argued that this would prevent a reoccurrence of the risky lending practices that led to the recession without weakening regulatory oversight.
The Conservatives on the other hand, felt the proposed “Volcker Rule†under consideration in the U.S. offered a better approach to reign in the risk-taking habits of lending institutions. Under the regulations being discussed in the U.S., new rules restricting “prop†(proprietary) trading would prevent banks from speculating in certain types of investments if not conducted directly on behalf of a client.
The compromise appears to settle the future of financial regulation in the UK for the time-being at least. There remains however, the question of possible changes in the European Union and how these could affect England. The EU government has gone on record saying that it is seeking a uniform approach to regulations for the industry consistent across all of Europe. As a member of the European Union, changes within the EU would affect Britain and could force the Bank of England to adopt measures to ensure regulatory consistency with the EU.
Note however, that Britain, while a member of the European Union, is not a member of the Euro Zone which consists of those countries using the euro currency. Interestingly, a major plank of the Liberal Democrat platform during the election, was for England to formerly join the Euro Zone. This demand has since been set aside for at least five years as a Liberal Democrat concession to the coalition.
