UK: Reforming Financial Markets - Government white paper published

This afternoon the Chancellor of Exchequer delivered a statement before Parliament concerning the publication today of the white paper Reforming Financial Markets. The white paper does not propose significant change to the tripartite system of regulation although it does propose: [a] amending the FSA's statutory objectives to include financial stability and increasing the FSA's rule making and enforcement powers; [b] creating a new Council for Financial Stability. The white paper also endorses the findings of the Turner Review. 

The Chancellor's statement was followed by questions and responses from the opposition parties. The Shadow Chancellor, George Osborne MP, was critical of the tripartite framework and stated that he would soon publish alternative proposals which would give a much greater role to the Bank of England in regulating banks.

With regard to corporate governance matters, the white paper notes:

It is also clear that there must be major changes to the way that bank boards function. Improved risk management at board level, changes to the balance of skills, experience and independence, and a better approach to audit, risk and remuneration are required. Institutional shareholders need to be more actively engaged in monitoring the board of the bank in which they have invested. The FSA has already taken action to vet potential board members of banks more thoroughly.

The FSA have proposed the incorporation of a Code of Practice on remuneration into the FSA's Handbook and to apply it to banks, building societies and broker dealers. The Code has a general requirement that ‘a firm must establish, implement and maintain remuneration policies, procedures and practices that are consistent with and promote effective risk management’. This is backed up by ten principles covering the key areas of governance, performance measurement and the composition of remuneration packages. The FSA will continue to play an active role in the remuneration discussion at the EU and international level.

The Chancellor has, furthermore, asked the FSA to provide an annual report on remuneration practices, including compliance by firms with the new Code. This report will assess whether remuneration practices are likely to lead to a build up of systemic risk, and make recommendations for action if this is thought to be the case.

The Chancellor has also asked Sir David Walker to conduct a review of the corporate governance of banks and other financial firms, to recommend how financial institutions can better equip themselves to respond to lessons learnt from the crisis. Sir David’s interim report is due shortly [next week] and the Government looks forward to responding".