Bank of England to become one of world's most powerful central banks

Breakup of Financial Services Authorities puts Bank in charge of regulation and crisis avoidance in biggest shakeup since 1997

The Bank of England will be given regulatory powers taken away from it when it was given independence in 1997. Photograph: Ben Stansall/AFP/Getty Images

The Bank of England will become one of the most powerful central banks in the world on Monday after the biggest overhaul of financial regulation since 1997.
As part of sweeping changes that will undo the system set up by former chancellor Gordon Brown, the Financial Services Authority (FSA) has been replaced with three new bodies – the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
Slammed for being "asleep at the wheel" during the financial crisis, the so-called tripartite structure – comprising the FSA, the Treasury and the Bank of England – has made way for a new system to regulate the financial sector and ward off future crises.
With the FPC and the PRA sitting within the Bank, it has taken on vast powers and responsibility not just for regulating lenders, but also spotting and preventing possible financial shocks. It marks a return of regulatory powers to the Bank, which were taken away when it was given independence in 1997. George Osborne is hoping the shakeup will plug the gap in the tripartite system that left no one taking responsibility to monitor risks to the financial system as a whole, such as in the pre-2007 lending boom.
He criticised the structure for being "incoherent" and "without clear lines of accountability".
The lack of oversight led to the excessive lending that sparked a sub-prime mortgage crisis and in turn the credit crunch and banking meltdown. Regulators worldwide have now accepted the need to have macro responsibilities to avoid a repeat of the financial crisis.
There were also specific faults within Britain's financial regulations that the new system aims to iron out. With its self-proclaimed "light touch" regulation, the FSA failed to rein in banks. It later admitted mistakes were made before the collapse of Northern Rock, while it appeared woefully inept in preventing the banking scandals that have emerged in recent years – such as the Libor interbank rate-rigging affair and mis-selling of payment protection insurance (PPI) and interest rate swaps to small businesses.
There are hopes the new system will have more teeth.
With the FPC acting as the pillar of the new regime, it will take the broadest overview of financial regulation. The PRA will ensure banks and insurers have enough capital and liquidity, while the FCA will protect consumers by promoting effective competition and regulating financial services companies.
PRA chief Andrew Bailey has already promised a more intrusive approach to regulation of the 1,700 financial institutions under his remit.
His counterpart at the FCA, Martin Wheatley, has also pledged to clean up the sector with new powers to suspend or ban products.
The FCA, which will sit outside the Bank, will also be able to fine firms.
But there are concerns the Bank will become too powerful, given that it also has responsibility for monetary policy in the UK.
In a stark warning, the former head of Germany's central bank said recently it risked impacting its independence.
Ex-Bundesbank boss Axel Weber, who currently chairs Swiss group UBS, said he "flatly refused" to take on a regulatory remit when he was head of the bank due to concerns over independence.
However, the new structure heralds a new era for UK financial regulation after the banking crisis.
There will also be a change at the top of the Bank, with Canadian Mark Carney taking over as governor from Sir Mervyn King in July.