The Treasury’s long-awaited document on financial regulation attempts to champion consumer rights, boost competition and set out a framework for regulatory reform to strengthen the financial system.

Most of the Treasury’s document, entitled Reforming Financial Markets, has been trailed in the media. But there are a few surprises in its 170 pages.

Pre-paying for disaster

A major standout - which will be opposed by the industry - is that banks will be forced to put up cash in advance to fund the compensation scheme which is used to cover losses suffered by depositors if a bank collapses.

At the moment, the so-called Financial Services Compensation Scheme (FSCS) is funded by a loan from the Treasury, which banks will have to repay along with interest.

Alistair Darling said today that that a “better long term approach is pre-funding” so that the money is there “before a major failure occurs”.

Banks are against pre-funding, arguing that their stretched finances cannot take the strain of a major lump sum paid into the FSCS.

The Treasury has given some ground, saying pre-funding will not be introduced before 2012.

Splitting responsibility

The Treasury document devotes a lot of space to financial stability.

There has been a huge amount of speculation in the run up to the publication of the paper on how Treasury mandarins would split responsibility for preserving stability between the Bank of England and Financial Services Authority (FSA).

The Treasury will introduce legislation in the autumn, to formally give the FSA responsibility for financial stability alongside the Bank, which was given this role under the Banking Act in February.

The Treasury will also create a new Council for Financial Stability, with the Chancellor as chair, plus the head of the FSA and Bank.

In an attempt to avoid turf wars between the Bank and FSA, the Treasury said minutes of the council’s meetings would be published every three months.

However, the measure might not be meaningful as the Treasury has reserved the right to keep some of the minutes secret if they are on “market sensitive” issues for banks.

Some accused the Government of introducing unnecessary and confusing extra levels of regulation.

The new Council for Financial Stability will be separate from a recently created Financial Stability Committee, which sits within the Bank.

At an international level, the will also be a Financial Stability Board, which will have a mandate from the G20 group of countries to oversee very large banks with systemic importance around the world.

There was criticism from the Conservatives at the Treasury’s decision to stick to the Labour-created tri-partite system, which shares out responsibility for financial regulation between the Treasury, FSA and Bank.

The Conservatives said ultimate authority for ensuring the financial system is stable should be transferred to the Bank.

Michael Wainwright, a partner at Eversheds, the law firm, noted that the Government was reluctant to hand over ultimate power to the Bank because such a move may have strengthened the European Central Bank’s hand at a Europe-wide level.

“This is unattractive to the UK, because it has very little influence in or on the ECB, in part because the UK has not adopted the euro,” Mr Wainwright said.

Competing for choice

The Treasury paper places a lot of emphasis on competition and says it will take action to increase choice for consumers, through measures such as making it easier for customers to switch between banks.

However, Brussels has warned that it likely to force state-controlled banks Llolyds and Royal Bank of Scotland to sell assets, on the grounds that the billions of pounds of state assistance they have received has distorted the market.

The Treasury said in its document that there is not a huge amount of evidence that the dominant market share created by the merger of Lloyds and HBOS has hurt competition.

But the Treasury adds that it will organise an “orderly exit” from the banks in which it owns massive stakes, as part of its drive to improve competition.

Various measures to help consumers have also been proposed. Among them are increasing financial education in schools and making more independent advice available, with the costs covered by a levy on the financial industry.

Controlling pay

The Treasury also deals with the emotive issue of bankers’ pay, saying compensation must be linked to the “long-term sustainable growth” of a company, rather than its “short-term, paper profits”.

If will be up to the FSA to police pay, under a Code on remuneration that it is currently drawing up.

The FSA will have to provide an annual report on remuneration to the Treasury.

As with many of the measures proposed by the chancellor today, this suggestion may be ripped up and changed should the Conservatives win the general election next year.

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