London: George Osborne will risk a schism with the Liberal Democrats when he strips the Financial Services Authority (FSA) of the majority of its powers in a shakeup of City regulation to be announced later this month.
The chancellor will use his Mansion House speech on June 16 to give the Bank of England the pivotal role in preventing a rerun of the financial crisis of the last three years.
Government sources said Osborne would use his speech, one of the big set piece events of the financial calendar, to "put flesh on the bones" of the coalition agreement on financial regulation. This called for the Bank of England to be given the control of macroprudential regulation supervision, a "big picture" assessment of prevailing conditions in the City, together with an important say in the supervision of individual banks.
While Osborne's aides refused to be drawn on whether the FSA would be scrapped entirely, Whitehall sources said it would lose its independent role in the shakeup. Complete abolition was being considered by the Treasury, the sources said, despite support for the FSA's continued existence from the Lib Dems.
Osborne remains convinced that the tripartite system of regulation set up by Gordon Brown in 1997 with control split between the Bank, the Treasury and the FSA was a key factor in the problems faced by the UK during the buildup to the financial crash.
Planned reforms
Brown moved quickly and secretly to remove banking supervision from Threadneedle Street within a month of the 1997 election and Osborne is also keen to announce his planned reforms as soon as possible. Both the chancellor and David Cameron believe that the trend internationally is for regulatory power to be concentrated in central banks.
In the hours after the coalition government was formed last month it appeared that the chancellor had been forced into a climbdown and bowed to pressure from the Lib Dem business secretary, Vince Cable, to reprieve the FSA.
However, plans are well advanced in the Treasury to proceed with winding down the FSA and handing much of its power to the Bank of England.
The chancellor and other Treasury officials have failed to clarify their attitude to the FSA and although the Queen's speech promised to hand "control of macroprudential supervision" and "oversight of microprudential supervision" to the Bank, few in the City understand what this means. Asked about the FSA when the coalition launched its programme for government last month, Osborne did not clear up the confusion.
Focus on deficit reduction
UK Chancellor of the Exchequer George Osborne said the government is committed to reducing the country's budget deficit and he will show people there will be stability in the future when he announces the budget.
Osborne, speaking in Shanghai, said that the UK and China share a common objective of promoting free trade, and that his country hopes to continue to strengthen ties with the Chinese government.
