LONDON The government launched its new system of financial supervision on Tuesday, hoping that two new regulators will succeed where a single one failed in preventing banking crises and protecting consumers from getting fleeced.
Experts say the real test of the new system will not come until boom times return and regulators get a chance to prove they have the mettle to rein in excesses.
The reform scraps the 12-year-old Financial Services Authority, which took the blame for failing to head off the 2008 financial meltdown or to prevent the misselling of products to customers leading to billions of pounds in compensation claims.
It is replaced by two new bodies formally launched on Tuesday, a Prudential Regulation Authority (PRA) to make sure banks are sound, and a separate Financial Conduct Authority (FCA) to ensure they do not mistreat customers.
"The changes coming into effect today are the start of resetting the system of financial regulation in our country," Chancellor George Osborne said on Tuesday.
"They represent a fundamental change in how financial services will be regulated in the future."
The PRA, a subsidiary of the Bank of England, will ensure that banks, insurers and building societies hold enough capital and abide by rules to curb bonuses and monitor risk.
The FCA, a standalone body which will be based in the former FSA's building in London's Canary Wharf, will supervise behaviour at all financial institutions and will go after misconduct with tougher powers and higher fines.
Britain was forced to pump 65 billion pounds into Royal Bank of Scotland (RBS.L) and Lloyds (LLOY.L) to keep them afloat during the 2007-09 financial crisis, prompting public outrage and calls for reform.
British banks have also been hit in recent years by huge settlements over their misbehaviour, from ripping off customers with inappropriate products, to manipulating the LIBOR benchmark interest rate, to lax standards in preventing money laundering.
The hope is that the new "twin peaks" system will be able to sound the alarm on risky activities much earlier to shield taxpayers in future.
Sceptics say that a new system would not automatically provide better supervision. Since 2007, the FSA has already ditched its discredited - and then government-sanctioned - "light touch" approach to become one of the world's toughest regulators, using its existing structure.
"If one goes back to 2008 and considers whether this would have made a real difference, that is debatable," said Peter Snowdon, a financial services lawyer at Norton Rose.
"The new system is designed to deal with the problems that happened yesterday. No regulatory system has managed to be entirely successful in any crisis," Snowdon said.
FIGHTING THE LAST WAR
In addition to the two new bodies, the restructuring also gives the Financial Policy Committee at the Bank of England formal authority to set the direction for supervision and look out for risks to stability, such as property bubbles.
The committee is chaired by the central bank governor and includes the heads of the two new regulatory bodies.
Last week it ordered Britain's main banks to swell their capital buffers by a further 25 billion pounds.
The new bodies are expected to bring in a more interventionist, judgement-led style of supervision aimed at improving culture and standards.
The FCA has said it will examine how much money banks make from products to make sure customers are not being ripped off.
"The big difference from today will be that firms will place a greater focus on collaborative relationships with customers, which involves them from start to finish in financial product design," said David Kenmir of consultancy PwC.
Some FPC members say their real test will come when boom times return and there is a need to take away the punchbowl from the party by calling for tighter credit. They will have to resist political pressure to back off.
Some of the FPC's hardliners have just been replaced with new members, who are seen by critics as being more friendly to banks and business.
Banks say it is time to move on from banker bashing.
"The new posse of regulators has been welcomed by the industry, but the challenge for them is to ensure they don't damage the interests of the economy by going too far fighting the last war," Anthony Browne, chief executive of the British Bankers' Association, told the Telegraph newspaper on Tuesday.
Lawyers say the new system's success will hinge on how well the new regulators work together not just in a crisis but also day-to-day to avoid bureaucracy and unnecessary costs.
The PRA will supervise 1,700 banks, insurers and building societies. The FCA will supervise behaviour at the same firms and will have oversight of 26,000 firms in total, including brokers, investment advisers and money managers.
"Unfortunately we have already seen evidence of overlap and duplication," said Iain Pickard, a partner at RSM Tenon advisory firm.
(Editing by Peter Graff and Carmel Crimmins)