Conservative bank plan sows doubt

By Huw Jones -Analysis

LONDON (Reuters) - Plans from the Conservative Party to shake up banking supervision threaten to undermine oversight of banks in the short term but could end long-standing confusion over who should close a failing institution.

Opinion polls show the party forming the next government after an election that must be held by June 2010. On Monday it put forward its ideas on applying lessons from the global financial crisis, such as better monitoring of risks across markets.

It wants to abolish the Financial Services Authority (FSA) and hand its supervisory powers back to the Bank of England which oversaw banks until 1997 when the FSA was formed.

This runs counter to the plan by the Labour government to strengthen the FSA's powers and give the central bank more say over financial system stability.

Debate over supervision is not confined to Britain. The EU's system is being shaken up and, across the Atlantic, the U.S. Federal Reserve and Securities and Exchange Commission are fighting a turf battle over future supervisory structures.

But under threat from a Conservative election victory, the FSA will find it harder to keep staff, deliver on its pledge to become a tougher, more interventionist regulator, and implement reforms it has in the pipeline, lawyers and industry specialists said.

It cold also find it harder to assert its authority when the European Union is adopting rules on supervision, hedge funds and bank capital that will affect the bloc's top financial centre.

"I find it hard to see (how) we don't get regulatory paralysis," said Simon Gleeson, a partner at Clifford Chance law firm. "If you were the French government or German regulator, how much attention would you pay to the FSA's views on anything? The answer is not a hell of a lot."