CHOPPY markets and growing European Union powers will pose big challenges for the country's transition to a new financial supervisory system, a top regulator said.
The government announced last week it would scrap the Financial Services Authority (FSA) and fold many of its powers into a new Bank of England subsidiary by 2012.
The aim is to learn from a failure to spot risks that destabilised markets and forced the government to bailout out the banking sector.
The FSA's remaining powers will be divided up between a new consumer protection and markets authority, and a new white collar crime busting agency.
"Achieving these goals will be a challenge, particularly since we are likely to be making these changes against the backdrop of a continued fragile marketplace," FSA Chief Executive, Hector Sants, told the watchdog's annual conference.
"We must recognise that going forward, particularly in respect of supervision, the national entities will increasingly become an arm of European policy and thus, effective engagement with the European agencies is absolutely critical," Sants said.
But Sants, who will head the Bank's new regulatory unit, said he was confident the transition would be successful.
The FSA has taken a tougher stance on market abuses since 2007 and is reaping success in the courts but critics fear this momentum will be at risk during the transition.
"The new structure will create separate organisations to address conduct and prudential risk. We will thus need to ensure that these new organisations carry forward both the philosophy of "outcomes based regulation" but also the necessary mechanism for making the required judgements," Sants said.
All the FSA's recent policies will be taken forward and firms were warned that the watchdog's "intensive supervisory approach" would continue.
City A.M. Reporter