HM Treasury News Release
49/97					          20 May 1997
______________________________________________________________
 

    THE CHANCELLOR'S  STATEMENT TO THE HOUSE OF COMMONS
                 ON THE BANK OF ENGLAND
                                
                                
The Chancellor of the Exchequer, Gordon Brown, today made a
statement to the House of Commons on the Bank of England. 
Attached to this Press Release are: 


 -   The text of the Chancellor's statement; and


 -   A copy of the Chancellor's letter to Sir Andrew Large,
     Chairman of the SIB.  

STATEMENT ON THE BANK OF ENGLAND

With permission Madam Speaker, I would like to make a
statement.

   2.This Government's central economic objective is high and
stable levels of growth and employment.  This can only happen
if we build a solid foundation of monetary and fiscal
stability.

   3.I am determined to set the British economy on a new long-
term course by taking the correct long-term decisions.

   4.The previous arrangements for monetary policy were too
short-termist, encouraging short but unsustainable booms and
higher inflation, followed inevitably by recession.  This is
why we promised in our election manifesto to "...reform the
Bank of England to ensure that decision-making on monetary
policy is more effective, open, accountable and free from
short-term political manipulation."

   5.On 6 May, I announced the means by which we would achieve
this promise, by giving the Bank operational responsibility
for setting interest rates, and on the first economic day in
the new House, I have sought the opportunity to explain my
proposals for legislation that will be introduced to and fully
 debated in the House.  The House will understand the length of
the statement reflects the significance of the changes I
propose.

   6.In undertaking these reforms, I have taken account of the
recommendations of the Treasury and Civil Service Committee's
report on the Role of the Bank of England, which stressed the
need for clear lines of accountability and answerability for
monetary policy to Parliament.  As the Committee stated in
1993:

     "The present system for determining monetary policy does
     not, in practice, allow for clear Parliamentary
     accountability." 

   7.The reforms represent a British solution to meet British
needs.  Their main elements are as follows:

     The Bank's monetary policy objective will be to deliver
     price stability and, without prejudice to this objective,
     to support the Government's economic policy, including
     its objectives for growth and employment.

     The Government will set the inflation target for the
     Bank.  This target will be reviewed annually, and
     announced in the Budget.  The Bank will have operational
     responsibility to achieve the inflation target. 

     Decisions on what actions need to be taken to achieve the
     target will be taken by a Monetary Policy Committee, on
     the basis of a majority vote.  The committee will include
     the Governor and two deputy Governors nominated by the
     Government, and two senior Bank officials with management
     responsibility for monetary policy and market operations. 
     But it will also include four other expert members
     appointed from outside the Bank by the Government.  The
     committee will be responsible for taking full account of
     regional and sectoral information in its monetary policy
     decisions. 

     The Monetary Policy Committee will meet on a monthly
     basis.  All decisions on interest rates will be announced
     immediately after the meeting.  The proceedings of the
     meetings, including votes, will be minuted, and published
     within six weeks.
          
          The Monetary Policy Committee's performance will be
     reviewed by the Court of the Bank.  The Court will be
     substantially reformed, so that it is able to take
     account of the full range of industrial and business
     view, and for the first time is fully representative of
     the whole of the United Kingdom.

     The Bank will be expected to report to the Treasury
     Select Committee and to the House.  I will write to the
     Chairman of the Committee suggesting that the Bank's
     Annual Report be debated in the House, and that the Bank
     appear four times a year before the Committee to give
     evidence and answer questions on its Inflation Report, so
     that the Bank's performance will be able to be judged by
     Parliament.

     There will be a review of the Bank's financial
     arrangements, to ensure that the Bank meets the highest
     standards of accountability and transparency, in the
     light of its new responsibilities.  The Bank's role in
     debt management will be transferred to the Treasury.

   8.The Government will retain the right to override the
operational independence of the Bank in extreme economic
circumstances, for a limited period only, and subject to
ratification by the House.  I would expect this right to be
exercised rarely if at all.  These requirements mean that
while the Government retains clear responsibility to
Parliament for the goals of monetary policy, the Bank will be
clearly accountable for the operation of monetary policy, and
will be required to report to Parliament on a regular basis. 
In addition, through the regular publication of the minutes of
the Monetary Policy Committee's meetings, and the Bank's
quarterly Inflation Report, the public will have sufficient
information to judge the performance of the Bank against the
target it is set.

   9.I intend to introduce legislation enacting these changes
as soon as possible, for the House to consider.  In the
meantime, the Governor - for whose cooperation in this I am
grateful - has agreed on a transitional basis to implement the
new procedures for decision-making, and I will be nominating
the four new members of the Monetary Policy Committee.

  10.I now turn to the question of prudential supervision.  Of
course this concerns not just the Bank of England, but also
the reform of the Financial Services Act.

  11.Financial services lie at the heart of a modern, dynamic
economy.  The effectiveness and competitiveness of all our
industries depends on the availability and efficiency of the
increasingly wide array of financial products and services,
from pensions and insurance to securities and derivatives. 
Our standard of living depends on them, particularly in
retirement.  Financial services are often complex and long
term.  Products, markets and advice must therefore be fair,
honest, transparent and command confidence.

  12.It has long been apparent that the regulatory structure
introduced by the Financial Services Act 1986 (FSA) is not
delivering the standard of supervision and investor protection
that the industry and the public have a right to expect.  The
current two tier system splits responsibility between the
Securities and Investments Board (SIB) and the Self Regulatory
Organisations (SROs), together with the Recognised
Professional Bodies This division is inefficient, confusing
for investors and lacks accountability and a clear allocation
of responsibilities.  Reform is long overdue to simplify the
delivery of financial service regulation, and this was a key
commitment in our Business Manifesto.  At the same time, it is
important to preserve the beneficial aspects of the current
Act, including practitioner involvement and differential
levels of regulation for wholesale and retail business.


  13.I can announce today that work is to start immediately on
the legislation needed to simplify and reform the regulatory
system at an early opportunity.  I am announcing our
intentions in advance to give the  SIB and the self-regulating
bodies the opportunity to work on the detailed implementation
of our proposals, to ensure the smoothest possible transition
to the new regime.  I am confident that the simpler system we
are proposing will reduce compliance costs, and increase
public confidence in the regulatory regime.

  14.But simply reforming the Financial Services Act is not
enough in itself.  In today's world of integrated global
markets, the financial services industry transcends
geographical and political boundaries.  The regulatory
response must meet this challenge.  The UK financial services
industry needs a regulator which can deliver the most
effective supervision in the world.

  15.You cannot ensure the success of British financial
services in the 21st century without modernising arrangements
for the protection of investors.  My reforms are essential to
ensure the future confidence of investors large and small, and
the future success of the increasingly integrated financial
services industry on which so many British jobs rely.

  16.At the same time it is clear that the distinctions
between different types of financial institution - banks,
securities firms and insurance companies - are becoming
increasingly blurred.  Many of today's financial institutions
are regulated by a plethora of different supervisors.  This
increases the cost and reduces the effectiveness of
supervision.

  17.So there is a strong case in principle for bringing the
regulation of banking, securities and insurance together under
one roof.  Firms organise and manage their businesses on a
group-wide basis.  Regulators need to look at them in a
consistent way.  This would bring the regulatory structure
closer into line with today's increasingly integrated
financial markets.  It would deliver more effective and more
efficient supervision, giving both firms and customers better
value for money.  This would improve the competitiveness of
the sector and create a regulatory regime to meet the
challenges of the twenty-first century. 

 18.So I have decided to take the opportunity presented by
the Bank of England Bill to reform the regulatory system. 
Responsibility for banking supervision will be transferred, as
soon as possible after passage of the Bill, from the Bank of
England to a new and strengthened Securities and Investments
Board, which will also, as a result of forthcoming legislation
take direct responsibility for the regulatory regime covered
by the Financial Services Act.  

 19.SIB will become the single regulator underpinned by
statute. The current system of self-regulation will be
replaced by a new and fully statutory system, which will put
the public interest first, and increase public confidence in
the system.

 20.The Governor of the Bank of England will be fully
involved in drawing up the detailed proposals.  The Bank will
remain responsible for the overall stability of the financial
system as a whole.  The enhanced Securities and Investments
Board will be responsible for prudential supervision.

 21.As the House will already be aware, Sir Andrew Large, the
current Chairman of the SIB, has decided to step down.  I
would like to take this opportunity to pay tribute to him, and
thank him for his contribution to financial regulation over
the past years. 

 22.It is crucial to the success of these reforms that we
have a new Chairman with the stature and calibre to implement
them quickly and smoothly.  Because of the importance I attach
to drawing on the Bank of England's expertise in these areas
the Governor and I have asked Howard Davies, the Deputy
Governor of the Bank, to be the first Chairman of the enhanced
Securities and Investment Board responsible for integrating
the supervision of banking and financial services.  I am
pleased he has agreed.  He is of course already a member of
the SIB Board.  He will take over as Chairman when Sir Andrew
Large steps down.  Two new Deputy Governors of the Bank will
be appointed in due course.

 23.I have today written to Sir Andrew Large with further
details of my proposals.  I have placed a copy of this letter,
together with my earlier letter to the Governor on monetary
policy, in the Library of the House.

 24.I am confident that the new arrangements, taken together,
will enhance significantly the credibility of UK monetary
policy and improve the workings of the financial markets. 
That means lower long-term interest rates and higher growth
and investment.  Indeed, we have already seen long-term
interest rates fall by over 30 basis points since my
announcement a fortnight ago, reflecting the positive reaction
to the new monetary framework.

 25.These reforms are founded on sound economic principles. 
This is a long-term policy for long-term prosperity.  It
provides the building blocks for a new economic strategy for
monetary and financial stability aimed at enhancing longer
term growth and prosperity.  I am confident that their success
will be reflected in a stronger and more robust economy for
the long term.


May 1997



Sir Andrew Large
Chairman
The Securities and Investments Board
Gavrelle House
2-14 Bunhill Row
LONDON
EC1Y 8RA



REFORM OF FINANCIAL REGULATION


As you are aware, I will be announcing today important changes to
the institutional framework which in future will deliver
financial regulation and supervision.

Responsibility for banking supervision will, at the earliest
opportunity, be transferred from the Bank of England to the
Securities and Investments Board.  The transfer will be effected
under the Bank of England Bill which will also take through the
legislation to enact the monetary policy changes which I
announced two weeks ago.  As agreed between us, the Treasury, the
Bank and the SIB will work closely together over the coming
months on the details of the transfer.

This will be an important step in the establishment of a single
regulatory body to oversee all the financial markets and to bring
the regulatory structure much closer to the way in which today's
commercial markets and companies are organised and managed on an
integrated basis.

I am also announcing the Government's plans for reform of the
financial services regulatory structure.


Financial services lie at the heart of a modern, dynamic economy. 
The effectiveness and competitiveness of all our industries
depends on the availability and efficiency of the increasingly
wide array of financial products and services.  The standard of
living of all of us depends on them, particularly in retirement. 
Financial services are often complex and long term.  Products,
markets and advice must therefore be fair, honest, transparent
and command confidence.

It has long been apparent that the regulatory structure
introduced by the Financial Services Act 1986 (FSA) is not
delivering the standard of supervision and investor protection
that the industry and the public have a right to expect.  The
current two tier system splits responsibility between the
Securities and Investments Board (SIB) and the Self Regulatory
Organisations (SROs), together with the Recognised Professional
Bodies.  This division is inefficient, confusing for investors
and lacks accountability and a clear allocation of
responsibilities.  Reform is long overdue to simplify the
delivery of financial service regulation.  At the same time, it
is important to preserve the beneficial aspects of the current
Act, including practitioner involvement and differential levels
of regulation for wholesale and retail business.

The Government is committed to reform, as promised in its
manifesto, to reduce the chance of events such as the mis-selling
of personal pensions happening again.  It has not been possible
to introduce legislation the first Session of Parliament due to
the heavy legislative programme announced in the Queen's Speech. 
But work is to start immediately on the legislation needed to
simplify and reform the regulatory system at an early
opportunity.

The legislation will deliver the Government's manifesto
commitment to give the Securities and Investments Board direct
responsibility for the regulatory regime covered by the 1986 Act. 
It will do this principally by transferring to it all the
functions of the SROs, so establishing the SIB as the single
financial services regulator, with full responsibility and
accountability.  The legislation will also give to the SIB the
full range of powers and discipline, established in statute,
which are currently available to the SROs under contract law.


I am concerned that the transition to the new arrangements should
be as speedy and as smooth as possible, so as to maintain the
confidence of investors, the financial services industry and the
regulators.  I am also anxious to use the period leading up to
legislation to full effect, so that we will be ready to implement
the new regulatory regime as soon as the legislation is enacted. 
There is much practical planning work to be done at the
organisational level to ensure that the simplification of the
regulatory bodies is successful and that the transition to the
new regime is smooth and efficient.  Some of the changes will
have to await  legislation.  But I hope that with the full
cooperation of the SROs we will be able to embark on the
transition and even begin to reap some of the gains in
anticipation of the legislation.

I would be grateful if the Securities and Investments Board could
take this work forward and project manage this process of
implementation, working with the SROs and the financial services
industry.  This exercise will require the close cooperation of
all the regulatory bodies and authorised firms.  I have no doubt
that you will receive their full support.  The Chief Secretary
has today written separately to the Chairmen of the Securities
and Futures Authority, the Investment Management Regulatory
Organisation and the Personal Investment Authority.  I am
enclosing copies with this letter.

The SIB and SROs have primary responsibilities to deliver
standards of regulation, supervision and investor protection as
required by the Financial Services Act.  Consistent with these
responsibilities, I hope that you will be able to give this work
the highest priority.

I would be grateful if, by the end of July, you could develop an
implementation plan to carry the work forward over the next year. 
I would hope that the plan would cover both logistical (eg
accommodation and co-location) and organisational (eg the
structure of the new organisation, how to preserve practitioner
input and the regulatory differential between wholesale and
retail business) issues.  Also that it would look both at the
eventual architecture when the legislation is in place and at
transitional, intermediate proposals.  Ahead of the legislation,
we need to capture, as far as possible, the benefits which will
flow from fuller integration of operations and greater
harmonisation of policies between the SROs and between the SROs
and the SIB.

We look forward to reviewing progress and plans with you at the
end of July.

I am copying the letter and enclosure to Nicholas Durlacher
(Chairman of the Securities and Futures Authority), Charles
Nunneley (Chairman of the Investment Management Regulatory
Organisation) and Joe Palmer (Chairman of the Personal Investment
Authority).





    GORDON BROWN