Q&A: Osborne's financial regulation reforms

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The chancellor says his goal is to radically improve financial regulation

Chancellor George Osborne has announced sweeping changes to the way financial regulation will work in the UK.

He is abolishing the current tripartite system of regulation, effectively dismantling the Financial Services Authority and placing more power in the hands of the Bank of England.

BBC News takes a detailed look at the proposed reforms.

George Osborne says the tripartite system "failed spectacularly" in its mission of ensuring financial stability.

The system divides responsibility between the Bank of England, the Financial Services Authority (FSA) and the Treasury.

The Bank of England is responsible for keeping an eye on the money markets, the FSA supervises the individual banks and looks after the interests of consumers, while the Treasury provides the public money for this.

In a crisis, it is the FSA that is supposed to spot that a bank is failing. The Bank of England then decides what to do about it, and the Treasury takes decisions to do with public funds and is the body that nationalises banks if necessary.

But critics say the problem with the old system was that it was not clear who would be in charge in a crisis and the tripartite financial authorities needed to communicate better with each other.

"No one was controlling levels of debt, and when the crunch came no one knew who was in charge," Mr Osborne said in his first Mansion House speech.

The FSA, in particular, has also been criticised for not doing enough to prevent or limit the crisis in the financial markets.

The government is dismantling the FSA and giving the Bank of England control of macro-prudential regulation and oversight of micro-prudential regulation.

It will create a new Financial Policy Committee within the Bank of England.

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The Bank of England will be the top regulator in the new system

It will create two new regulators. The first, a Prudential Regulation Authority, will be charged with regulating banks and other financial institutions, and will operate under the Bank of England.

The second will be a new Consumer Protection and Markets Authority.

It will also create a new single agency to tackle economic crime.

All the new bodies will be responsible to parliament. Financial Secretary Mark Hoban has said, "Never again can someone ask who's in charge and get no answer."

The government says the transition to the new system will be completed by 2012. Hector Sants, the current chief executive of the FSA, will oversee the transition and will then head the new prudential regulator.

Mr Osborne has also announced that an independent commission will look into the possible break-up of big banks.

The Financial Policy Committee (FPC) will monitor the economy, looking at the macro-economic and financial issues that may threaten stability.

It will address any risks it identifies by directing the new Prudential Regulation Authority to take regulatory action with respect to any financial firm.

Mervyn King, the governor of the Bank of England, will chair the new committee.

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Mervyn King will chair both the FPC and the PRA

The Prudential Regulation Authority (PRA) will regulate sectors such as deposit-taking High Street banks, insurers and investment banks.

The PRA will be also chaired by Mervyn King. Hector Sants, the new deputy governor for prudential regulation, will be its chief executive.

The Consumer Protection and Markets Authority (CPMA) will take on the FSA's responsibility for consumer protection and conduct regulation.

Designed to be a consumer champion, it will seek to ensure transparency in financial services and markets. Financial Secretary Mark Hoban says the CPMA will have a "tougher, more proactive approach" to regulating conduct.

The CPMA will also have responsibility for the Financial Services Compensation Scheme.

The new independent banking commission will be chaired by Sir John Vickers, a former member of the Bank of England's Monetary Policy Committee.

It will take at least a year to review whether casino-style investment banks should be split from deposit-taking institutions on the High Street.

It will consider the competitiveness of the City, whether power has become too concentrated among some leading institutions, and whether there should be restrictions on bank activities.

With the new banking commission looking at the competitiveness of financial institutions, the breaking up big banks will become a possibility.

However, the British Bankers' Association (BBA) issued this warning: "It is clear that other countries are in favour of universal banks and in the crisis they have been the most stable, with the so-called narrow banks being the ones that failed most.

"A modern economy requires banks of all types and sizes. Breaking banks up here would quickly be felt by individuals and companies who would pay more for their mortgages and finance."

Shadow chancellor Alistair Darling has said that the failure of the old system was down to individuals and not the structure.

Changing the architecture will not make any difference unless you have people with the right skills in place, he says.

Richard Lambert, the director general of the employers' group the CBI, has also said that he does not think structure was the critical issue in terms of regulation.

The BBA also says there are still questions that need to be resolved such as the relationship between the Monetary Policy Committee and the Financial Policy Committee and how the FPC will be accountable for its actions.

"As there is no equivalent to the MPC interest rate target for financial stability, [the FPC] will need to exercise considerable judgement over when to intervene," says Angela Knight, chief executive of the BBA.

The biggest concern about the changes lie in the two-year period of transition to the new system, says BBC business editor Robert Peston, citing concerns that the FSA might not have its eye on the ball.

However, he says that persuading chief executive Hector Sants and chairman Lord Turner to remain at the FSA for this period was "quite a coup".

But he warned that Mr Osborne should expect criticism if another financial storm emerged and regulators were too preoccupied with the minutiae of the financial system overhaul to react properly.