The Bank of England (BoE) on Wednesday called on Britain's new coalition government for "careful thought and discussion" on reforming Britain's financial system and warned against too much haste.
Britain's new Prime Minister David Cameron is expected to water down initial plans to dismantle the Financial Services Authority (FSA), which has been lambasted for failing to halt banker excesses that helped spark the biggest financial crisis in a generation.
Cameron's historic coalition of Conservatives and Liberal Democrats — which came to power on Tuesday evening after five days of fierce negotiation — plans instead to return some of the FSA's key supervisory powers to the central bank.
But the BoE will not be dealing with day-to-day supervision of banks, meaning the FSA is likely to survive with a reduced role.
"The agreement does suggest that the Bank of England will be asked to be responsible for macro prudential regulation (and) it will have an oversight role in micro prudential regulation," Bank of England Governor Mervyn King told a news conference.
"Right through this I have always said that what concerns me most is what the nature of regulation is, not who does it. I can reiterate that today. I have never made any pitch for any particular responsibility but we are concerned about its nature.
But he called on Britain's first coalition government since World War Two to engage in "careful thought and discussion".
"It seems the FSA is surviving, albeit with slightly less influence," said Jan Putnis, a partner at British law firm Slaughter and May. "It's a classic compromise and, of course, rooted in classic compromises are classic fudges and potential confusion."
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Any survival of the FSA will spell less upheaval for the financial sector at a crucial time when the EU is adopting new rules on supervision, hedge funds, derivatives and bank crisis management.
But bankers voiced concerns about how much power the coalition government would hand to Vince Cable, the Liberal Democrats' former treasury spokesman, who has been among the most outspoken critics of banker greed and excesses.
The new government has already said it will instruct a commission to report back in one year on whether to support one of the Liberal Democrats' key demands on banking reform: whether to separate retail banking from "casino-style" investment banking. It also wants to introduce a levy on bank liabilies.
"The new coalition makes the regulatory outlook for UK banks rather murky," noted Mike Trippitt, an analyst at Oriel Securities, adding that regulatory uncertainty was further clouded by the precise role Cable would take in the government.
Ahead of a news conference at which Cameron and Liberal Democrat leader Nick Clegg might outline further plans for the sector, the British Bankers' Association lobby group declined to be drawn on its views.
A spokesman said only: "More important than which institution makes the rules is the need for them to be the right rules and for there to be proper international agreement on the main issues of banking reform going forward."
The Association for Financial Markets in Europe, a new international industry lobby group, said the key would be close cooperation between all supervisory bodies.
"That way we get consistency in policy and practice, which is what we need," an AFME spokesman said.
