"It is now well known that the tripartite system set up by the previous Government failed spectacularly in its mission to maintain stability. The decision to divide responsibility for assessing systemic financial risks between three institutions meant that in reality no one took responsibility. The crisis dramatically exposed this flaw and cost the taxpayer a vast amount of money.
We cannot allow another crisis such as the one we have just witnessed. Shortly after taking office, we set in train a consultation on reforming our system of financial regulation. Today, after two extensive rounds of consultation, I am presenting to the House a White Paper, including draft legislation, setting out the blueprint for a completely new system of regulation. Let me summarise the main proposals.
A permanent financial policy committee will be established inside the Bank of England. Its job will be to monitor overall risks in the financial system, identify bubbles as they develop, spot dangerous interconnections and stop excessive levels of leverage before it is too late. It has already started operating on an interim basis and is having its first formal meeting today. Subject to legislative progress, the permanent body will be in place by the end of next year.
We will abolish the Financial Services Authority in its current form and transfer its significant prudential functions to a new prudential regulatory authority that will sit in the Bank of England. The prudential regulatory authority will focus on microprudential regulation. It will bring judgment to the vital task of regulating the soundness of individual firms that manage risk on their balance sheet, particularly banks and insurance companies. But we recognise, of course, that these types of firms engage in very different types of business, which is why we propose to provide the PRA with a specific statutory objective for its insurance responsibilities.
We are bringing a new approach to protecting consumers. A new financial conduct authority will oversee the conduct of financial services firms, the operation of markets and the protection of consumers, with new powers to ban the sale of toxic products. I can confirm that as an integral part of its mission to secure better outcomes for consumers and investors, this authority will also have a new duty to promote competition. Judgment, discretion and proactive intervention will be the hallmark of our new regulators.
We are bringing forward this draft Bill for pre-legislative scrutiny, for which a Joint Committee of both Houses will shortly be convened. We are seeking valuable input from Members on both sides of this House. It is in all our interests to get this right.
Last year we also established under Sir John Vickers an Independent Commission on Banking, to resolve the debate around the structure of the banking sector in the UK. I am sure the whole House will join me in paying tribute to Sir John and his fellow commissioners for the excellent job they are doing.
The commission's interim report put forward two particularly important proposals: bail in, not bail out, so that private investors, not taxpayers, bear the losses when things go wrong; and a ring-fence around better capitalised high street banks to make them safer and protect their vital services to the economy if things do go wrong. I can confirm that the Government agree in principle with both these proposals.
Of course, we will await the commission's final report, but I can tell the House that any reforms will need to meet the following principles: all banks should be allowed to fail safely without affecting vital banking services, without imposing costs on the taxpayer, through reforms that are applicable across our whole banking industry and in a manner consistent with EU and international law. I can also confirm today that we welcome the commission's recommendations on increasing competition in retail banking and we are working closely with them to achieve this aim.
We are also taking the first steps towards normalising the Government's involvement in the financial sector. One legacy of the crisis is that today's taxpayers have a direct interest in several banks through large-scale guarantees and shareholdings. We do not believe the Government should be a long-term investor in financial institutions. It will take some time, possibly several years, before we can make a complete exit from our investments in the banks.
Today I can confirm the start of that process. On the advice of UK Financial Investments, we have decided to launch a sale process for Northern Rock. This follows extensive work over the past three months to consider potential options for returning Northern Rock to the private sector, while generating the best possible taxpayer value. The sale process will be open and transparent and in line with state aid rules. I have already written to the chair of the all-party parliamentary group on mutuals to reassure him that any interested parties can bid for it, including mutuals. This reaffirms the Government's commitment to actively promoting the mutuals sectors. This does not mean that other options to return Northern Rock plc to the private sector have been ruled out. However, I believe that at this point in time a sale process is most promising.
I also want to make the House aware that, following an application by the Bank of England to the High Court today, Southsea Mortgage and Investment Company Ltd, a very small bank, has been placed into the bank insolvency procedure. This follows a decision by the FSA that Southsea no longer satisfied the FSA's threshold conditions for operating as a deposit-taker. As such, the Financial Services Compensation Scheme has been triggered and eligible depositors with balances up to the limit of £85,000 are safeguarded. Eligible depositors with amounts in excess of the insured limit of £85,000 may be entitled to receive a share of their savings above this limit as part of the insolvency process.
Finally, I would like to update the House on the ongoing negotiations on international financial regulation. When I was in Brussels yesterday, my message was clear. We must learn the lessons of the crisis and create the foundations for stable and sustainable growth without fragmenting global markets. That is why global standards are strongly in our national interest. Much of the debate has focused on the implementation of the Basel III accord and we have been busy making the case for implementing it in full right around the world, including here in Europe. Last week's IMF assessment supported our arguments for minimum standards here in the EU, with discretion for national authorities to increase them where necessary.
When the coalition Government came into office, questions were asked about the future of banking and regulation, but they had not been answered. It has been our job to resolve them. Our goal should be a new settlement between our financial system and the British people-a new settlement where the banks support the people, instead of the people bailing out the banks. This Statement today sets out the progress we have made towards building this new settlement and the actions we are taking to complete it".
My Lords, that concludes the Statement.