Economic News

LONDON (ShareCast) - Business Secretary Lord Mandelson will tonight reject calls from the Bank of England to give it more regulatory powers and instead confirm that the Financial Services Authority be the main instrument for UK financial regulation

Mandelson, who released the text of his speech this evening to the British Bankers Association, said the FSA will retain its sole power over direct regulation, though the Bank may have a greater say going forward over financial stability matters.

"We need to keep prudential and conduct of business expertise in one place, in a regulator capable of seeing all parts of the picture at once. That regulator has to be the FSA," Mandelson said.

In his speech, Mandelson will also warn bankers that reform would have to continue even if the economy improved.

"I have never felt such a sense of distrust and anger between the financial sector and the rest of the economy," he said in the speech.

New proposals will include new capital rules that match the economic cycle and account better for different types of risk, more controls over derivatives and a "fundamentally different approach to risk and failure."

"While I think there is an argument for the Bank taking a more direct role in financial stability issues, I don't support a twin peaks system. I believe the lesson of the last year is that we need a stronger regulator, not a weaker one," he said.

The speech is likely to inflame an already tense situation between Bank governor Mervyn King and the Treasury over the current tripartite regulatory system.

The governor stunned MPs last week when he said that he had not been consulted by the Treasury on the upcoming regulatory changes, which are now likely to be announced next week.