By Venkata Vemuri

London, Jun 17 (IANS): British Chancellor of the Exchequer George Osborne has announced sweeping changes for stronger regulation of the UK's banking system in order to avoid a banking meltdown like the one in 2007 that plunged the country into the worst financial crisis.

In his first keynote address at the Lord Mayor's annual dinner Wednesday, Osborne outlined a new regulation policy to reform the financial system by 2012. "The plan I have set out tonight represents a new settlement between our banks and the rest of our society. A fairer settlement in which the banks support the people, instead of the people bailing out the banks."

His plan does away with the previous Labour government's 1997 policy in which the banks were supervised by the Treasury, Bank of England and Financial Services Authority (FSA). Instead, the Bank of England (BoE) will get more powers to regulate the financial sector.

Under Osborne's plan, a new regulator will replace the FSA and report to the Bank of England which will have oversight of banks, investment banks, building societies and insurance companies. The new regulator will act as an early-warning system for future financial crises, he said.

In addition, an independent financial policy committee will be created at the Bank of England to look across the economy at the macro issues that may threaten economic and financial stability and take effective action in response.

The new proposals became necessary as the previous tripartite regulatory system failed to spot the looming financial crisis that has helped saddle the country with a national debt that will hit £1.4 trillion by 2014, he said.

A new, powerful consumer protection and markets authority also will be established to regulate the conduct of every authorised financial firm providing services to consumers. Osborne explained: "It will also be responsible for ensuring the integrity of the UK's financial markets in order to preserve their reputation for transparency and efficiency as well as the UK's reputation as one of the world's leading global financial centres."

A banking commission will be established to examine what further restraint is needed on bankers' pay and bonuses. Business secretary Vince Cable said: "The banking sector... it acted as an agent for a massive increase in instability, the costs of which were unfairly borne by ordinary businesses and taxpayers. We hope and expect that this Commission will produce recommendations to ensure that this will never happen again and that in future banking will provide positive benefits to power the recovery."

The recommendation comes even as official figures show that between December, 2009 and April, 2010 the five-month period typically regarded as peak bonus season, those working in the UK financial intermediation sector received bonuses worth £7.6 billion.

The figure is more than 40 per cent lower than last year's total of £13.2 billion, but the fact is that it came during a period where the banking system owed its survival to the rescue support of taxpayers' money.