UK launches new financial regulators; real test to come

* Two new watchdogs replace the FSA in a "twin peaks" system

* A third regulator will monitor broad threats to stability

* Old "light touch" system discredited by financial crash,scandals

* Real test of new structure will come when boom timesreturn

By Huw Jones

LONDON, April 2 (Reuters) - Britain launched its new systemof financial supervision on Tuesday, hoping that two newregulators will succeed where a single one failed in preventingbanking crises and protecting consumers from getting fleeced.

Experts say the real test of the new system will not comeuntil boom times return and regulators get a chance to provethey have the mettle to rein in excesses.

The reform scraps the 12-year-old Financial ServicesAuthority, which took the blame for failing to head off the 2008financial meltdown or to prevent the misselling of products tocustomers leading to billions of pounds in compensation claims.

It is replaced by two new bodies formally launched onTuesday, a Prudential Regulation Authority (PRA) to make surebanks are sound, and a separate Financial Conduct Authority(FCA) to ensure they do not mistreat customers.

"The changes coming into effect today are the start ofresetting the system of financial regulation in our country,"British Finance Minister George Osborne said on Tuesday.

"They represent a fundamental change in how financialservices will be regulated in the future."

The PRA, a subsidiary of the Bank of England, will ensurethat banks, insurers and building societies hold enough capitaland abide by rules to curb bonuses and monitor risk.

The FCA, a standalone body which will be based in the formerFSA's building in London's Canary Wharf, will supervisebehaviour at all financial institutions and will go aftermisconduct with tougher powers and higher fines.

Britain was forced to pump 65 billion pounds into Royal Bankof Scotland and Lloyds to keep them afloatduring the 2007-09 financial crisis, prompting public outrageand calls for reform.

British banks have also been hit in recent years by hugesettlements over their misbehaviour, from ripping off customerswith inappropriate products, to manipulating the LIBOR benchmarkinterest rate, to lax standards in preventing money laundering.

The hope is that the new "twin peaks" system will be able tosound the alarm on risky activities much earlier to shieldtaxpayers in future.

Sceptics say that a new system would not automaticallyprovide better supervision. Since 2007, the FSA has alreadyditched its discredited - and then government-sanctioned -"light touch" approach to become one of the world's toughestregulators, using its existing structure.

"If one goes back to 2008 and considers whether this wouldhave made a real difference, that is debatable," said PeterSnowdon, a financial services lawyer at Norton Rose.

"The new system is designed to deal with the problems thathappened yesterday. No regulatory system has managed to beentirely successful in any crisis," Snowdon said.

FIGHTING THE LAST WAR

In addition to the two new bodies, the restructuring alsogives the Financial Policy Committee at the Bank of Englandformal authority to set the direction for supervision and lookout for risks to stability, such as property bubbles.

The committee is chaired by the central bank governor andincludes the heads of the two new regulatory bodies.

Last week it ordered Britain's main banks to swell theircapital buffers by a further 25 billion pounds.

The new bodies are expected to bring in a moreinterventionist, judgement-led style of supervision aimed atimproving culture and standards.

The FCA has said it will examine how much money banks makefrom products to make sure customers are not being ripped off.

"The big difference from today will be that firms will placea greater focus on collaborative relationships with customers,which involves them from start to finish in financial productdesign," said David Kenmir of consultancy PwC.

Some FPC members say their real test will come when boomtimes return and there is a need to take away the punchbowl fromthe party by calling for tighter credit. They will have toresist political pressure to back off.

Some of the FPC's hardliners have just been replaced withnew members, who are seen by critics as being more friendly tobanks and business.

Banks say it is time to move on from banker bashing.

"The new posse of regulators has been welcomed by theindustry, but the challenge for them is to ensure they don'tdamage the interests of the economy by going too far fightingthe last war," Anthony Browne, chief executive of the BritishBankers' Association, told the Telegraph newspaper on Tuesday.

Lawyers say the new system's success will hinge on how wellthe new regulators work together not just in a crisis but alsoday-to-day to avoid bureaucracy and unnecessary costs.

The PRA will supervise 1,700 banks, insurers and buildingsocieties. The FCA will supervise behaviour at the same firmsand will have oversight of 26,000 firms in total, includingbrokers, investment advisers and money managers.

"Unfortunately we have already seen evidence of overlap andduplication," said Iain Pickard, a partner at RSM Tenon advisoryfirm.