Banking supervision in the UK is to be removed from the Bank of England (BoE) and transferred to a new super-regulator, to be called the Financial Services Authority, which will supervise the whole financial services industry.

Arab banks in London are unlikely to be affected by the change, though they will be affected by the introduction of new regulatory methods in the next two years.

The reforms, which are intended to be implemented in stages between now and 1999, will bring under one roof the various bodies which regulate different sectors of the UK's financial services industry, such as banking, investment management and

insurance.

The Labour government, which was elected in May, hopes that consolidation will make regulation more efficient and give consumers more protection from malpractice. In the last decade, London has seen a string of scandals including the mis-selling of personal pensions, the closure of the Bank of Credit & Commerce International, and the Barings debacle. The authorities are asking banks to submit their comments on the changes, and what the role of practitioners should be by January next year.

Most Arab banks with operations in London are wholesale commercial banks supervised by the BoE but not by other regulators, so should not be greatly affected by the reform. 'They'll be spectators in the process to a considerable extent,' says John Milne, BoE supervisor for Gulf banks. 'We don't expect the underlying nature of supervision to change, other than on the basis of what's been happening post-

Barings.'

The introduction of new supervisory methods in the wake of the Barings crash in 1995 will, however, have an impact. The BoE is introducing a new risk-based approach called Risk Assessment Tools & Evaluation (Rate) for UK-incorporated banks, which has a version for foreign bank branches called Scale. A pilot scheme with 20 banks is due to finish at the end of this year and the method will be brought in during 1998 and 1999.

As part of the introduction of the new methods, supervisors will carry out an intensive review of banks' operations, management and risk profiles.

For most Arab banks in London, this could mean a week of intensive talks with management, Milne says. After that, banks which are judged to be low-risk could in principle be less intensely supervised than those deemed high-risk.

Many Arab bankers fear the changes will mean more intrusive and expensive supervision. 'At the end of the day, it means higher costs and more management time. A lot of Middle East institutions will need to update their control functions and information systems,' says Abdulmagid Breish, general manager of ABC International Bank. 'Supervision [worldwide] in general has become more intensive.'