UK: The End Of The FSA

This article continues the series on financial regulatory reform that was first published in the October 2010 edition of Corporate Focus. Growing public antipathy towards the conduct of the financial services industry, together with a perception that the UK's 'light touch' regulatory regime was no longer fit for purpose, has contributed to the coalition government's decision to pursue radical change. A White Paper published on 16 June 2011 contained a draft Financial Services Bill which provides for substantial amendments to the Financial Services and Markets Act (FSMA) 2000, the Bank of England Act 1998, and the Banking Act 2009. The Financial Services Bill is currently receiving its second reading in Parliament, and is expected to be passed at the end of 2012.

The Financial Services Bill

Under the changes proposed, the existing 'tripartite' system of regulation which is dominated by the Financial Services Authority (FSA) and under which the Treasury and the Bank of England (the Bank) play overseeing roles, will be replaced with a system in which the Bank will have a much stronger role in protecting and enhancing the stability of the financial system of the UK. The Bank's role will be reinforced by the creation of a Financial Policy Committee (FPC) and the responsibility for monitoring firms will be handed to two new agencies: the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA). The impact of these changes means that the FSA's days are numbered.

Financial Policy Committee

The FPC will be a committee formed of members of the court of directors of the Bank (being directors of the Bank who are responsible for managing the affairs of the Bank, other than the formulation of monetary policy) and will be required to meet at least four times a year. Records of meetings will be published in a bid to make its workings transparent and accountable. It will be chaired by the Governor of the Bank and consist of three Deputy Governors of the Bank, two Bank executive directors, the Chief Executive of the FCA, four external members, and a non-voting Treasury representative. Through the FPC, the Bank will have responsibility for identifying imbalances, risks, and vulnerabilities in the financial services system as a whole, contributing to the Bank's financial stability objective and acting as a look out for future systemic crises. It will have primary operational responsibility for financial crisis management. According to the White Paper, it will have the power to (i) issue public pronouncements and warnings of potential crises, (ii) make recommendations to the Treasury, as well as having formal powers of direction over the PRA and FCA, where such powers have been granted by the Treasury. This could take the form of raising bank capital requirements, or placing loan to value limits on mortgages. The draft bill also includes a power for the Treasury to direct the Bank to provide liquidity assistance to individual financial institutions when there is a risk to public funds. The FPC's first meeting is scheduled for 16 March.

Prudential Regulatory Authority

The PRA will be under a statutory duty to supervise firms which manage significant balance sheet risk as a core part of their business such as deposit-taking institutions, insurers, Lloyd's managing agents and larger, complex investment firms. The PRA's board will include the Governor of the Bank as chairman and the Bank Deputy Governor as chief executive. The FCA chairman will also sit on the PRA board. As a subsidiary of the Bank, its statutory objective will be financial stability. The PRA will focus on the safety and soundness of individual firms, assessing whether they are capable of conducting themselves prudently, have adequate financial resources, and whether their businesses are carried on in a fit and proper manner. To this end, the PRA's approach will be 'judgement-led', characterised by a move away from 'tick-box' compliance and an increased emphasis on forward looking risk assessment of bigger picture issues. This will consist of identifying which firms are at risk of failing and how best to respond if a firm fails. The PRA will also identify the potential systemic impact of such issues and how to resolve them, for example the impact on the economy if a firm fails and the best use of public funds in such circumstances. The nature and intensity of supervision will depend on the risks identified by senior, expert teams within the PRA.

Financial Conduct Authority

The FCA will inherit the majority of the FSA's existing responsibilities for conduct of business regulation and the supervision of firms. It will be independent of the government and the Bank, and will have the single objective of protecting and enhancing confidence in the UK financial system. It will also play a role in securing an appropriate degree of protection for consumers and promoting effective competition in the market. It will have a specific new power to require the Office of Fair Trading to consider whether structural barriers are creating competitive inefficiencies in specific markets. In addition, the draft bill also gives the FCA a range of new tools and powers which include:

  • a new power to block an imminent product launch or to stop an existing product;
  • the ability to name and shame firms against which formal enforcement action has been commenced; and
  • requiring firms to withdraw or amend misleading financial promotions.

What next?

The impact of these changes means that many firms currently regulated by the FSA will in future be regulated by the PRA and FCA. It is as yet unclear how both the PRA and the FCA will work together to address issues that come under the remit of both bodies, such as the "threshold conditions" under FSMA, which are the minimum requirements that firms must meet in order to be authorised for business. A draft Order by the Treasury will clarify the ways in which both regulators should cooperate, and the new regulators will be obliged to prepare a memorandum of understanding setting out how they will coordinate the exercise of their functions. The joint publication of approach documents by the Bank and the FSA will provide further clarification of what will be expected of firms. What is clear is that firms regulated by the PRA and the FCA will face increased scrutiny, be subject to additional restrictions and may face adverse publicity if they do not comply with the requirements of the new regime (due to the FCA's new power to name and shame non-compliant firms). Firms should make sure that they are aware of the changes and how they are likely to impact on them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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