The New UK Financial Services Regulatory Landscape
The UK financial services regulatory structure is facing major reform under the Financial Services Bill (the Bill) which was published in draft form in June 2011. As part of the overhaul, the Government has proposed the abolition of the current system including the Financial Services Authority (FSA) and the introduction of three new regulatory bodies, namely:
- the Financial Conduct Authority (FCA);
- the Prudential Regulation Authority (PRA); and
- the Financial Policy Committee (FPC).
Under the proposed new system the FCA and PRA will undertake dual regulatory roles in respect of all firms considered by the Government to manage significant risks on their balance sheets including banks, building societies, insurers, credit unions and Lloyds's of London. The FPC will monitor the stability and resilience of the UK financial system and unlike the FCA and the PRA will not have direct regulatory responsibility for particular firms.
In addition the Bill proposes extensive amendments to the Financial Services and Markets Act 2000, the Banking Act 2009 and the Bank of England Act 1998.
The Prudential Regulation Authority
In its dual regulatory role the PRA will be responsible for the authorisation, prudential regulation and day to day supervision of applicable firms.
The PRA's general objective will be to promote the safety and soundness of the firms it authorises with the main aim of ensuring that firms carry on their business in a way that avoids adverse effects on the UK financial system. In addition it is proposed that the PRA will adopt an insurance objective that will apply when the PRA discharges its general functions in relation to insurance and insurers, the aim of which will be securing an appropriate degree of protection for those who are or may become policy holders.
Together with the FCA, it is intended that the PRA will be granted new powers which go beyond those inherited from the current system:
- Unregulated holding companies. The FCA and the PRA will be given the power to make directions imposing requirements on certain unregulated parent undertakings that control and exert influence over authorised persons;
- Early publication of enforcement action. This new power will allow the FCA and the PRA to publish the fact that a warning notice has been issued to a firm, marking the start of formal enforcement proceedings, together with a summary of the content of the warning notice;
- Investigations. The FCA and the PRA will be given the FSA's existing powers to carry out investigations into firms and individuals for enforcement and other purposes, which will include powers to obtain information and access to premises;
- Increased disclosure. The Government is considering changes to the powers of disclosure currently held by the FSA with a view to allowing the FCA and the PRA to act without the level of restrictions imposed on the FCA in respect of disclosure.
The Financial Conduct Authority
Together with the dual regulatory role the FSA will hold with the PRA, the FCA will inherit the majority of the FSA's existing roles and will fulfil the role of the UK financial services regulator with the responsibility of all firms currently regulated by the FSA including personal investment firms, insurance and mortgage intermediaries, investment managers, custodians and corporate finance companies. The FCA will also act as the prudential regulatory for all firms that do not fall under the dual-regulation system.
It is intented that the FCA will have a more pro-active and interventionist approach to conduct regulation, aimed at addressing weaknesses in the current system and confronting actual and potential risks before they crystallise.
The Bill outlines the strategic objective for the FCA as ensuring that the relevant markets function well. In addition the FCA will have three operational objectives:
- the Consumer Protection Objective: to secure an appropriate degree of protection for customers;
- the Integrity Objective: to protect and enhance the integrity of the UK financial system; and
- the Competition Objective: to promote effective competition in the interests of consumers in the markets for regulated financial services.
In addition to those shared with the PRA, the FCA will gain the following powers:
- Misleading financial promotions. The Bill will give the FCA power to require firms to withdraw or amend a misleading financial promotion with immediate effect and to announce that it has done so;
- Product intervention. It is proposed that the FCA will be given new powers to allow it to make temporary interventions to address problems arising from financial products or services that it considers are detrimental to the interests of consumers or competition;
- UKLA. The Bill will amend the Financial Services and Markets Act 2000 to reflect the FCA's role as the UK Listing Authority and its regulatory responsibilities for recognised investment exchanges; and
- Competition: The Government is considering giving the FCA additional powers to enhance its operational objection to promote competition.
Current status of the bill
Royal assent is expected to be given to the final version of the Bill by the end of 2012 with the current expectation for completion of the necessary primarily legislation and the transfer of powers to the new regulatory bodies in March 2013.
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