The Financial Services Act 2012, which received Royal Assent in December 2012, is scheduled to come into force on 1 April 2013. This Act significantly reforms the financial regulatory structure currently used throughout the United Kingdom. The new legislation creates a Financial Policy Committee (FPC) to be in charge of macro-prudential regulation of the financial system and replaces the Financial Services Authority (FSA) with two new regulators, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA), forming a ‘twin peak’ regulatory structure. These new regulators will have comprehensive powers to ensure financial stability, protect consumers and promote competition. Below is an overview of the new regulators.
THE NEW REGULATORY BODIES
Financial Policy Committee (FPC)
The FPC is a new committee, chaired by the Governor of the Bank, which sits within the Bank of England. It is in charge of macro-prudential financial regulation, with primary objectives of:
- Helping the Bank of England maintain its financial stability objective
- Supporting the economic policy of Her Majesty’s Government, including objectives for growth and employment
- Identifying, monitoring and taking action to remove systemic risks in the UK financial system
The FPC will have a variety of macro-prudential tools at its disposal to counteract systemic risks affecting the UK financial system, including setting countercyclical capital buffers and creating capital requirements for certain sectors. The FPC must respond to recommendations from the Treasury in writing, citing actions to be taken or reasons for not acting on the recommendations. The FPC must also publish two financial stability reports detailing developments, strengths and weaknesses, and the outlook for the UK financial system each calendar year.
Prudential Regulation Authority (PRA)
The first ‘peak’ replacing the FSA is the PRA, which will be in charge of micro-prudential regulation and the supervision of deposit-taking firms such as banks, insurers, major investment firms, credit unions and building societies. This means that the PRA is responsible for promoting stability and the prudent operation of over 1,700 financial firms throughout the United Kingdom. In contrast to the FPC, the PRA will handle day-to-day regulations, rather than the larger, overall systemic risks of the financial industry.
The general objectives of the PRA are the following:
- To promote the safety and soundness of PRA-authorised persons
- To secure an appropriate degree of protection for those who are or may become insurance policyholders
These objectives are advanced by ensuring that firms regulated by the PRA conduct business in such a way that the actions or failure of a firm does not create adverse effects on the stability of the UK financial system. Firms will be supervised based on a new risk assessment framework that analyses several factors, including business risks, the potential impact on the financial system if the firm fails, and any other mitigating factors.
Financial Conduct Authority (FCA)
The second ‘peak’ replacing the FSA is the FCA. The FCA is responsible for conduct regulations of all authorised firms in the financial services sector, including firms regulated by the PRA on prudential issues. Firms regulated by the PRA are considered to be dual-regulated because while the PRA regulates their prudential issues, the FCA will still regulate conduct. For firms not regulated by the PRA, or FCA–only firms, the FCA will also regulate on prudential issues.
The FCA has the following objectives:
- To ensure the relevant markets function well
- ‘Relevant markets’ include the financial markets and the markets for regulated financial services
- Securing an appropriate degree of protection for consumers
- Protecting and enhancing the integrity of the UK financial system
- Promoting competition in the interests of consumers in markets for regulated financial services and services provided by a recognised investment exchange.
Firms will be classified into four categories, ranked C1 through C4, based on their potential impact on the FCA’s objectives. The C4 firms, consisting of smaller firms and almost all intermediaries, will be the least heavily supervised. The C1 group, consisting of banking and insurance groups with a very large number of retail customers, will face much more supervision and a high level of contact with the FCA. The majority of firms will fall in the C3 or C4 categories.
The FCA is also given proactive procedures to advance its objectives. This includes the ability to make temporary product intervention rules on retail products for 12 months without having to follow consultation procedures and taking action against misleading financial promotions.
The FSA recently published draft handbooks for the PRA and FCA, as well as a guide for interpreting the new handbooks and revised versions of forms and templates in the existing FSA handbook. Please see www.fsahandbook.info/FSA for more information.