Regulatory reform of UK Financial Services

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As part of our professional network, we have the benefit of receiving valuable industry updates from various firms and individuals. Cummings Law have prepared a useful briefing on the regulatory reform of the UK financial services which we believe will be of interest to you.

Welcome to this month's editions of Legal Long, a briefing on a recent development in the financial services industry.

If you would like to discuss any of the points we raise below, please contact me or one of our other lawers.
Claire Cummings
020 7585 1406  



As a result of the financial crisis in 2008, the government announced its intention to reform the regulatory system in the UK and replace the current tripartite system, consisting of the Bank of England, HM Treasury and Financial Services Authority (FSA), with three new regulatory bodies with effect from April 2013. The tripartite system was strongly criticised for its performance during the crisis, firstly, for failing to anticipate the crisis itself and secondly, for failing to provide clear, decisive leadership during the crisis, and the government is seeking to address these concerns through the proposed reform.

The three new bodies which will be established are the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). It is envisaged that the PRA and the FCA will inherit the majority of the existing functions carried out by the FSA, with the result that the FSA Handbook will be split between the PRA and FCA to form two new Handbooks, one for the PRA and one for the FCA.

Financial Policy Committee (FPC)

The FPC will monitor the financial system as a whole, but will not have direct regulatory responsibility for any particular type of firm.

The FPC will sit within the Bank of England and will focus on identifying and managing macroeconomic and other risks to the stability of the financial services sector as a whole or to a significant part of the sector. It will respond to any such issues which arise by directing the PRA (and the FCA where appropriate) to take necessary action to deal with the relevant issue.

The FPC will be given a ‘toolkit’ of macro-prudential powers to address systemic risks, including:

  • imposing countercyclical capital buffers;
  • liquidity limits; and
  • maximum LTV ratios in the mortgage markets to discourage unsustainable lending

    The PRA (and the FCA where appropriate) will be responsible for applying whichever tool, as determined by the FPC, directly to the relevant regulated firm(s).

    Prudential Regulation Authority (PRA)

    The PRA, which will be a subsidiary of the Bank of England, will be responsible for the micro-prudential regulation and supervision of systemically important firms i.e.
  • banks;
  • building societies;
  • insurers;
  • credit unions;
  • Lloyds of London and Lloyd’s managing agents; and
  • certain investment firms with systemic importance.

    These firms will also be regulated by the FCA for conduct purposes and are therefore known as ‘dual-regulated firms’.

    The objective of the PRA is to promote the safety and soundness of regulated firms by seeking to minimise any adverse effects of firm failure on the UK financial system as a whole. It will be operationally independent from the Bank of England and the FPC in respect of day to day regulation and supervision of firms and will focus on setting institution-specific capital requirements.

    Which investment firms will be dual-regulated?

    The PRA shall be responsible for determining whether an investment firm will be regulated by it and will only be permitted to designate an investment firm if the firm:
  • holds, or is seeking to hold, permission to deal in investments asprincipal or is a firm based in another EEA state passporting into the UK under MiFID to offer the service of dealing on its own account; or
  • is required to have initial capital of at least EUR730,000 or would be if it were established in an EA state (i.e. those investment firms that are currently classed as BIPRU 730K firms)

The PRA will also have regard to the following non-exhaustive list of criteria when considering whether to designate an investment firm:

  • assets above a specified threshold (suggested by the FSA as exceeding at least £15 billion on the firm’s last accounting reference date); and
  • group issues, such as whether the investment firm's activities could impact on the safety and soundness of other PRA-authorised entities in the group and consideration of the activities of investment firms in the firm's group as a whole (i.e. a group cannot avoid designation of an investment firm by establishing several eligible investment firms that individually fall below the total asset threshold, but which in aggregate are above the threshold)

The PRA will consult with the FCA before deciding whether to designate an investment firm (or to revoke its designation) and will consider periodically, or in response to a merger or acquisition, whether the conditions for designation for an individual firm are satisfied.

Financial Conduct Authority (FCA)

The FCA will be independent from the Bank of England and the FPC and will adopt the legal corporate identity of the FSA and will inherit most of the roles and functions of the FSA accordingly:

  • it will be responsible for the conduct of business regulation of all firms, including dual-regulated firms;
  • it will be responsible for the prudential regulation of firms not regulated by the PRA (i.e. non-dual regulated firms); 
  • it will inherit the majority of the FSA’s market regulatory functions, including the role of UKLA (the UK listing authority); and
  • it will be responsible for prosecuting criminal offences involving insider dealing, other forms of market abuse and other criminal law breaches.

The FCA’s main objective will be to ensure that the markets function well by: (i) securing reasonable protection for retail investors; (ii) protecting and enhancing the integrity of the UK financial system; and (iii) promoting effective competition in the interests of consumers.

It is intended that the FCA will also be given additional powers, such as the power to make temporary product intervention rules (which means that it may block an imminent product launch or stop an existing product) and the power to require firms to withdraw or amend misleading financial promotions.

NB. The FSA’s current regulatory responsibility for settlement systems and recognised clearing houses will be transferred to the Bank of England to sit alongside the Bank’s existing responsibilities for payment systems oversight.

FSA transitional arrangements

The FSA is currently preparing for the transition to the new structure and from 2 April it moved to its ‘twin peaks’ operating model, with the intention of moving the FSA as closely as possible to the new regulatory structure within the current legal framework. Two new supervisory units have thus been created:

  • a prudential supervisory group with objectives aligned with those of the PRA; and
  • a conduct supervisory group with objectives aligned with those of the FCA, although the group will not be required to take into account the new powers proposed for the FCA mentioned above.

Firms that will be regulated solely by the FCA are solely supervised by the conduct supervisory group and firms that will be dual-regulated by the PRA and the FCA under the new structure are supervised by both groups.

The Financial Services Bill

The Financial Services Bill 2012-13 is the primary legislation which will bring the reforms into force. The Bill has completed the committee stage in the House of Lords and will now pass on to the report stage, although the date for this has not yet been set. The date for Royal Assent is expected to take place before the end of 2012 and HM Treasury has stated that it expects the new regulatory structure to be fully established on 1 April 2013.

Impact on FSA-authorised firms

Firms already authorised and regulated by the FSA will be grandfathered into the new regime, which means that they will not need to re-apply to the FCA or the PRA for their existing authorisations and regulatory approvals.

Firms designated as dual-regulated firms under the new regime will face the most disruption, as they will need to adapt to supervision by two regulators and the fact that regulatory processes such as the approved persons regime will be split between the FCA and the PRA. Firms which will be regulated by the FCA only will have a similar relationship with the FCA as they currently have with the FSA.

October 2012

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