Responsibility for conduct issues across the entire spectrum of financial services
UPDATE 20 June 2011: The Government published its White Paper and draft Bill on the reform of UK financial regulation on 16 June 2011. We give an overview of the proposed regulatory structure as set out in the White Paper in this post of 17 June 2011 and examine what the White Paper says about the Financial Conduct Authority in this post of 19 June 2011.
Detailed proposals (the Proposals) for the reform of UK financial regulation were published by HM Treasury on 17 February 2011. Here is the Proposals document. This is the second of four posts looking at those aspects of the Proposals that are most interesting from a Corporate lawyer’s perspective.
This post gives describes plans for the new Financial Conduct Authority (the FCA). The other posts give an overview of the Proposals and of the next steps as the Government moves towards producing legislation to implement the changes, discuss how wholesale and markets regulation will be conducted by the FCA, and look at the FCA’s responsibility for countering financial crime.
The FCA: Purpose and creation
The FCA will be established as a specialist regulator with responsibility for, in the words of the Proposals document, “conduct issues across the entire spectrum of financial services”. Responsibility for conduct of business regulation in the financial sector currently lies with the Financial Services Authority (the FSA). That responsibility will transfer to the FCA and the FSA will be abolished as a regulator. The FCA’s single strategic objective will be to “protect and enhance confidence in the UK financial system”.
Since the financial crisis started in 2007, the FSA has moved from a regulatory philosophy that was “principles based” to one that is focused on intensive supervision and on credible deterrence through enforcement. The intention is that the FCA will adopt and take forward this approach, with a concentration and focus on conduct issues which (the Proposals document argues) was not possible for the FSA with its wide remit of financial stability, consumer protection, public awareness, market confidence and reduction of financial crime.
Responsibility for financial stability will move to the new Financial Policy Committee and to the Prudential Regulation Authority (the PRA). For a discussion of those bodies, see our Overview of the Proposals.
The Government’s intention with the FCA is to create “the right institutional framework, one that gives conduct of business regulation the required mandate and prominence”. The FCA will be a standalone, independent regulator, accountable for its own administrative, operation and strategic performance. As a focused conduct authority the FCA will have as its core purpose “protecting and enhancing the confidence of all consumers of financial services – from retail customers choosing a current account to a hedge fund engaging in a multi-million pound derivates trade”.
The FCA will be created by adopting the legal corporate entity of the FSA and will be funded by fees paid by the financial services industry.
Scope of the FCA
The FCA will be responsible for the conduct of business regulation of all financial institutions. This will total approximately 27,000 firms and will include both those passported into the UK and those 1,700 systemically important firms which will be prudentially regulated by the PRA; so those firms will be “dual-regulated”, prudentially by the PRA and as to conduct by the FCA. Firms that do not fall within the scope of PRA regulation will be prudentially regulated by the FCA.
The FCA will regulate both the conduct of firms when engaging with retail customers, and conduct between wholesale markets participants. The Government is separately consulting on whether to transfer consumer credit regulation from the Office of Fair Trading to the FCA.
The FCA’s regulatory objectives and its powers
The FCA will have, as mentioned above, a statutory objective to “protect and enhance confidence in the UK financial system”. It will have three operational objectives:
- To facilitate efficiency and choice in the market for financial services. This should reflect, in the Proposal’s words, “the importance of competitive markets in delivering better outcomes for consumers”.
- To secure an appropriate degree of protection for consumers. “The Government does not believe that this objective should shift the responsibility for taking decisions from the consumer on to the regulator.”
- To protect and enhance the integrity of the UK financial system. “This…reflects the FCA’s remit in markets regulation, as well as its work on countering financial crime across the financial system.”
The Proposals are clear that the FCA will take a different philosophical approach to risk in financial services than that of the FSA. So the FSA will have a “lower risk appetite for issues affecting a whole sector, sub-sector or type of product – it will be less prepared to see detriment actually occur, instead seeking to act in a more preventative manner”. Specifically, the FCA will have:
- New product intervention powers. It will be able to place requirements on products, restrict the sale of products to certain classes of consumers or even to ban a product.
- Power to direct firms to withdraw misleading financial promotions, and will also be able to publicise the fact that it has done so.
- The ability to publicise the issue of a warning notice. Where the FCA is conducting an enforcement action, it will be able to publish a summary of any warning notice issued to an entity that it regulates.
In discharging its general function, the FCA must where appropriate seek to promote competition; accordingly, the Government is also considering whether the FCA should also have new powers in relation to general competition law.
Wholesale and markets regulation
See our post on wholesale and markets regulation for details of the FCA’s proposed role in wholesale conduct regulation and the future of the UK Listing Authority. The FCA will hold the UK’s seat on the European Securities and Markets Authority.
Financial crime
See our post on financial crime for details of the FCA’s proposed role in countering financial crime.
The FCA’s six regulatory principles
The FCA will have a statutory objective and three operational objectives; these are described above. It will also be guided by a set of six “regulatory principles”. These principles (which will also be apply to the PRA) are:
- The need to use resources in the most efficient and economic way.
- “Proportionality” – the principle that a burden or restriction imposed on a person or activity should be proportionate to the expected resulting benefits. This will be a particularly important principle for the FCA, as its interventions in retail markets will necessarily be different from its interventions in the wholesale markets.
- That, although a core remit of the FCA is capturing better outcomes and giving (particularly retail) consumers adequate protection, consumers are ultimately responsible for their own decisions.
- That the senior management of an authorised person is responsible for securing compliance with the regulatory framework.
- The desirability of the regulator, where appropriate, making information about authorised persons available to the public as a mean of contributing to the achievement of the FCA’s objectives and bringing about best practice.
- The importance of the regulator conducting its business as transparently as possible.
Next steps in the reform process: Consultation, legislation and the end of the FSA
The Government is now consulting on the Proposals. That consultation closes on 14 April 2011. After that, the Government will publish a White Paper in the spring of 2011, including a draft Bill for Parliamentary pre-legislative scrutiny, with the expectation that the Bill will receive Royal Assent in mid-2012. The Government states in the Proposals document that it “is committed to putting the new regulatory architecture in place by the end of 2012″.
The mechanism for reform will be this Bill, which will amend the Financial Services and Markets Act 2000 (the FSMA). There had been some comment that the FSMA would be repealed and replaced in its entirety, but that now seems not to be the case.
The FSA is now preparing for its own demise and for the transfer of its staff to the PRA and the FCA. The FSA described this transition process in this “Dear CEO” letter on 7 February 2011.
Our other posts on the Proposals are here:
Wholesale and markets regulation
Friendly Corporate PSL
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