Three key changes aim to prevent future crises
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 first of four posts looking at those aspects of the Proposals that are most interesting from a Corporate lawyer’s perspective.
This post gives an overview of the Proposals and of the next steps as the Government moves towards producing legislation to implement the changes. The other posts discuss the Financial Conduct Authority, wholesale and markets regulation, and financial crime.
Background to the Proposals
Reform of UK financial regulation is a key priority of the Coalition Government; the aim is to avoid a repetition of the financial crisis that started in 2007. So the stated purpose of the Proposals is “to ensure that financial firms are never again allowed to take on risks that are so significant and so poorly understood, resulting in such severe economic consequences for businesses, households and individuals”. The Government first outlined its plans in July 2010 with the publication of a consultation entitled “A new approach to financial regulation; judgment, focus and stability“. The Proposals represents the next stage in the Government’s thinking.
Overview: Three new bodies
Three institutional changes are at the heart of the reform:
- A new Financial Policy Committee (the FPC) will be established in the Bank of England, with responsibility for macro-prudential regulation. That is, for the stability and resilience of the financial system as a whole.
- The Prudential Regulation Authority (the PRA) will be created as a subsidiary of the Bank of England, to carry out micro-prudential (that is, firm-specific) regulation of financial institutions that manage significant risks on their balance sheets.
- The Financial Conduct Authority (the FCA) will be a new specialist regulator with responsibility for conduct issues across the entire spectrum of financial services. The FCA (it was previously provisionally called the “consumer protection and markets authority”) is the organisation that will be of greatest interest to Corporate lawyers and is discussed in more detail in this post.
There is an useful diagram (Figure 1.A, at page 5) in the Proposals document that summarises the roles of these new three bodies in the regulatory architecture.
The FPC and the PRA
The FPC will be a committee of the Bank of England’s Court of Directors (the Bank’s governing body). The FPC’s purpose will be to contribute “to the Bank’s objective to protect and enhance financial stability, through identifying and taking action to remove or reduce systemic risks, with a view to protecting and enhancing the resilience of the UK financial system”, and so it will be the locus for macro-prudential regulation.
The PRA will be the micro-prudential regulator, “enhancing financial stability by promoting the safety and soundness of PRA authorised persons, including minimising the impact of their failure”.
The PRA will be responsible for the prudential regulation of “prudentially significant firms” – meaning those that manage significant risks on their balance sheet, such as deposit takers, insurers and some investment firms. All of those firms will also be regulated by the FCA with regard to their “conduct”; the Proposals document estimates that about 1,700 firms will be subject to this model of dual-regulation, being prudentially supervised by the PRA while also being subject to conduct of business regulation by the FCA.
The PRA will hold the UK seat on the European Banking Authority and on the European Insurance and Occupational Pensions Authority.
The FPC will have power to make recommendations and issues directions to both the PRA and the FPC in order to address systemic risk.
The FCA
The FCA will be focused on conduct issues. It will have responsibility for the conduct of business regulation of all financial institutions (totalling approximately 27,000 firms), including those that are regulated prudentially by the PRA and those passporting into the UK. The FCA will also be responsible for the prudential regulation of those firms that are not prudentially regulated by the PRA, such as investment firms and exchanges and other financial providers including independent financial advisers, insurance brokers and fund managers.
The FCA will be established by adopting the legal corporate entity of the Financial Services Authority (the FSA), which will be abolished as a regulator, and will be a standalone, independent organisation. It will hold the UK seat at the European Securities and Markets Authority.
The FCA is discussed in more detail in this blog post.
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:
The Financial Conduct Authority
Wholesale and markets regulation
Friendly Corporate PSL
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