The Financial Policy Committee, the Prudential Regulation Authority and the Financial Conduct Authority
HM Treasury published its White Paper titled “A new approach to financial regulation: the blueprint for reform” on 16 June 2011. The White Paper contains the draft Bill that will, when made into law, put in place the UK’s new structure of financial regulation. The White Paper can be read here (413 pages, pdf). The accompanying Treasury press notice is here and the Treasury page on “The structure of UK financial regulation” is here. The new structure is expected to be in place by the end of 2012 or in early 2013.
This is the first of two posts on the White Paper and the draft Bill. This first post summarises the proposed future structure of UK financial regulation. The second post examines what the White Paper says about the powers of the Financial Conduct Authority – the new regulatory body that will be of most interest to Corporate lawyers – and can be read here.
The future of UK financial regulation
- The Financial Policy Committee (FPC), a macro-prudential regulator established within the Bank of England to monitor and respond to systemic risks in the financial system.
- The Prudential Regulation Authority (PRA), a focused regulator established as a subsidiary of the Bank of England and responsible for prudential regulation of individual, systemically important firms.
- The Financial Conduct Authority, a focused conduct of business regulator with the remit of ensuring that business across financial services and markets is conducted in a way that advances the interests of all users and participants.
The philosophy underlying the creation of these new regulators is described in the White Paper as follows:
“The Government’s primary objective in reforming financial regulation in the UK is to fundamentally strengthen the system by promoting the role of judgement and expertise. New regulatory bodies will be created, each with clarity of responsibility, a focused remit, appropriate tools and the flexibility to use them as they see fit. Tick-box compliance with rules has been shown to be of limited use as a model of supervision. Regulators must be empowered to look beyond compliance, to supervise proactively, and to challenge.”
The Financial Policy Committee
The Government identified one of the “main shortcomings” of the regulatory system before the financial crisis as being the lack of a single, focused body with responsibility for protecting the stability of the financial system as a whole. The FPC is designed to fill this gap, “ensuring that a single body, situated within the Bank of England, has the expertise to monitor the financial system” and to:
“identify risks to its stability; the authority to make recommendations and offer advice to institutions responsible for day-to-day oversight and policy; and the power to intervene to ensure appropriate action is taken where needed to ensure stability.”
The Governor of the Bank of England will chair the FPC, which will sit at the apex of the regulatory structure. The FPC will be able to offer advice to the Treasury and to other relevant bodies, such as the Financial Reporting Council, and will have formal powers of direction over the PRA and the FPC.
The Prudential Regulation Authority
In contrast to the FPC’s role as a system-wide monitor of risks to stability, the PRA will be a regulator of individual firms. The PRA will conduct prudential regulation of firms which “manage significant balance sheet risk as a core part of their business – banks, insurers and the larger, more complex investment firms”. The PRA will be a subsidiary of the Bank of England, reflecting its role in protecting financial stability, and its core objective will be to promote the safety and soundness of the firms it regulates.
The White Paper describes the PRA’s approach as combining
“regulatory policy – relating to both firm resilience (e.g. capital, liquidity and leverage) and to resolution of firms when they fail – with the application of that policy through effective and, where necessary, intensive supervision. The PRA’s approach to supervision will be judgement-led. The nature and intensity of supervision will depend on the risks posed by each firm; while every firm will be subject to a baseline level of supervision to promote and support their soundness and resilience, supervisory effort and resource will focus particularly on ‘big picture’ issues with potential systemic impact…Supervision will be undertaken by senior, expert teams, whose role will be to make forward-looking judgements…”
The PRA will be led by Hector Sants, the current Chief Executive of the Financial Services Authority (FSA). The FSA will be effectively abolished when the new structure comes into effect.
The Financial Conduct Authority
The FCA’s remit, in the words of the White Paper, will be “to specialise in protecting consumers and promoting confidence in financial services and markets”, fulfilling this role for all consumers of financial services, from retail savers to the largest institutional investors. It will be an integrated regulator, covering retail, wholesale and market conduct (including the regulation of listings). The intention is that the FCA will take a more proactive approach than the FSA in dealing with the conduct of financial firms, and will be equipped with new tools to enable it to do so:
“These include a new power to intervene to impose requirements on (or even to ban) products; the ability to disclose the commencement of formal enforcement action against a firm; and a strengthening of the FCA’s ability to tackle misleading financial advertisements.”
In a response to the consultation that followed the Treasury’s February 2011 paper, the Government is now proposing that the FCA will have a specific competition power to require the Office of Fair Trading to consider whether there are competitive inefficiencies in specific financial markets.
The FCA will contain the UK Listing Authority, be responsible for the regulation of recognised investment exchanges and will assume the FSA’s functions in relation to market abuse. The FCA will be headed by Martin Wheatley, whose views we featured in a recent post.
We discuss the FCA in more detail in the second post in this series, which can be read here.
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