The Financial Conduct Authority’s remit: To protect consumers and promote confidence in financial services and markets
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 post examines what the White Paper says about the powers of the Financial Conduct Authority (the FCA) – the new regulatory body that will be of most interest to Corporate lawyers – and is the second of two posts on the White Paper and the draft Bill. The first post summarises the proposed future structure of UK financial regulation and can be read here.
The FCA: Overview
The FCA will be one of three new financial regulators in the UK. We give an overview of the Financial Policy Committee and the Prudential Regulation Authority (the PRA), the other two new bodies, in the first post in this series.
The FCA will have a single, statutory, strategic objective of protecting and enhancing confidence in the UK financial system, 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.
During the consultation launched by the Treasury’s February 2011 paper, there were concerns expressed that the FPC might end up being a junior partner to the PRA, which will have the perhaps more high-profile job of prudentially regulating those systemically important financial institutions – i.e. banks, insurers and the larger, more complex investment firms – whose failure could jeopardise the entire financial system. In the White Paper the Government confirms that the PRA and the FCA will be bodies of equal standing.
The FCA will be headed by Martin Wheatley, whose views on the regulatory response to the financial crisis we featured in a recent post
The FCA: Operational objectives and competition
The operational objectives of the FCA will be spelt out in statute as:
- securing an appropriate degree of protection for consumers;
- protecting and enhancing the integrity of the UK financial system; and
- promoting efficiency and choice in the market for certain types of services.
The White Paper states that the Financial Services Authority (the FSA) will publish a paper in June 2011 giving more detail on the FCA’s regulatory approach.
The FCA will also have a competition “duty” requiring it to discharge its general functions in a way that promotes competition in the financial sector unless that would be incompatible with its strategic and operational objectives.
The FCA: A new approach to conduct regulation
Since the financial crisis, the FSA has moved towards a more pre-emptive and intrusive model of conduct regulation. The White Paper confirms that the FCA will continue this approach, and will in particular have three powers that were raised in the Treasury’s February 2011 consultation and which generated some opposition from the financial services industry.
Product intervention power
The White Paper confirms that the FCA will
“have [the] flexibility to intervene quickly and decisively where it considers that a product or product feature is likely to result in significant consumer detriment”
and that power will include being able to require changes to features of financial products or to prevent the sale of a product. The FCA will be able to make temporary product intervention rules without prior consultation valid for up to 12 months. In a nod to the opposition to this intervention power that was expressed in the consultation process, the Government expects that it will only be used where it is appropriate and proportionate and agrees that intervention is “a complement to and not a substitute for regulation of the sales process”.
New financial promotions power
The FCA will have two new powers in relation to financial promotions: A power to take “credible and effective action” in relation to misleading financial promotions, enabling the FCA to “take swift regulatory action to prevent consumers being misled”, and a power allowing it to disclose that enforcement action against a firm or an individual has commenced.
The Government recognises in the White Paper that such publication may cause reputational damage to firms, and so the FCA will required to alert firms to its proposed course of action and to allow representations before publishing any details of its action, together with other safeguards.
Early publication of disciplinary action
A new power will also be given to the FCA enabling it to disclose that a warning notice in relation to proposed disciplinary action against a firm or individual has been issued, a part of a strategy of “credible deterrence”. This power generated, in the words of the White Paper:
“a negative response from [the financial services] industry but a very positive response from consumer groups, who welcomed the proposal and the presumption towards disclosure and stressed how this would put consumers’ interests first.”
The Government has, however, noted the concerns raised about the possible reputational damage that could be caused to firms, and “has taken them in to account” in designing the power, including requiring the FCA to consult with the person affected before making any disclosure, and must consider a number of statutory factors before publication, including whether it would be unfair to the affected person.
The FCA: Wholesale and markets regulation
The FCA will be responsible for the regulation of recognised investment exchanges and for other market-focused functions in respect of short selling and market abuse.
The UK Listing Authority (the UKLA) will be part of the FCA – there had been a suggestion that it would be spun out to become a standalone securities regulator – and so the FCA will continue the FSA’s role as the competent authority for listing matters. The Government confirms in the White Paper that it will be going ahead with a package of technical measures to strengthen the listing regime, including:
- Extending powers to impose sanctions on sponsors; and
- Allowing the FCA to require an issuer of securities to appoint a “skilled person” to prepare a report in respect of a matter on which the UKLA could require information to be provided.
Specific regulatory processes
The White Paper contains some detail on proposed regulatory processes – and stresses that “much will…depend on the PRA and FCA’s operational delivery of regulation” – in the areas of:
- Authorisations: One regulator, i.e. the PRA or the FCA, will have responsibility for processing authorisation applications and seeking consent from the other where appropriate. This is the preferred approach of consultees, who feared that when a firm is “dual-regulated” – and most systemically important firms will be regulated by both the PRA and by the FRC – those firms would need to deal with two regulators in relation to authorisations.
- Variations and removal of permissions.
- Approved persons: The PRA will have primary responsibility for designating Significant Influence Functions. The FCA will be able to make its own rules on all approved persons, and will be able to remove approvals from persons for “egregious conduct or consume protection breaches”.
- Passporting.
- Mutuals.
- Unregulated holding companies.
- Change of control.
- Investigations and enforcement.
The White Paper also sets out further detail on how the PRA and the FRC will coordinate their regulatory activities at an operational level.
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