UK rings in regulatory changes follow death of old tripartite structure

The financial crisis has powerfully demonstrated the need for a new approach to financial regulation. Major reforms are therefore under way, aiming to establish a UK financial regulatory framework which is more focused on the issues that matter and better equipped to deliver financial stability.

Following the financial crises of 2008 which gripped the UK, the so-called tripartite structure of the Financial Services Authority (“FSA”), Treasury and Bank of England (“BoE”), was blamed for being “asleep at the wheel”. The crisis powerfully demonstrated the need for a new approach to financial regulation. The Financial Services Act 2012 (“FSA 2012”) was enacted as the primary legislation relating to the UK Government’s reforms of the UK financial services regulatory structure.

The changes introduced by the FSA 2012 resulted in the abolition of the FSA on 1 April 2013, and a majority of its functions were transferred to two new regulators: the Financial Conduct Authority (“FCA”) and the PrudentialRegulation Authority (“PRA”). On the same date, the Bank of England (“BoE”) took over the FSA’s responsibilities for financial market infrastructures (“FMIs”) and the Financial Policy Committee (“FPC”) was established on a statutory basis. In addition to creating new regulators, the UK Government has also made other significant changes to aspects of financial services regulation.

The FSA 2012 made extensive changes to the Financial Services and Markets Act 2000 (“FSMA”) as well as to the Bank of England Act 1998 and the Banking Act 2009. Although the majority of the FSA 2012’s provisions relate to amendments to other primary legislation, it also contains provisions for mutual societies, collaboration between Treasury and BoE, FCA or PRA, investigation of complaints against regulators and offences relating to financial services.
The roles of the new regulators created by FSA 2012 are set out below:

(a) Financial Conduct Authority (FCA)
The FCA inherited the majority of the FSA’s roles and functions and also adopted the legal corporate identity of the FSA. The FCA:

• Is responsible for the conduct of business regulation of all firms, including those regulated for prudential matters by the PRA.
• Is responsible for the prudential regulation of firms not regulated by the PRA.
• Inherited the FSA’s market conduct regulatory functions, with the exception of responsibility for systemically important infrastructure which was transferred to the BoE.
• The FCA has a strategic objective and three operational objectives:
• The strategic objective is to ensure that the “relevant markets” function well.
• The operational objectives are:
  • to secure an appropriate degree of protection for consumers;
  • to protect and enhance the integrity of the UK financial system; and
  • to promote effective competition in the interests of consumers.

The FCA is also obliged to discharge its general functions in a way that promotes competition.

(b) Prudential Regulation Authority (PRA)
The PRA, a subsidiary of the BoE, is responsible for micro-prudential regulation of systemically important firms, including banks, insurers and certain investment firms. These firms are referred to as PRA-authorised firms and also as dual-regulated firms because, while the PRA regulates prudential issues, the FCA acts as these firms’ conduct regulator.

The PRA has operational independence from the BoE, and the FPC, for day-to-day regulation and supervision of PRA-authorised firms. Its focus is on setting institution-specific capital requirements.

The PRA has a general objective: to promote the safety and soundness of regulated firms.

The PRA is likely to try to meet this objective primarily by seeking to minimise any adverse effects of firm failure on the UK financial system and by ensuring that firms carry on their business in a way that avoids adverse effects on the system.

The PRA’s board includes the Governor of the BoE as chairman and the BoE Deputy Governor for prudential regulation as chief executive. The FCA chairman also sits on the PRA board.

(c) Financial Policy Committee (FPC)
The FPC is a committee of the Court of Directors of the BoE responsible for macro-prudential regulation. This means that it considers prudential regulation issues across the UK financial system, in contrast to the PRA’s micro-prudential role, which is focused on the supervision of individual firms. Unlike the PRA and the FCA, the FPC does not have direct regulatory responsibility for any particular types of firm.

The FPC’s objective is to contribute to the BoE’s achievement of its financial stability objective under the Banking Act 2009 by identifying, monitoring and taking action to remove or reduce systemic risks. For these purposes a “systemic risk” is a risk to the stability of the UK financial system as a whole or to a significant part of that system.

The FSA was created in the late 1990s by combining a number of regulatory authorities. The new regulatory framework has, to some extent, reversed this process. Whether the new regulatory framework will achieve its intended purpose only time will tell. In the meantime, regulated businesses will have to manage any disruption caused by the implementation of the new framework, especially PRA-authorised firms which will have to adapt to supervision by two regulators.

Mehboob Dossa is a partner in the Corporate Department at international law firm, McGuireWoods. He is head of the London office’s equity capital markets group.  Mehboob can be contacted at mdossa@mcguirewoods.com.