On 19 April 2013, the FCA and PRA each published their respective approaches to identifying regulatory failure and conducting investigations, as required by the Financial Services Act 2012.
FCA: The FCA is required to carry out an investigation where its operational objectives (i.e. consumer protection, integrity and competition) could have been significantly adversely affected by events relating to a regulated person or entity and those events might not have occurred but for a serious failure of the regulatory system for which the FCA has responsibility. The FCA’s statement of policy (which referred to its reports in relation to Northern Rock, RBS and LIBOR) makes clear that the FCA only expects formally to investigate and report in “exceptional circumstances”.
PRA: Reflecting the statutory objectives of the PRA (promoting safety and soundness of PRA-authorised firms and providing protection to insurance policy-holders), the triggers for PRA investigations are its serious failures giving rise to one of the following: (i) the incurring of relevant public (i.e. government) expenditure in respect of PRA-authorised firms; (ii) events which have or could have had a significant adverse effect on the safety or soundness of a PRA-authorised firm; and (iii) where the events could place the protection of (insurance) policyholders at risk. The PRA has said that an investigation would not be automatically triggered if one of the statutory events occurred as “it is not the PRA’s role to prevent all firm failures, nor to protect all policyholders in full in all circumstances”. Both the FCA and PRA will ensure that investigations are conducted independently and with the oversight of their boards.