The extensive reforms to regulation of financial institutions announced by the Chancellor of the Exchequer, George Osborne, in Summer of this year (please click here for our previous e-update on this) included the abolition of the Financial Services Authority (FSA) and the transfer of its functions to four new bodies: the Prudential Regulation Authority (PRA), the Financial Policy Committee (FPC), the Consumer Protection and Markets Authority (CPMA) and a serious economic crime agency.
The consultation paper on such reform published by HM Treasury, ‘A new approach to financial regulation: judgement, focus and stability’ providing more detail on the proposed reforms to the UK financial regulatory structure and setting out the government’s next steps, has attracted a vast number of responses from industry groups, regulatory bodies and leading financial services practitioners.
The paper confirms that the CPMA will be responsible for the conduct of business regulation of every authorised financial services firm (including banks and building societies) providing services to consumers and the prudential regulation of those firms which are not regulated by the PRA. The CPMA and the PRA will each have its own enforcement and supervisory powers. The CPMA will take the lead on market conduct regulation, but regulation and supervision of settlement systems and central counterparty clearing houses will transfer to the Bank of England.
However, it is thought that, although the paper sets out further detail on the objectives, powers and governance of each of the FPC, the PRA and the CPMA, it does not go far enough.
Whilst it is clear that the model for the CPMA's powers, responsibilities and accountability mechanisms will be that which currently applies to the FSA, the equivalent mechanisms for the PRA are less clear. Concerns have been raised about the proposal that the PRA will have the power to make new rules without having to consult, and will not be subject to the statutory accountability mechanisms to which the FSA is subject to. This may lead to the creation of a regulatory body with potentially unlimited powers and little or no accountability to the firms it regulates.
Co-ordination between the three new authorities will be key. Clarity is needed regarding the jurisdiction of each body, otherwise there is a real risk that the new system will suffer the same problems as the current system, for instance, issues falling between two regulators. There is concern that the government has underestimated the difficulties in splitting regulation between different bodies.
There are many uncertainties about the new regulatory model and this paper is believed to be just one of many to follow, with HM Treasury due to publish a further consultation paper in February 2011. This second paper is expected to present the government's more detailed proposals, including draft legislation in the form of the FS Regulation Bill. The Government has set the ambitious target of Royal Assent within two years and full implementation by 1 January 2013.