The Financial Services Act 2012 (FS Act) received Royal Assent just before Christmas 2012 and will, for the most part, take effect on 1 April 2013 (Legal Cut-Over or LCO). Banks will see significant changes in the manner in which they are regulated, as they will be subject to dual-regulation by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).

In this article, Emma Radmore looks at key regulatory issues for dual-regulated firms.

Who will be my regulator?

From LCO, the Financial Services Authority (FSA) will no longer be the regulator of financial institutions and financial services firms. As a corporate entity, it will be renamed FCA. FCA will take over most of FSA’s powers and rule-making abilities, with additional powers given to it by the FS Act. PRA is a new company, a subsidiary of the Bank of England (BoE).

Under the new regime, the Financial Services and Markets Act 2000 (FSMA) remains the law that sets out which firms require authorisation to carry on regulated activities. All authorised firms will have one prudential regulator and one conduct regulator. FCA is the conduct regulator for all firms. It is also the prudential regulator for the majority in number of authorised firms. PRA is the prudential regulator for all systemically important firms. What is a "PRA-regulated firm" is set out in secondary legislation. The key instrument, the Financial Services and Markets Act 2000 (PRA-regulated Activities) Order 2013, sets out which firms will be subject to PRA regulation and therefore be dual-regulated under FSMA. The list includes all deposit-takers and insurance companies, as well as defined systemically important investment firms, Lloyd’s and Lloyd’s managing agents. So all banks will be dual-regulated and will need to understand how the rules of the two regulators apply to them.

Supervisory style

PRA and FCA have new objectives under FSMA, as amended by the FS Act, and these will affect the way in which they supervise their regulated communities.

PRA plans to use a judgement-led, forward-looking supervisory approach that takes into account a wide range of possible risks to its objectives. It will use a "Proactive Intervention Framework" and will assign its regulated community to one of five risk categories. The largest deposit-takers, the type and complexity of whose business gives the potential to cause significant disruption to the UK financial system, will be within category 1. Firms with the least potential to cause disruption will be in category 5, with the others graduated in between.

PRA says it will regulate based on the new threshold conditions that firms must meet on an ongoing basis. For a bank, these include carrying out its business prudently with regard to PRA’s regulatory objectives and to ensure PRA is able to supervise it adequately. PRA says its supervisory approach may lead to early intervention based on risks that could "plausibly" arise in the future. However, it also says it wants to foster trust on both sides by expecting firms to raise issues with it at an early stage, in response to which PRA will react proportionately.

FCA’s objectives and threshold conditions will also be relevant for banks. Its objectives allow it to use its significant powers in relation, for example, to prevention of financial crime and product intervention. Its remit covers not only current FSMA-regulated financial services, but also consumer credit, payment services and e-money activities. FCA will apply its supervisory model using three pillars — the firm systematic framework (FSF), event-driven work and issues and products. It will create supervisory groups for certain types of firm, including a group for banks and insurance groups with a large retail client base and universal/investment banks with large client asset and trading operations. Firms in this group will have a specific allocated supervisor.

What does this mean for banks?

Banks must ensure they clearly understand which rules apply to which parts of their business. This will often be clear. For instance, all financial resource related issues and high-level systems and controls will be supervised by PRA, while all conduct of business and financial crime issues will fall under FCA’s remit. Banks should, however, pay particular attention to the approved persons regime. Banks must ensure they apply to the right regulator for approval for individuals to carry on controlled functions, depending on the specific function.

The designation of the FSA Handbook between PRA and FCA will not change the substance of much of the rules. However, banks must both prepare for the change in supervisory focus ahead and ensure they meet the administrative requirements to adapt to the transition, such as updating their status disclosure and references to the regulator on their customer-facing documentation.