the recent regulatory reform consultation paper issued by the FSA and the likely changes that will occur to the FSA Handbook:
The Financial Services Bill 2011 (“the Bill”) creates a new financial services regulatory structure. In addition to the creation of the Financial Policy Committee, the regulation of prudential and conduct operations will be separated out to two new organisations - the Prudential Regulation Authority (“PRA”) and the Financial Conduct Authority (“FCA”) - when the Bill receives Royal Assent. The FCA will become responsible for the authorised person regime and will maintain the supervision, monitoring and enforcement regimes currently conducted by the FSA.
On 12 September 2012 the FSA published consultation paper CP12/24 entitled “Regulatory Reform: PRA and FCA regimes relating to aspects of authorisation and supervision” (the “Consultation Paper”). The paper consults on substantive proposed changes to the current FSA rules and guidance, in anticipation of the enactment of the Bill.
When the PRA and PCA (together the “New Regulators”) acquire their new powers, each body will adopt its own specific handbook. Provisions of the existing FSA Handbook will be adopted/designated by the FCA and/or the PRA to form the new handbooks. The new handbooks will be available online and it is expected that there will be a central version which will show the combined provisions with clear labels indicating which regulator each provision applies to. Whilst some of the amendments to the current FSA Handbook will be relatively straightforward there will be the need for substantive changes in some parts in order to reflect the objectives and functions of the New Regulators, as set out in the Bill.
The Consultation Paper identifies a number of substantive changes to the current FSA Handbook. Some of these appear relatively uncontroversial, whilst others will have an impact on the procedures and practices that some firms may currently adopt. The Consultation Paper is aimed at all firms and should be considered carefully as the proposed amendments/additions to the Handbook may require action on the part of firms.
The main aspects of the Consultation Paper can be summarised as follows:
Relevant amendments to definitions
A number of amendments and additions to the current Handbook glossary are proposed. These appear fairly uncontroversial and straight forward. They reflect the new regulatory regime that the Bill will create and are unlikely to create a great deal of difficulty for firms.
Changes to regulator disclosure requirements and use of the regulators’ logos (GEN 4/5)
Firms will continue to be required to disclose their regulatory status in letters and electronic communications to retail clients. The suggested wording currently provided by the FSA will be amended to reflect the change in regulator to the New Regulators. However, perhaps one of the most significant proposed amendments, in terms of costs to be incurred by firms, is that the general licence currently in place, which enables firms to utilise the FSA logo, will be removed and no alternative general licence will be brought into effect when the New Regulators take over.
Many firms currently use the FSA logo on letterheads, email signatures and websites etc. in order to communicate to consumers that they are authorised and regulated by the FSA (in accordance with their disclosure obligations under GEN 4). However, the Consultation Paper indicates that firms should be able to comply with their regulatory disclosure requirements without the need to utilise the New Regulators’ logos. Firms will be able to apply for an individual licence to use the new logos but it is unclear exactly on what basis such a licence would be granted.
It is proposed that firms will have a 6 month transitional period once the New Regulators acquire their regulatory powers. Firms will not be permitted to continue to display the FSA logo after this 6 month period and must ensure that the New Regulators’ logos are not used in any communication unless an individual licence has been granted.
These new provisions mean that firms must take steps to amend all stationary and electronic equivalents which currently display the FSA logo. Annex 1 of the Consultation Paper sets out a cost benefit analysis and estimates that most small firms will incur one-off costs to implement these changes. The analysis estimates that such one-off costs for a small firm would range from less than £100 to no more than £2,500. Firms should start planning and considering the cost implications of these proposals now, particularly if they usually bulk buy stationary which already has the FSA logo printed.
Firms will be able to continue using the “Keyfacts” logo given the connotations this conveys to consumers (i.e. that documents are important and should be read).
Changes to the Supervision Manual (SUP 5) regarding reports by Skilled Persons
A Skilled Person is a person appointed by the New Regulators  to provide a report under s. 166 or s. 166A (as will be added by the Bill) of the Financial Services and Markets Act 2000 (the “Act”).
Amendments to SUP 5 will reflect amendments that the Bill proposes to make to the Act, namely:
That the New Regulators will be able to contract directly with Skilled Persons. The FSA does not currently have this ability and instead can only notify a firm that a report by a Skilled Person is required and either can nominate a Skilled Person or ask the firm to nominate a Skilled Person to conduct the work. The proposed amendments will give the New Regulators increased control and management over the individuals providing Skilled Persons reports;
That the fees of Skilled Persons will be payable by the firm concerned by way of a levy imposed by the New Regulators where the New Regulators contract directly with the Skilled Person; and
To reflect the provisions of the new s.166A of the Act which will enable the New Regulators to instruct a Skilled Person (or to require the firm in question to instruct a Skilled Person) to collate and keep up to date information in respect of a firm where the firm has failed to comply with its regulatory requirements to do so.
In light of the new powers to contract with skilled persons, the FSA has put out to tender the various areas for which services are deemed required under the skilled persons regime with an intention to begin contracting from March 2013.
Changes to the Supervision Manual (SUP 6 and 7): applications to vary and cancel Part IV permissions and requirements
Part IV of the Act will be replaced by Part 4A when the Bill is enacted. SUP 6 will be amended to reflect the changes which Part 4A of the Act introduces.
It will be important for firms to understand which regulator they must apply too, should changes to permissions and requirements be necessary. This is particularly important for firms which will be dual-regulated. The Consultation Paper states that firms which are authorised by the PRA, but which are regulated by the FCA for conduct purposes, must ensure applications to vary or cancel are made to the PRA. Firms which are regulated and authorised by the FCA exclusively must apply to the FCA for variations or cancellations except where the application is to vary its permission to include a PRA regulated activity. In such circumstances the application should be made to the PRA.
The Bill proposes to separate out the procedure for applying to vary and cancel requirements from the procedure for applying to vary and cancel permissions, in an attempt to narrow the concept of varying permission. In respect of varying and cancelling requirements imposed on firms, the New Regulators will be given the power to impose, vary or cancel requirements on their own initiative.
The FCA’s approach to utilising the regulator initiated power, in respect of requirements, will be outlined within a new, updated SUP 7 which will be consulted on later this year. At this time there is, therefore, little that can be said on the new procedures.
Changes to the Supervision Manual (SUP 8): Waiver and modification of rules
Firms will continue to be able to apply for waivers and modifications of rules. However, it is proposed that the Online Notification and Application system will cease to be utilised and instead all applications for a modification or waiver must be submitted via email. There is currently no indication as to the likely turnaround such applications will be subject to.
Firms will have to ensure that they understand which regulator they should apply to for a modification or waiver. The PRA will be able to authorise a modification or waiver in respect of rules within the PRA Handbook as they apply to dual-regulated firms. The FCA will be able to authorise a modification or waiver in respect of rules within the FCA Handbook as they apply to dual-regulated and FCA only regulated firms. The FCA will be required to consult with the PRA where the firm is a PRA authorised person.
The New Regulators will not be required, as the FSA currently is, to consider whether waiver or modification would result in undue risk to persons who the Handbook is intended to protect. The New Regulators will, however, be required to consider whether the waiver or modification would adversely affect the advancement of their objectives and whether compliance with unmodified rules would be unduly burdensome on the firm.
The Consultation Paper provides a clear indication as to how the provisions of the Bill will be brought into effect when the Bill receives Royal Assent. What is clear is that firms must ensure that they understand the roles of the New Regulators and, particularly where a firm is dual regulated, which regulator is responsible for which aspects of the firms activities and conduct. Firms should ensure that they understand the new handbook provisions and regulator powers before the Bill comes into force in order to ensure a smooth transition.
It is expected that further consultation will occur on the provisions of the new FCA and PRA Handbooks. The FSA has indicated that a draft designation for the existing Handbook will be published prior to the formal creation of the New Regulators in order to give firms the opportunity to familiarise themselves with the new and amended provisions.
Responses to the Consultation Paper are required by 12th December 2012. Contact details for the various chapters can be found within the Consultation Paper. It will be interesting to see the views of firms and whether these are taken on-board when the new Handbooks are published.
This article was first published by Complinet on 24th September 2012.