On 16 June 2011, HM Treasury published a White Paper providing further detail on its new approach to financial regulation including a partial draft of its proposed Financial Services Bill and explanatory notes. The reforms to the UK system of financial regulation are the Government’s response to the shortcomings of the UK system of financial regulation which were highlighted by its failure to predict and adequately respond to the financial crisis which started in 2007. The White Paper provides that the Government’s primary objective in reforming financial regulation in the UK is “to fundamentally strengthen the system by promoting the role of judgment and expertise”.
As has been widely discussed, the Government plans to reform the financial regulatory system by establishing a macro-prudential regulator, the Financial Policy Committee (“FPC”) within the Bank of England to monitor and respond to systemic risks; transferring responsibility for prudential regulation of banks, insurers and complex investment firms to a new regulator, the Prudential Regulation Authority (“PRA”) which will be a subsidiary of the Bank of England; and creating a focussed new regulator for conduct of business, the Financial Conduct Authority (“FCA”), to ensure that business across financial services and markets is conducted in a way that interests all users and participants. These regulators will be judgment-led and empowered to look beyond compliance and supervise proactively.
The draft Financial Services Bill provides for the PRA to be given a specific statutory objective for insurers “to ensure the insurer has a reasonably high probability of meeting claims from and material obligations to policyholders as they fall due.”
Under the new system, insurers will be dual regulated. The PRA will be responsible for the prudential regulation of insurers whilst the FCA will be responsible for supervision of their conduct of business. The Society of Lloyd’s and Lloyd’s managing agents will be dual regulated firms whilst Lloyd’s members’ agents and Lloyd’s brokers will be FCA-regulated firms.
The White Paper can be viewed at: