The Financial Services Bill (FS Bill) was introduced in the House of Commons on 26 January. It consolidates the changes to legislation (mainly, but not only, the Financial Services and Markets Act 2000 (FSMA)) necessary to:
- create the new regulatory structure for UK financial services regulation;
- introduce new obligations on regulators; and
- bring more credit and hire activities within the scope of FSMA.
The FS Bill finished its period of pre-legislative scrutiny at the end of 2011 and the Government hopes to drive it through for Royal Assent by the end of 2012, so it can implement the changes early in 2013.
The FS Bill is lengthy and is divided into nine parts.
The Bank of England (BoE)
There are changes to the composition of the Court of the BoE, including creating the post of Deputy Governor for prudential regulation. The FS Bill also includes changes to set out BoE’s financial stability strategy and the constitution, objectives and functions of the Financial Policy Committee (FPC). It also sets out how the FPC can give directions to the Financial Conduct Authority (FCA) or the Prudential Regulation Authority (PRA) in relation to implementation of macro-prudential measures for specified classes of regulated firms, and how the FPC can make recommendations:
- to BoE about financial assistance to financial institutions (generally, but not in respect of specific institutions) and BoE’s functions in relation to payment systems, clearing houses or settlement systems;
- to Treasury about the exercise of various powers, including Treasury’s powers to make macro-prudential measures, amend regulated activities, designate activities requiring PRA regulation, and give FCA powers to make product intervention rules;
- to FCA and PRA about how to exercise their functions in relation to regulated persons of specific descriptions; or
- to other persons, in writing.
This part also sets out the need to publish records of meetings and to produce and publish two financial stability reports each year, which the Governor of BoE and the Chancellor must discuss. Finally, BoE may require FCA or PRA to provide it with information that it reasonably requires to carry out its financial stability objective.
Amendments to FSMA
Most of the FS Bill deals with amendments to FSMA. Some of these are minor, but many are major and will have far reaching implications. These include:
Provisions specific to FCA:
- the creation of FCA by changing the Financial Services Authority's (FSA) name, and setting FCA’s strategic objective of ensuring that relevant markets function well and its three operational objectives (consumer protection, integrity and competition);
- bringing within the list of “regulated financial services” for the purpose of FCA’s objectives not only the current FSMA “regulated activities”, but also certain consumer credit business, approval of financial promotions, ancillary services, appointed representatives, payment service and e-money businesses, sponsors and primary information providers;
- rules on how FCA must supervise, monitor and enforce, including its duty to consult and the role of three Practitioner Panels and the Consumer Panel; an
- a power for Treasury to appoint an independent person to conduct a review of FCA.
Provisions specific to PRA:
- setting out the functions of PRA, its general and insurance objectives and providing a power to provide for additional objectives in respect of new regulated activities. It also lets Treasury specify which regulated activities are “PRA-Regulated Activities”; and
- setting out PRA’s duty to consult and Treasury’s right to require an independent review of PRA.
Provisions on PRA and FCA arrangements
- regulatory principles that both PRA and FCA must comply with and rules to ensure co-ordination in their exercise of their functions, including an obligation to follow generally accepted principles of good governance and to enter into a memorandum of understanding (MoU), and the duty on both regulators to co-operate with BoE;
- the power of Treasury to set the boundary between PRA and FCA and the power of PRA to require FCA not to take a specific action in closely-defined circumstances;
- directions on how regulators should deal with group supervision; and
- allowing PRA and FCA to make arrangements to provide services to each other, to provide to or receive services from BoE, and to provide services to the consumer financial education body, the scheme manager or the scheme operator.
Other FSMA amendments
- setting out the function of the consumer financial education body;
extending the scope of FSMA to include:
- loans and other forms of credit;
- contracts for hire of goods;
- providing credit reference services; and
- providing credit information services;
- setting a new permission regime, including how FCA and PRA give permissions, vary, cancel or impose requirements in relation to firms, and work together. It also sets out how the appropriate regulator may have regard to any person connected with an applicant;
- amending the rules on prohibition orders to set out the roles of PRA and FCA;
- confirming that FCA is the competent authority for listing and setting out the rules on its disciplinary powers. There is also a new section on primary information providers and FCA’s powers over them;
- making changes to rules relating to hearings and appeals;
- replacing the current sections on rule-making powers with new ones with specific parts referring to FCA rules on client money, rights to rescind, product intervention, price stabilisation and financial promotion and to PRA rules on remuneration and recovery and resolution plans. New sections also apply to modification, waiver and contravention of rules, including the duties of FCA and PRA to consult each other;
- setting out the power of FCA to give guidance;
- setting out the rules on competition scrutiny and the powers of the Competition Commission and Office of Fair Trading;
- amending the rules on control over authorised persons, including the obligation of PRA and FCA to consult each other;
- introducing a new section of FSMA on powers exercisable in relation to parent undertakings of authorised firms;
- confirming FCA’s position as the regulator of regulated investment exchanges and BoE’s position as the regulator of recognised clearing houses and setting out relevant powers, including disciplinary powers. FCA will also take over FSA’s powers to make rules on short selling;
- setting the PRA’s objectives in relation to the Lloyd’s market; and
- inserting new provisions about consumer protection and competition including how references can be made to FCA.
The FS Bill includes new provisions on functions relating to mutual societies and building societies.
Collaboration between Regulators
The FS Bill includes detail setting out the basis for collaboration between the relevant regulators where a possible need for public funds is identified, and requiring Treasury, BoE and PRA to sign an MoU on crisis management and the three regulators and FCA to sign an MoU in relation to international memberships and activities.
Inquiries and Investigations
The FS Bill sets out cases where Treasury may arrange independent inquiries, and the duties of FCA and PRA to investigate and report on possible regulatory failure. There are also new rules on how complaints against regulators should be dealt with.
Amendments of the Banking Act 2009
The FS Bill makes several amendments to the Banking Act, including:
- amending it in respect of the special resolution regime and bank administration, specifically in respect of private sector purchasers, reports following use of stabilisation powers, and powers in relation to inter-bank payment systems; and
inserting new schedules addressing various matters including:
- terms of office of FPC officials;
- further provisions relating to officials of BoE;
- details of the constitution, duties and accountability of FCA and PRA;
- amendments to the schedules of FSMA dealing with passport rights to reflect the new UK regulators; and
- setting out the application of FSMA to BoE,
as well as various general and miscellaneous changes.
Treasury’s Command Paper
Accompanying the FS Bill is a Command Paper setting out Treasury’s objectives for financial reform, which it lists as being, in addition to the FS Bill:
- the creation of the Independent Commission on Banking and the implementation of its recommendations;
- proactive and constructive diplomacy in Europe;
- the bank levy;
- credit easing; and
- returning public sector stakes in banks to the private sector.
The paper discusses the key new proposals in the FS Bill including:
- the work and role of BoE and FPC, including governance, crisis management and accountability;
- the role of PRA, including how Treasury plans to consult on how to divide the existing threshold conditions for authorisation between PRA and FCA as appropriate;
- the roles of FCA, including its competition objective and powers. The paper explains Treasury’s belief that consumer credit should be brought within the FSMA regulatory regime and that FCA should be responsible for consumer credit. It explains the FS Bill includes provisions to enable a full transfer of regulation to FCA but keeping the provisions of the Consumer Credit Act. This section also looks at how the Government plans to control FCA’s product intervention powers, and why it thinks it is appropriate to permit FCA to publish warning notices and actions taken against misleading financial promotions. This part of the paper also confirms the Government’s decision to make FCA responsible for regulating recognised investment exchanges and multilateral trading facilities. FCA will also be responsible for the Code of Market Conduct;
- how the new regulators will co-ordinate;
- the importance of getting both the domestic and international regulatory frameworks right and how the UK should engage internationally;
- the Government’s response to the Joint Committee’s report of 19 December 2011and the amendment to the FS Bill, which reflect some of the comments. In relation to consumer credit, it notes it will exercise the powers in the FS Bill only when it has identified an FSMA-based model that will deliver appropriate and proportionate regulation;
- the Government’s response to the Treasury Select Committee report of 8 November, which looked at the accountability of BoE;
- a summary of responses the Treasury’s June consultation paper;
- an impact assessment; and
- the rationale for the MoUs on crisis management and international organisations.
In addition to the FS Bill and Explanatory notes, Treasury has published:
- a draft Statutory Instrument setting out the changes affecting mutual societies;
a draft Statutory Instrument setting out the regulated activities that will fall within PRA's remit. These are:
- accepting deposits;
- effecting contracts of insurance;
- carrying out contracts of insurance;
- dealing in investments as principal if the PRA thinks it appropriate. This will be based on whether various conditions are met, in particular that it is, or would be if it were established in the EEA, a firm required to have minimum capital of €730,000. There is an additional, less clear, test, that requires PRA to consider the assets of the firm in question and its group when deciding whether to make a designation;
- managing the underwriting capacity of a Lloyd’s syndicate as a managing agent; and
- arranging, by Lloyd’s, deals in contracts of insurance underwritten by Lloyd’s or related activities; and
- a draft MoU between FCA and PRA.
In the immediate future, the second reading of the FS Bill is scheduled to take place on 6 February. There is then much more work to be done before the Government’s planned adoption of the new Act before the end of the year.