As outlined in Edition 2 of the SCM Briefing, the Financial Services Act 2012 took effect in the UK on 1 April 2013 (a date known as 'legal cut-over'), to create an entirely new framework for financial services regulation. Led once again by the Bank of England under the oversight of a new 'macro-prudential' Financial Policy Committee (FPC), the new regime has replaced the Financial Services Authority (FSA) with two new regulatory bodies, the Prudential Regulation Authority (PRA, a micro-prudential regulator) and the Financial Conduct Authority (FCA, responsible for conduct of business regulation). Now that the new regime is up and running, we take this opportunity to provide some key practical information about the regime and its operation, summarise some of the key legislative and Handbook changes, and provide an overview of the responsibilities of the new regulatory bodies, including some key aspects of the Handbook they each administer.
- The Financial Services Act 2012 makes substantial amendments to the Financial Services and Markets Act 2000 (FSMA) but does not repeal it. A significant number of amendments are made to the Banking Act 2009 (to expand the Special Resolution Regime to allow the PRA and FCA to place certain "systemically important" entities within its scope), the Bank of England Act 1998 (generally to reflect the Bank's new powers, statutory objectives and functions), and numerous consequential amendments have been made to other pieces of existing UK legislation to reflect changes in references from the FSA to the FCA, PRA and FCA as appropriate.
- In terms of the relevant Rulebooks, the FSA Handbook has been split between the PRA and FCA to form two new, separate Handbooks. While both the PRA and FCA Handbooks currently display the particular sections of the rules that each regulator administers, a useful Handbook "combined view" has also been provided which show the provisions of both Handbooks, clearly marked to indicate which regulator enforces them. Some chapters of the Handbook are published by both regulators, reflecting the fact that each regulator enforces separate rules within the same chapter. We note below how responsibility for some of the key aspects of the Handbook have been divided between the PRA and FCA.
- The Bank of England's new FPC has overall responsibility for monitoring the stability and resilience of the UK financial system (including reducing systemic risks). It does not directly regulate individual firms, although it is responsible (working closely with the FCA) for the oversight of so-called "Financial Market Infrastructures" (such as regulated investment exchanges and clearing houses). The FPC may direct both the PRA and FCA to take specific actions through the issuance of Recommendations and Directions.
The new PRA is a direct subsidiary of the Bank of England, and its key objective is to promote the safety and soundness of regulated firms. Some key aspects of the PRA's role are as follows:
- All firms regulated by the PRA are known as "dual-regulated" firms as they are PRA-authorised, but are also subject to conduct of business regulation by the FCA. There are around 1,700 of these dual-regulated firms.
- The PRA has power to set additional capital requirements for banks at the FPC's direction and will be responsible for those "national discretion" aspects of the Capital Requirements Directive (such as the imposition of the "systemic risk buffer" and countercyclical capital requirements) that require local regulators' involvement.
- The PRA will oversee the new recovery and resolution planning activities for all UK banks.
- Both the PRA and FCA have a role in the EEA "Passporting" process. The PRA administers the "inward" and "outward" (for dual-regulated firms) passporting regime as lead regulator (for passporting under the CRD and insurance Directives), while the FCA acts as lead regulator for inward passporting under all other Directives and for outward passporting of FCA-only firms. In each case, the non-lead regulator may make representations in certain circumstances regarding an inward- or outward-passporting firm.
- Key parts of the Handbook administered by the PRA include the Prudential Sourcebook for Banks, Building Societies and Investment Firms (BIPRU, including Chapter 9 - Securitisation) and the Prudential Sourcebook for Mortgage and Home Finance Firms and Insurance Intermediaries (MIPRU). The PRA will develop its own "Supervisory Statements" (formerly FSA Guidance) and intends to develop a brand new PRA Rulebook over time that will move away from the FSA's 'legacy' material.
- PRA-authorised firms include banks, building societies, credit insurers, Lloyd's of London and certain "systemically important investment firms" designated by the PRA.
The new FCA inherits the majority of the FSA's previous functions. Its key (statutory) objective is to ensure that "relevant markets" function well, and its (strategic) objectives are to protect consumers, enhance the integrity of the UK financial systems and promote competition in the interests of consumers. Some key aspects of the FCA's role are as follows:
- The FCA is responsible for the conduct of business regulation of all firms, and acts as prudential regulator for all firms other than those subject to PRA regulation (known as FCA-only firms).
- A wide range of additional powers are available to the FCA, including product intervention and product bans, removing misleading promotions and taking enforcement proceedings. It is expected that the FCA will have a lower risk tolerance than the FSA for products and practices that are likely to cause consumer detriment (by way of example, the FCA has recently taken pre-emptive action in relation to interest-only mortgages).
- The FCA takes over the UK Listing Authority (UKLA) function from the FSA, and is responsible for the Listing Rules, Prospectus Rules and Disclosure and Transparency Rules (LR, PR and DTR) in its capacity as competent authority for listing. The UKLA Knowledge Base (comprising technical and procedural notes on the LR, PR and DTR) now constitutes binding FCA guidance from legal cut-over.
- Key parts of the Handbook for which the FCA is responsible include the Banking and Mortgage Conduct of Business Sourcebooks (BCOBS and MCOB), the Client Assets Sourcebook (CASS), the Market Conduct Sourcebook (MAR) and the Regulated Covered Bonds Sourcebook (RBC).
- The FCA will assume its new role in overseeing the consumer credit regulatory regime (taking over from the Office of Fair Trading) in April 2014.
- At European level, the FCA will represent the UK's interests in European financial market regulation at the European Securities and Markets Authority.
- The FCA is responsible for administering the single Financial Services Register which replaces the FSA Register (helpfully, there are not separate Registers for PRA- and FCA-authorised firms). The Register is a public record of all the firms, bodies and individuals regulated by the PRA and FCA. It allows searching by firm, by individual approved person, or by business type and the results show the authorisation status of each registered firm or individual.
- FCA-authorised firms include financial advisers, investment firms, insurance and mortgage brokers, lenders, custodians, investment exchanges, collective investment schemes and other firms not considered "systemically important".
Some of the key repeals and changes effected by the Financial Services Act 2012 are as follows:
- Part IV FSMA (Authorisation) becomes 'Part 4A' of FSMA such that a firm with Part IV permission under FSMA becomes a firm with Part 4A permission under FSMA;
- Part VI FSMA (Official Listing) of FSMA remains Part '6' but is heavily amended to reflect the FCA as the new UKLA; and
- Section 397 FSMA (Misleading Statements and Practices) is repealed by Part 7, section 95 of the Financial Services Act 2012. New Sections 89-91 set out the three new offences relating to misleading statements, misleading impressions and misleading statements in relation to "benchmarks". The provisions relating to "benchmarks" were introduced into the Financial Services Act 2012 following Martin Wheatley's Review of LIBOR, along with amendments to FSMA to deal with the new regulated activities ("providing information in relation to a specified benchmark" and "administering a specific benchmark") connected with the setting of benchmarks. Secondary legislation has now also specified that the relevant benchmark for these purposes is LIBOR (additional benchmarks may be added over time).
Existing permissions and approvals as at 30 March 2013 have been "grandfathered" to the new regime such that all permissions and approvals remain effective from 1 April 2013 and firms did not need to re-apply for permission or authorisation. Regulated firms have been given six months (from legal cut-over) in which to review and amend their literature to ensure they are making the correct regulatory status disclosures, however the FCA and PRA are urging firms to complete these changes as soon as possible. Examples of the revised regulatory status disclosures (as provided by the FCA and PRA) are set out below:
FCA-only firms: "authorised and regulated by the Financial Conduct Authority".
Dual-regulated firms: "authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority".