On 1 April 2013, the Financial Services Authority (FSA) will be replaced by two new financial services regulators: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
The PRA will be responsible for the prudential regulation of systemically important institutions such as:
- certain systemically important investment firms.
The PRA's general objective will be to promote the safety and soundness of firms in order to reduce the threat firms pose to the stability of the financial system and thus to the provision of critical financial services.
The FCA will become the conduct regulator for all firms and the prudential regulator for firms not subject to prudential regulation by the PRA. This new regulatory structure means PRA-regulated firms will be 'dual regulated', by the PRA for prudential purposes and the FCA for conduct purposes.
The FCA's strategic objective will be to ensure confidence in the financial system. The FCA will meet this objective by advancing three operational objectives to:
- secure an appropriate degree of protection for consumers
- protect and enhance the integrity of the financial system
- promote effective competition in the interests of consumers.
The new regulatory structure heralds a change of approach to financial regulation, which will allow regulators to be more proactive and intrusive. To meet their objectives, the PRA and the FCA will have certain new powers over firms. We set out below a few of the key issues and changes for clients.
The FCA will take over the FSA's role and functions as the UK Listing Authority (UKLA). The Listing Rules and Disclosure and Transparency Rules will be brought within the new FCA Handbook.
The FCA will be able to make temporary product intervention rules that are necessary or expedient in advancing either its consumer protection or competition objective.
These powers will allow the FCA to block the launch of a new product, stop an existing product or specify requirements on the features and terms of products. The FCA will also have similar powers to direct firms to remove or amend misleading financial promotions.
Although the FCA will not pre-approve products, it is likely to remain interested, as the FSA has been, in how products are designed and sold to ensure products meet customer needs and achieve the intended outcomes. With the new powers at the FCA's disposal, firms will need to ensure good product governance structures are maintained.
Existing FSA approvals of persons who carry out a controlled function will be 'grandfathered' to the new regulatory structure so that a person will be deemed to have approval from either the PRA or the FCA, as appropriate.
If a person's role changes after 1 April 2013 which results in them performing a different or additional controlled function, a new approval will be required.
Under the new regime, the approval of a person to carry out a controlled function will be performed by the FCA, although for dual regulated firms senior appointments will be considered by the PRA, which must also obtain the FCA's consent.
Applications will not be approved solely on the basis of an individual's ability, skills and behaviours. The appropriateness of the individual will be considered in the light of the whole senior executive team to ensure a firm's board has the right management balance.
Change of control
The new regulatory structure will impact the change of control regime for authorised firms. The assessment criteria for change of control applications have not been changed under the Financial Services and Markets Act 2000. In future, the appropriate regulator for change of control applications will be:
- the PRA where the target is a dual regulated firm
- the FCA for all other firms.
The PRA will liaise with the FCA regarding applications it receives in respect of dual-regulated firms. The FCA will consult with the PRA if the target is a dual-regulated firm in its immediate group or if the proposed controller of the target is a dual-regulated firm.
As regulators will be required to consult each other regarding applications, this raises the question as to what happens if the regulators disagree. Where regulators are required to consult, each regulator may make representations to the other regarding any of the assessment criteria.
Where the PRA consults the FCA, the FCA may only direct the PRA to object to an application or impose conditions if it considers there are reasonable grounds to suspect money-laundering or terrorist financing in connection with a change of control. Although the FCA may make this direction, the PRA retains a general power of veto.
Where the FCA consults with the PRA, the PRA may only direct the FCA to object to an application or impose conditions if it considers there are reasonable grounds to object on the basis of the following:
whether the target will be able to comply with its prudential requirements
if the target becomes part of a group, whether that group has a structure which makes possible effective supervision
the financial soundness of the purchaser (if the purchaser is a dual-regulated firm).
Unregulated holding companies
Many regulated entities are the subsidiaries of unregulated holding companies. The FSA recognises that the activities of a group parent company may affect a regulated entity's ability to comply with its obligations.
Following legal cutover the FCA and PRA will have new powers that it may apply to unregulated holding companies in order to:
make information requests
impose fines or censure for breach of either of the above.
The regulators may use a power of direction where they believe such a direction is required to advance its objectives. The FCA, for example, has indicated that it may use its power to bring a FCA-regulated entity back into compliance with its regulatory requirements.
Both regulators will be keen to make their marks and show that they are competent and proactive. Whilst a period of bedding in is likely it is clear from both the PRA and FCA that firms will need to adapt rapidly to the new regulatory structure and supervisory framework.