HM Treasury published on 17 February 2011 a further consultation paper on the new UK regulatory architecture, A new approach to financial regulation: building a stronger system. The consultation builds on the government’s proposals announced in its July 2010 consultation paper and reflects the responses to that consultation, (including the House of Commons Treasury Select Committee’s report on the new structure published in February 2011).
The new regulatory body responsible for conduct of business regulation, as well as most of the FSA’s existing market regulation functions, is now to be called the Financial Conduct Authority (or “the FCA”). (Its previous working name was “the Consumer Protection and Markets Authority” (or CPMA) The names of the other two new regulatory bodies, the Financial Policy Committee (“the FPC”) and the Prudential Regulation Authority (“the PRA”) remain unchanged.
The consultation paper includes further details and proposals in the following key areas:
- the primary legislation introducing the reforms will amend rather than repeat and replace the Financial Services and Markets Act 2000 (“FSMA”);
- the core statutory objectives of the new regulatory bodies: the FCA’s objectives are to include a greater focus on competition issues;
- the macro-prudential tools potentially available to the FPC are to be designed to address systematic risk, including capital requirements, liquidity and collateral requirements;
- the firms to be dual regulated by the PRA and the FCA, which will include investment firms classified as BIPRU 770K firms, and also Lloyd’s of London, as well as other insurers and deposit-takers;
- the accountability mechanisms for the new regulators;
- co-ordination between the new regulators, including in crisis management situations;
- the PRA’s “judgement-led approach” to prudential regulation;
- the FCA’s more “interventionist” approach to conduct of business and product regulation (which is likely to be very controversial in the financial services industry and with product providers in particular); and
- the extended enforcement powers of the PRA and FCA, including powers to publicise that a warning notice has been issued to a firm (and which have already attracted adverse media comment).
Whilst the Treasury’s consultation document is a further important stage in the restructuring of the UK’s financial regulatory architecture, important details on how the new bodies will function in practice are still awaited despite this 138-page consultation.
With regard to the Financial Ombudsman Service (“FOS”) it is proposed that it will remain as an independent dispute resolution service, and the FCA will take on the FSA’s existing functions in relation to the FOS. A number of changes are planned, however. The statutory function and responsibilities are to remain quite distinct from those of the regulatory body and this distinction should become clearer as a result of the FCA’s greater focus on improving firms’ retail conduct and the action it will take to tackle potential causes of consumer detriment before their effects become widespread. The FCA is also proposed to have tools at its disposal to act early and decisively, including new regulatory powers to require firms to establish and operate consumer redress schemes. This is to ensure that the FOS is then able to focus on its function to deal with individual disputes on a case-by-case basis. (In addition, there will be a statutory obligation for the FOS and the FCA to publish and maintain a memorandum of understanding to replace the voluntary understanding that already exists between the FOS and the FSA).
Comments are invited on a series of broad questions raised in the consultation until 14 April 2011. The Government then intends to publish a White Paper and draft primary legislation for Parliamentary pre-legislative scrutiny, but remains committed to its timetable for introducing the primary legislation in Parliament in mid-2011 and establishing the new regulatory system by the end of 2012.
Meanwhile, the FSA intends to make the transition to the new regulatory structure at the end of 2012, and in April 2011 will replace its currency risk and supervision business units with a prudential business unit and a consumer and markets business unit. Following that, the focus will be on progressively changing the regulatory processes (insofar as the FSA’s current statutory remit allows this) so that the FSA can begin to operate distinct prudential and conduct approaches to regulation. This approach is intended to provide an opportunity to “road test” some important elements of the new supervisory structure before the formal transition at the end of 2012.