Treasury has published a paper updating its proposals for regulatory reform. The paper sets out the Government's policy responses on key areas identified by respondents to its first consultation:

  • balanced core statutory objectives for the regulatory authorities: in response to concerns, the Government will build into the regime safeguards against the Financial Policy Committee (FPC) exercising its functions in such a way as to have a significant adverse effect on the ability of the financial sector to contribute to the UK's economic growth. The primary objectives of the Prudential Regulatory Authority (PRA) and what Treasury has now decided to call the Financial Conduct Authority (FCA) will be an overarching strategic objective for each regulator, underpinned by appropriate operational objectives;
  • transparency and accountability for the FPC, PRA and FCA: the paper sets out the detail of each entity's accountability – the FPC and PRA will be accountable to the Court of the Bank of England, while the FCA will be accountable to its own independent board. The Government is also planning to legislate for external channels of accountability, involving a twice-yearly Financial Stability Report and update on developments in prudential regulation and financial stability, and the publication of meeting records. Treasury should also receive all directions the FPC issues to the PRA or FCA. The PRA and FCA will be subject to full audit by the National Audit Office, and Treasury will be able to enquire into causes of regulatory failure. The PRA will be subject to reporting requirements and the obligation to consult market professionals, and the FCA will have non-executive directors appointed by Treasury and BIS, as well as a new small business practitioner panel alongside the existing FSMA panels;
  • the need for a strong, coherent markets function within the FCA: Treasury had already confirmed the UK Listing Authority will be housed within the FCA and that the FCA will have the FSMA criminal powers to prosecute market abuse. It will also regulate investment exchanges, multilateral trading facilities and other platforms. Its objectives will include requiring appropriately tailored treatment of markets and wholesale issues;
  • the importance of the European and international agenda: the paper says the Bank of England will sit on the European Systemic Risk Board, the PRA on the European Banking Authority and European Insurance and Occupational Pensions Authority and the FCA will represent the UK on the European Securities and Markets Authority. The Treasury will continue to represent the UK in high-level policy discussions and political negotiations. This will be backed up by Memoranda of Understanding between the authorities to ensure a consistent, strategic view of the UK's priorities and interests; and
  • effective co-ordination between the authorities: Treasury plans to legislate for a statutory duty for the authorities to co-ordinate functions, an obligation to have MoUs, cross-membership of boards and a veto mechanism for the PRA to reduce the risk of the FCA's regulatory actions threatening the financial stability or disorderly failure of a firm.

Treasury will separately fully respond to the recent report from the Treasury Select Committee. For the moment, it has confirmed it will implement its changes by amending the Financial Services and Markets Act, where appropriate modifying, supplementing and in some cases replacing the current framework. It says this will be better for firms than introducing a new piece of legislation. There is an eight-week consultation period on this report, so the Government can publish a draft Bill in the spring. It says the consultation period is shorter than normal to allow for formal pre-legislative scrutiny lasting 12 "sitting" weeks without significantly extending its timetable for reform. It plans to hold a number of roundtables and discussion fora during the consultation period. It remains committed to putting the new architecture in place by the end of 2012 so aims to publish a Bill in mid-2011 which would receive Royal Assent in mid-2012. It notes FSA's plans to make the transition.

Treasury also announced the appointment of Alastair Clark, Michael Cohrs, Donald Kohn and Sir Richard Lambert have been appointed to the interim FPC as external members.

Treasury wants comments on the paper by 14 April. (Source: A new approach to financial regulation: building a stronger system and 23/11)