As discussed in previous newsletters (March and July 2011), the draft Financial Services Bill (the "Bill") is being introduced into legislation in the wake of the financial crisis, to strengthen financial regulation in the UK. The Bill amends the Bank of England Act 1998, the Financial Services and Markets Act 2000 and the Banking Act 2009 and represents a radical overhaul of the existing regulatory system.
Under the Bill the Bank of England will have responsibility for oversight of the macro-prudential issues via the Financial Policy Committee (the "FPC"). The Financial Services Authority (the "FSA") will be replaced by two new regulatory bodies: (i) the Prudential Regulation Authority (the "PRA"), a subsidiary of the Bank of England, which will have responsibility for micro-prudential regulation of firms whose activities require a significant degree of expert prudential regulation; and (ii) the Financial Conduct Authority (the "FCA") which will have responsibility for conduct of business regulation, consumer protection and market integrity.
The Bill was introduced to Parliament on 26 January 2012 and has since undergone its first and second readings in the House of Commons. The Bill has now completed its committee stage and is awaiting its report stage in the House of Commons. Assuming the Bill passes through the usual stages of legislative scrutiny it is envisaged that amendments will be implemented in early 2013.
Recommendations for reform
The Bill has been significantly amended following a number of recommendations from the Joint Committee, the Treasury Select Committee and various industry bodies.
Recommendations by the Treasury Select Committee
The Treasury Committee recommended that the FPC's accountability be enhanced considerably. Further, in view of the additional responsibility granted to the Bank of England in respect of prudential supervision, the Treasury Committee made a number of suggestions aimed at strengthening the governance of the Bank and improving the transparency of its decisions. In particular, the Treasury Committee proposed the creation of a "supervisory board" with the ability to carry out retrospective policy reviews of the Bank of England's performance, where necessary.
The Bill has been amended to take into account a number of the Treasury Committee's concerns. For example, the Bill now provides for increased accountability of the FPC, by requiring the FPC to respond publicly to the Treasury's recommendations regarding its remit and, where appropriate, to set out the reasons why it does not intend to act in accordance with the Treasury's recommendations. The Government has also confirmed that it will consult publicly on proposals regarding the macro-prudential tools available to the FPC.
There has been considerable discussion regarding changes to the governance structures within the Bank of England. The Bank of England is opposed to the creation of a separate supervisory board and instead favours the creation of an oversight committee made up entirely of non-executive members of the Court of the Bank of England. However, the Treasury Committee has indicated that it remains concerned about the need for enhanced governance and oversight structures within the Bank.
Interestingly, the Government has confirmed that it does not propose to replace the Court of the Bank of England with a supervisory board as it considers that the governance of the Bank should primarily be a matter for the Bank itself. However, the Government has agreed with the Governor of the Bank of England and the Chair of the Court that the oversight body will be expected to commission retrospective internal reviews of policy-making. There is still considerable uncertainty about how the proposals for strengthening the governance of the Bank of England will be taken forward.
Recommendations by the Joint Committee
The Bill has been amended to reflect the Joint Committee's recommendations regarding clarification of the FCA's strategic and operational objectives. The FCA's "efficiency and choice" operational objective has been replaced with one which focuses on the promotion of effective competition in the interests of consumers. Furthermore, the FCA's "consumer protection" objective has been enhanced to include a requirement for the FCA to have regard to:
- the general principle that those providing regulated financial services should be expected to provide an appropriate level of care; and
- consumers' need for advice and information that is accurate, timely and fit for purpose.
The Joint Committee also suggested that there would be significant benefit in transferring responsibility for the regulation of consumer credit to the FCA to bring the responsibility for protecting consumers of all financial services under a single regulator. The amended Bill provides for a full transfer of consumer credit regulation from the Office of Fair Trading (the "OFT") to the FCA. However, given that such a transfer would have a significant impact on many firms who are not currently authorised by the FSA, the Government has made it clear that it will only exercise these powers following a full consultation and impact assessment.
The FSA and the Joint Committee have previously mooted the idea of introducing a concept of "strict liability" of executives and board members for the adverse consequences of poor decisions to ensure that bank executives and Boards strike a balance between risk and return. The Government has recognised that this particular proposal has the potential to cause significant controversy within the financial services industry and has confirmed that it will publish a joint consultation document with the FSA in due course setting out the options for further action in this area.
The Government has also confirmed that there was no need to change the mechanism proposed for the investigation of competition issues, although it has agreed to revisit the issue once the FCA has bedded in. At present, the Government has concluded that it is not necessary to transfer the OFT's powers to the FCA. Instead the Bill enables the FCA to conduct its own market studies but allows it to draw on the expertise or powers of the OFT where necessary and provides for the FCA to make referrals to the OFT (rather than the Competition Commission).
Twin peaks system of regulation
In a recent speech to the British Bankers' Association, Hector Sants (Chief Executive of the FSA) indicated that from 2 April 2012 the FSA will create two new supervisory groups: (i) a prudential supervisory group reflecting the future PRA; and (ii) a conduct supervisory group reflecting the future FCA. It is envisaged that the two separate supervisory groups will make their own independent regulatory judgments on the basis of their separate objectives, but that they will co-operate where necessary to ensure effective regulation.
The reorganisation is part of the FSA's continued efforts to smooth the transition to the new twin peaks regulatory structure. However, it remains to be seen whether the creation of two new supervisory groups will serve to highlight some of the potential problems with the new system, including the difficulty of ensuring effective communication between the bodies responsible for prudential and conduct regulation.