Summary and implications

George Osborne’s Mansion House speech on regulatory reform has resulted in the publication of a consultation document and draft legislation. This white paper, “A new approach to financial regulation: the blueprint for reform (the Blueprint)” brings together the Government’s new proposals to regulate the UK financial system following the global financial crisis. Anyone looking for something radically new from the Government will be struggling to find it in the Blueprint. Instead the Blueprint fleshes out the Government’s proposals on:

  • The establishment of the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA);
  • The implementation of many of the recommendations contained in the report from the Independent Commission on Banking (ICB); and
  • The Financial Services Bill (the Bill), the primary legislation which will bring the reforms into effect.

Deadline for responses to the Blueprint is 8 September 2011. The Government aims to publish an amended version of the Financial Services and Markets Act 2000 (FSMA). Amending FSMA, rather than repealing it, received widespread support following the Government’s previous consultation in February this year. It is hoped that the Government can introduce the Bill into Parliament before the end of 2011. We still await the final report of the ICB but a short summary of the position following George Osborne’s Mansion House speech is included below.

Main points of the Blueprint

1. Bank of England and crisis management

Significant new powers are being handed to the Bank of England with accountability being considered in parallel by the Treasury select committee. In particular, responsibility for regulating settlement systems and recognised clearing houses (RCHs) is proposed to be transferred to the Bank of England. It will also be responsible for identifying potential crises and developing and implementing contingency plans. The Treasury is to publish a draft crisis management MOU during the pre-legislative process. The Government also proposes to make minor and technical changes to the Special Resolution Regime under the Banking Act 2009 which can be used for banks in difficulties. 2. The FPC

The FPC will be established within the Bank of England with responsibility for macro-prudential regulation.  

3. The PRA  

The PRA will be established as a subsidiary of the Bank of England to conduct prudential regulation of firms which manage significant balance sheet risk as a core part of their business – banks, insurers and the larger, more complex investment firms.  

4. The FCA  

The FCA will be a new authority to specialise in protecting customers and promoting confidence in financial services and markets and promoting competition. The FSA is to publish a launch document for the FCA in June which should reflect the more proactive approach to conduct regulation and consumer outcomes.  

5. Roles of new regulatory authorities

The Blueprint stresses the need for coordination between the regulatory bodies, as well as extensive coordination and communication with other bodies, such as the Financial Ombudsman Service (FOS) and the Bank of England. More flexibility has been given to the FPC in terms of appointments of committee members to allow for swift and efficient changes in membership. The Government intends to renew the FPC’s remit annually. Records of FPC meetings will be published in a bid to make its workings transparent and accountable.  

6. PRA supervision  

The Government has shied away from stipulating which firms will be subject to PRA supervision and has left the door open for the PRA to have the power to designate firms that should fall within their ambit, subject to certain procedural safeguards.  

7. Regulatory principles  

As a result of consultation feedback the Government proposes to make the competition scrutiny regime, which will apply to the PRA and FCA, more up-to-date and effective. This regime allows the competition authorities to monitor the impact of regulatory practices and provisions upon competition in financial services. There is also recognition of “diversity” proposals and the legislation will require the PRA and FCA to consider and consult on the impact of proposed rules on mutual societies.  

8. FCA competition duty  

The Bill extends the proposal set out in February regarding the promotion of competition as a key duty of the FCA. However, the FCA’s primary objective remains the protection and enhancement of the UK financial system. This primary objective is supplemented with three operational objectives, notably: consumer protection, protecting the integrity of the UK financial system and promoting efficiency and choice in the market. The Blueprint notes that the Government intends to give the FCA the power to initiate and refer proceedings to the OFT where it identifies a competition issue in the financial system.  

9. Financial promotions power

The FCA will have a new power to take regulatory action to prevent consumers from being misled and publish the fact it has done so. Safeguards are also being introduced to reflect concerns raised by respondents over potential reputation damage to them in the use of this power.  

10.Product intervention  

There are two ways in which the FCA’s new product intervention power and regulatory procedures could impact upon financial products. Either the regulatory bodies could be prescriptive and keep a tight rein on any kind of financial innovation, or the regulators could move forward with a more principles based approach. From the Blueprint, it seems that the regulators will probably be doing both. The emphasis is on regulators using their own judgement but also on their powers for addressing issues very quickly and efficiently where necessary. There is good news in that the FCA will not generally be able to exercise its product intervention powers in relation to its market integrity objective.  

11. Approved persons  

The Blueprint reflects many points raised by respondents to the earlier consultation and includes alternative proposals on designation of Significant Influence Functions. The PRA will have primary responsibility but the FCA will also be given a say where the PRA has not designated.  

12. Lloyd’s of London  

The Blueprint sets out the regulatory arrangements for Lloyd’s of London according to the different operations involved and allows the PRA to regulate the prudential aspects of its operations.  

13. Listing  

The Government has confirmed its intention to confer the listing function (which the FSA currently performs as the UK Listing Authority) on the FCA. There are also proposed technical improvements to listing and primary market regulations.  

14.Building societies  

There will be some amendment to building societies legislation, including widening the institutions to which a building society can be directed to transfer its business without a full member vote if a regulator considers a merger expedient to protect the investments of members or depositors.  

15. Unregulated holding companies  

The PRA and FCA will be given power to impose requirements on certain unauthorised parent undertakings (being financial institutions of a kind specified by HM Treasury) of certain UK authorised persons in order to support the PRA and FCA’s regulatory powers.  

16.Further information and consultation questions  

The Blueprint is 413 pages long and includes draft legislation and a list of the consultation questions and how to respond. Inevitably there is much more detail than summarised here. The paper is available on the Treasury website at www.hm-treasury.gov.uk

Independent Commission on Banking

The ICB was established to examine the role of the largest banks in the UK. The final report of the ICB is yet to be published but following its interim report and more recently George Osborne’s Mansion House speech, it is certain that many of the recommendations made in the interim report will be implemented into financial regulation in the UK. In particular, we expect to see firm proposals on:  

  1. Ringfencing the retail and institutional activities of larger UK banks to ensure that contagion from the risk activities of a bank’s institutional arm does not contaminate the retail activities, and by extension UK depositors and consumers;  
  2. UK banks holding higher capital requirements than the minimum set out in Basel III accord;  
  3. Creditor haircuts so that it is investors, not UK taxpayers, who bear the brunt of the cost of a failing institution.  

It is generally agreed that ringfencing will mean that banks will face more expensive funding, which is a cost that is likely to be passed on to consumers through fee paying current accounts or higher borrowing rates.  

At present the cut off between what will constitute retail activities and what will fall within an investment arm of a bank is yet to be revealed. Until this has been clarified, the exact consequences remain uncertain but from Mr Osborne’s speech, it is certain that changes are coming.