www.cummingslaw.comIntroductionAs a result of the financial crisis in 2008, thegovernment announced its intention to reformthe regulatory system in the UK and replace thecurrent tripartite system, consisting of the Bankof England, HM Treasury and Financial ServicesAuthority (FSA), with three new regulatory bodieswith effect from April 2013. The tripartite systemwas strongly criticised for its performance duringthe crisis, firstly, for failing to anticipate the crisisitself and secondly, for failing to provide clear,decisive leadership during the crisis, and thegovernment is seeking to address these concernsthrough the proposed reform.The three new bodies which will be establishedare the Financial Policy Committee (FPC), thePrudential Regulation Authority (PRA) and theFinancial Conduct Authority (FCA). It is envisagedthat the PRA and the FCA will inherit the majorityof the existing functions carried out by the FSA,with the result that the FSA Handbook will besplit between the PRA and FCA to form two newHandbooks, one for the PRA and one for the FCA.Financial Policy Committee(FPC)The FPC will monitor the financial system asa whole, but will not have direct regulatoryresponsibility for any particular type of firm.The FPC will sit within the Bank of Englandand will focus on identifying and managingmacroeconomic and other risks to the stabilityof the financial services sector as a whole or toa significant part of the sector. It will respondto any such issues which arise by directing thePRA (and the FCA where appropriate) to takenecessary action to deal with the relevant issue.The FPC will be given a ‘toolkit’ of macro-prudential powers to address systemic risks,including:• imposing countercyclical capital buffers;• liquidity limits; and• maximum LTV ratios in the mortgage marketsto discourage unsustainable lendingThe PRA (and the FCA where appropriate) willbe responsible for applying whichever tool, asdetermined by the FPC, directly to the relevantregulated firm(s).Prudential Regulation Authority(PRA)The PRA, which will be a subsidiary of theBank of England, will be responsible for themicro-prudential regulation and supervision ofsystemically important firms i.e.• banks;• building societies;• insurers;• credit unions;• Lloyds of London and Lloyd’s managingagents; and• certain investment firms with systemicimportance.These firms will also be regulated by the FCA forconduct purposes and are therefore known as‘dual-regulated firms’.The objective of the PRA is to promote thesafety and soundness of regulated firms byseeking to minimise any adverse effects of firmfailure on the UK financial system as a whole.It will be operationally independent from theBank of England and the FPC in respect of dayto day regulation and supervision of firms andwill focus on setting institution-specific capitalrequirements.Regulatory reform of UKFinancial Serviceswww.cummingslaw.com
www.cummingslaw.comWhich investment firms will be dual-regulated?The PRA shall be responsible for determiningwhether an investment firm will be regulatedby it and will only be permitted to designate aninvestment firm if the firm:• holds, or is seeking to hold, permission todeal in investments as principal or is a firmbased in another EEA state passporting intothe UK under MiFID to offer the service ofdealing on its own account; or• is required to have initial capital of atleast EUR730,000 or would be if it wereestablished in an EA state (i.e. thoseinvestment firms that are currently classed asBIPRU 730K firms)The PRA will also have regard to the followingnon-exhaustive list of criteria when consideringwhether to designate an investment firm:• assets above a specified threshold (suggestedby the FSA as exceeding at least £15 billionon the firm’s last accounting reference date);and• group issues, such as whether the investmentfirm’s activities could impact on the safetyand soundness of other PRA-authorisedentities in the group and consideration ofthe activities of investment firms in thefirm’s group as a whole (i.e. a group cannotavoid designation of an investment firm byestablishing several eligible investment firmsthat individually fall below the total assetthreshold, but which in aggregate are abovethe threshold)The PRA will consult with the FCA beforedeciding whether to designate an investmentfirm (or to revoke its designation) and willconsider periodically, or in response to a mergeror acquisition, whether the conditions fordesignation for an individual firm are satisfied.Financial Conduct Authority(FCA)The FCA will be independent from the Bank ofEngland and the FPC and will adopt the legalcorporate identity of the FSA and will inheritmost of the roles and functions of the FSAaccordingly:• it will be responsible for the conduct ofbusiness regulation of all firms, includingdual-regulated firms;• it will be responsible for the prudentialregulation of firms not regulated by the PRA(i.e. non-dual regulated firms);• it will inherit the majority of the FSA’s marketregulatory functions, including the role ofUKLA (the UK listing authority); and• it will be responsible for prosecuting criminaloffences involving insider dealing, otherforms of market abuse and other criminallaw breaches.The FCA’s main objective will be to ensurethat the markets function well by: (i) securingreasonable protection for retail investors; (ii)protecting and enhancing the integrity of theUK financial system; and (iii) promoting effectivecompetition in the interests of consumers.It is intended that the FCA will also be givenadditional powers, such as the power to maketemporary product intervention rules (whichmeans that it may block an imminent productlaunch or stop an existing product) and thepower to require firms to withdraw or amendmisleading financial promotions.NB. The FSA’s current regulatory responsibilityfor settlement systems and recognised clearinghouses will be transferred to the Bank of Englandto sit alongside the Bank’s existing responsibilitiesfor payment systems oversight.
www.cummingslaw.comFSA transitional arrangementsThe FSA is currently preparing for the transitionto the new structure and from 2 April it movedto its ‘twin peaks’ operating model, with theintention of moving the FSA as closely as possibleto the new regulatory structure within thecurrent legal framework. Two new supervisoryunits have thus been created:• a prudential supervisory group withobjectives aligned with those of the PRA; anda conduct supervisory group with objectivesaligned with those of the FCA, althoughthe group will not be required to take intoaccount the new powers proposed for theFCA mentioned above.Firms that will be regulated solely by the FCAare solely supervised by the conduct supervisorygroup and firms that will be dual-regulated bythe PRA and the FCA under the new structure aresupervised by both groups.The Financial Services BillThe Financial Services Bill 2012-13 is the primarylegislation which will bring the reforms into force.The Bill has completed the committee stagein the House of Lords and will now pass on tothe report stage, although the date for this hasnot yet been set. The date for Royal Assent isexpected to take place before the end of 2012and HM Treasury has stated that it expects thenew regulatory structure to be fully establishedon 1 April 2013.Impact on FSA-authorised firmsFirms already authorised and regulated by theFSA will be grandfathered into the new regime,which means that they will not need to re-apply to the FCA or the PRA for their existingauthorisations and regulatory approvals.Firms designated as dual-regulated firms underthe new regime will face the most disruption,as they will need to adapt to supervision by tworegulators and the fact that regulatory processessuch as the approved persons regime will be splitbetween the FCA and the PRA. Firms which willbe regulated by the FCA only will have a similarrelationship with the FCA as they currently havewith the FSA.
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