2. www.cummingslaw.com
Introduction
Largely as a result of the FSA’s failing
performance during the financial crisis in 2008, it
was announced in June 2010 that the FSA would
be abolished in its current form and that three
new regulatory bodies would be established with
effect from 1 April 2013:
(i) the Financial Policy Committee (FPC);
(ii) the Prudential Regulation Authority (PRA);
and
(iii) the Financial Conduct Authority (FCA).
The PRA and the FCA will inherit the majority
of the existing functions carried out by the FSA,
with the result that the FSA Handbook will be
split between the PRA and FCA to form two new
Handbooks, one for the PRA and one for the FCA.
Financial Policy Committee (FPC)
The FPC will be a committee of the Bank of
England (BoE) and will monitor the financial
system as a whole. It will be responsible for
macro-prudential regulation and will focus on
identifying and managing macroeconomic and
other risks to the stability of the financial services
sector as a whole or to a significant part of the
sector.
It will respond to any such issues which arise
by directing the PRA (and the FCA where
appropriate) to take necessary action, which
may include the use of new macro-prudential
tools. The FPC will not have direct regulatory
responsibility for any particular type of firm.
Prudential Regulation Authority
(PRA)
The PRA, which will be a subsidiary of the
Bank of England, will be responsible for the
micro-prudential regulation and supervision of
systemically important firms i.e. banks, building
societies, insurers, credit unions and certain
investment firms with systemic importance.
These firms are commonly known as ‘dual-
regulated firms’, as they will also be regulated
by the FCA for conduct purposes. The general
objective of the PRA is to promote the safety and
soundness of regulated firms.
Financial Conduct Authority (FCA)
The FCA will adopt the legal corporate identity
of the FSA and will inherit most of the roles and
functions of the FSA. It will responsible for:
(i) the conduct of business regulation of all
firms, including dual-regulated firms;
(ii) the prudential regulation of firms not
regulated by the PRA (i.e. FCA-authorised or
FCA-only firms); and
(iii) it will inherit the majority of the FSA’s market
regulatory functions, including the role of the
UK listing authority (although responsibility
for settlement systems and recognised
clearing houses will be transferred to the
BoE). The strategic objective of the FCA is to
ensure that relevant markets function well,
while its three operational objectives are to
protect consumers, to protect the integrity
of the UK financial system and to promote
effective competition in the interests of
consumers.
The FCA will be the prudential and conduct
regulator for all other firms currently regulated
by the FSA, which will generally include fund
managers. It will be independent from the BoE.
The regulatory principles of the PRA
and FCA
The FCA and PRA will have a shared set of eight
regulatory principles which the regulators
must take into account when exercising their
regulatory functions in pursuit of their objectives,
as follows:
FSA: Regulatory Reform
3. www.cummingslaw.com
Principle 1 (the “efficiency” principle): the need to
use the resources of each regulator in the most
efficient and economic way.
Principle 2 (the “proportionality” principle): the
imposition of a burden or restriction should be
proportionate to the benefits.
Principle 3 (the “sustainable growth” principle):
the desirability of sustainable growth in the
economy of the UK in the medium or long term.
Principle 4 (the “consumer responsibility”
principle): the general principle that consumers
should take responsibility for their decisions.
Principle 5 (the “responsibilities of senior
management” principle: the responsibilities of
the senior management in relation to compliance
with those requirements.
Principle 6 (the “recognition of business
differences” principle): each regulator should
recognise differences in the nature of, and
objectives of, businesses carried on by different
persons.
Principle 7 (the “openness and disclosure”
principle): publishing information, or requiring
persons to publish information, as a means
of contributing to the advancement by each
regulator of its objectives.
Principle 8 (the “transparency” principle): the
regulators should exercise their functions as
transparently as possible, as well as be “more
open and accessible” to both the regulated
community and the general public.
These principles are not intended to impose
burdens or requirements on firms or consumers,
but are matters which the regulators much have
regard to when exercising their general functions.
Co-ordination between the FCA
and PRA
The decision to split the majority of the FSA’s
current functions between the FCA and PRA
will require the two regulatory bodies to co-
ordinate their activities closely and they have a
statutory duty to do so, including where one of
the regulators is considering action which may
have an adverse material affect on the other’s
achievement of its objectives or in connection
with the exercise of their functions under FSMA.
The FCA and PRA must agree and publish a
memorandum of understanding on how they will
deliver their statutory duty to co-operate and this
MoU has to be reviewed annually.
Further, each of the chief executives of the
FCA and PRA will sit on the other regulator’s
board, although they will not be able to vote
on firm-specific issues, and there will be a
general obligation to share information with
each other and arrangements must be put
in place for regulatory data collection under
the memorandum of understanding to avoid
duplication.
It is envisaged that the FCA and PRA will also
need to co-operate with the BoE more generally
on certain issues, such as the gathering and
sharing of information.
New FCA interventionist approach
Important philosophical changes will be
embedded in the FCA’s supervisory model,
which will include moving away from the FSA’s
retail conduct philosophy and going beyond the
“buyer beware” principle to ensure integrity of
the wholesale markets, the five main elements of
which are as follows:
(i) being more forward-looking in its assessment
of potential problems;
(ii) earlier intervention when it sees problems;
(iii) attacking the underlying causes of problems,
not just the symptoms;
(iv) securing redress for consumers if failures do
occur; and
(v) taking meaningful action against firms that
fail to meet FCA standards through fines.
It will also adopt a pre-emptive approach to
supervision which will be based on making
forward-looking judgements about firms’
business models, product strategy and how
they run their businesses, to enable the FCA
4. www.cummingslaw.com
to identify and intervene earlier to prevent
problems crystallising and to be robust when
things do go wrong. The FCA also intends to
address the root causes of problems by seeking
to obtain a deeper understanding of underlying
commercial and behavioural drivers and the
causes of poor outcomes for consumers.
With regard to regulation, the FCA will take a
risk-based approach, which means the FCA will
make decisions and take action based on the
risks to the FCA in meeting its objectives. The FCA
will not seek to, or be able to, prevent or control
everything that causes harm to consumers or
financial markets. The FCA also intends to take
a more assertive and interventionist approach
to risks caused by wholesale activities and, if
necessary, will act to protect a wider range of
client relationships than the FSA does at present.
Its wholesale role will also apply to exchange-
operated markets and over-the-counter
(OTC) dealing.
New FCA powers
As part of its new interventionist approach, the
FCA will be given a number of powers additional
to those currently held by the FSA, including
powers to:
(i) make temporary product intervention rules,
allowing it to block an imminent product
launch or to stop an existing product;
(ii) require firms to withdraw or amend
misleading financial promotions;
(iii) impose requirements on certain unregulated
parent undertakings which exert influence
over authorised persons; and
(iv) publish details of the start of enforcement
proceedings against a firm for rule breaches
or compliance failings (although the PRA will
also have this power).
The FCA will also have additional powers to
enhance its operational objective to promote
competition.
Categorisation
Conduct supervision categorisation
The FCA will categorise all regulated firms into
four categories for their conduct supervision:
C1, C2, C3 and C4, with C1 firms subject to the
most intensive supervision and C4 firms the least.
The following firms are likely to fall within
each category:
(i) C1 firms: Banking and insurance groups with
a very large number of retail customers and
universal/investment banks with very large
client assets and trading operations.
(ii) C2 firms: Firms across all sectors with a
substantial number of retail customers and/
or large wholesale firms.
(iii) C3 firms: Firms across all sectors with retail
customers and/or a significant wholesale
presence.
(iv) C4 firms: Smaller firms, including almost all
intermediaries.
(v) The vast majority of firms will be categorised
as C3 or C4 and the FCA’s approach will be
similar to the FSA’s current approach to small
firms, as they will be supervised by a team of
sector specialists. The FSA will contact firms
in early 2013 to let them know how they will
be categorised by the FCA.
Prudential supervision categorisation
The FCA will categorise all the firms for which
it has prudential responsibility into three
categories: CP1, CP2 and CP3, with CP1 firms
subject to the most intensive prudential
supervision and CP3 firms the least. The
categories can be described as follows:
(i) Prudentially critical firms (CP1): firms where
a disorderly failure would have a significant
impact on the market in which they operate.
This might be the case because a particular
market is highly concentrated or where
there are significant client assets and money
holdings. The FCA will work closely with
these firms to reduce the probability of
their failure.
5. www.cummingslaw.com
(ii) Prudentially significant firms (CP2): firms
where a disorderly failure would have a
significant impact on the functioning of the
market in which they operate, but there is
a smaller client asset and money base or an
orderly wind-down can be achieved.
(iii) Prudentially insignificant firms (CP3): firms
where failure, even if disorderly, is unlikely to
have significant impact.
The FCA’s approach to prudential supervision
will be based on managing failures when
they happen, rather than on reducing their
probability, on the basis that the a failure of an
FCA-authorised firm (other than a CP1 firm) will
usually not present a risk to the integrity of the
financial system.
New FCA and PRA Handbooks
The FCA and PRA will each have a separate
handbook of rules and the FCA will also have
its own guidance. In the short term, both the
FCA and PRA will adopt relevant parts of the
FSA Handbook, with some parts being shared
between them, and only minimal changes will
be made to the current rules where necessary
to reflect the new regulatory structure. Both
regulators have stated, however, that they
intend to review their handbooks once they
are formally established.
FCA Register
The FCA will maintain a single register, the
equivalent of the current FSA register, which will
cover all FCA-authorised firms and dual-regulated
firms, as well as approved persons, and Current
details on the FSA Register will be carried across
to the new FCA Register after legal cutover.
The FCA Register will not include details of
recognised clearing houses, as these will be
regulated by the BoE, as mentioned above.
The PRA will be required to provide information
to the FCA to assist it in its obligations to
maintain the register
FCA online systems
The FCA will continue to use the existing FSA
systems, such as GABRIEL and ONA, and the way
in which they are used will not change and the
home pages for the FSA online systems will move
to the FCA website with links also available on
the PRA website.
Firm reference numbers, individual reference
numbers and user logins will stay the same and
no systems are being replaced. The contact
centre telephone number for firms will also
remain the same.
From 1 April 2013 most FSA systems will be
updated to show the new FCA and PRA logos
and branding.
Impact on FSA-authorised firms
The FSA will remain the UK regulator until the
legislation is implemented on legal cutover,
namely 1 April 2013. In its consultation paper
CP13/3, published in January 2013, the FSA
indicated that it was working on the assumption
that existing Part IV permissions, controlled
functions, rule waivers and modifications,
passports, limitations and requirements would
be grandfathered to the new regulator(s), which
means that firms will not need to re-apply to the
FCA or the PRA for their existing authorisations
and regulatory approvals.
According to CP13/3:
(i) actions taken before legal cutover by firms,
or other persons to whom the FSA rules
apply, will remain effective after the FCA and
PRA Handbooks come into force. Thus, if
either Handbook requires a firm to submit a
report that was submitted to the FSA before
legal cutover, it will be treated as if it had
been submitted to the new regulator;
(ii) for FCA-only firms, existing approvals will
be carried forward to the FCA and will be
deemed to have been given by the FCA; and
(iii) for dual-regulated firms, existing CF2s
(non-executive directors) will be deemed
to have been approved by the FCA. All
6. www.cummingslaw.com
other significant influence functions will
be transitioned according to the following
principles:
(a) each approved person will be deemed
to have been given approval by the
regulator that will in future specify that
particular controlled function into rules;
and
(b) where there are changes between the
FSA framework of controlled functions
and the new PRA and FCA frameworks,
firms will not be required to take action
to switch existing people to the new
framework of functions while they
remain in their current role.
Dual-regulated firms under the new regime
will face the most disruption, as they will need
to adapt to supervision by two regulators and
the fact that regulatory processes such as the
approved persons regime will be split between
the FCA and the PRA. Firms which will be
regulated by the FCA only will have a similar
relationship with the FCA as they currently have
with the FSA.
However, in the long term, all firms will be
affected by the new supervisory models that the
FCA and PRA intend to introduce and the impact
of the additional powers for the regulators being
introduced by the reforms.
As with the FSA, firms will be required to provide
appropriate details about their regulatory status
under the new regime, as follows:
(i) for an FCA-authorised firm, it is proposed
that the required disclosure is “Authorised
and regulated by the Financial Conduct
Authority”; and
(ii) for a PRA-authorised firm, the required
disclosure will be “Authorised by the
Prudential Regulation Authority and
regulated by the Financial Conduct Authority
and Prudential Regulation Authority”.
The FSA has stated that it intends to allow a
transitional period of six months after legal
cutover for firms to make the necessary changes
to their relevant business stationery and to any
electronic equivalents.
7. 42 Brook Street, London W1K 5DB +44 20 7585 1406 | Neuhofstrasse 3d, CH-6340 Baar +41 41 544 5549
Regulated by the Solicitors Regulation Authority
This document is for general guidance only. It does not constitute advice
February 2013
