The Government’s Financial Services Bill passed into law on December 19 2012. Under the new Financial Services Act, from April 1 2013, the existing Financial Services Authority (FSA) will be replaced.
The Prudential Regulatory Authority (PRA) will be responsible for the prudential regulation of banks, large insurers and large investment companies. It will impose new requirements on firms it regulates in areas such as capital, liquidity and risk management. It will be a subsidiary of the Bank of England.
Overall responsibility for the stability of the UK financial system will sit solely with the Bank of England, whereas previously responsibility was shared between the Bank of England, the FSA and the Treasury.
The Financial Conduct Authority (FCA) will conduct much of the day-to-day regulation of firms’ behaviour that the FSA currently undertakes.
A third new body created by the Act is the Financial Policy Committee, which will identify any fundamental macro-economic risks.
The FSA was much criticised for failing to identify the systemic risks within individual firms and in the wider economy that led to severe problems in several UK banks, which resulted in the Government spending billions on bailing them out. These issues were some of the main drivers behind the change in the regulatory regime.
The FCA will be granted certain powers that the FSA does not have at present. One will be the power to ban poorly designed products from being sold. Previously, the FSA could take action against firms who failed to comply with its rules when selling products such as payment protection insurance, but was powerless to prevent a product with fundamental flaws being sold.
The FCA will also be able to limit credit interest rates. It will take over credit regulation from the Office of Fair Trading in April 2014, and consumer credit firms have been warned to expect higher fees for Consumer Credit Licences (perhaps around £1,500).
The FCA will have promoting competition within the industry as one of its key aims.
The FCA will also be allowed to publicise the fact that it has commenced disciplinary proceedings against a particular firm. At present, the FSA can only make this public once it has completed its investigations and identified failings at the firm.
On the legal cutover date of April 1 2013, new rulebooks for the PRA and FCA will replace the existing FSA Handbook. It is anticipated that most of the existing requirements of the FSA Handbook will be included in one or both of the new Handbooks. The new Handbooks will be published prior to April 1 to allow firms to make any necessary changes to their practices and procedures.
Smaller firms, such as local financial advisory firms, should expect to be regulated only by the FCA, with this body responsible for both their conduct and their prudential regulation. Large insurers and banks should expect to be regulated by both the FCA and the PRA.
More information on the changes can be found in the document ‘Journey to the FCA’, available on the FSA’s website.