+44(0)20 7638 9271

The New UK Financial Services Regulatory Structure

This note provides a brief overview of the new financial services regulatory structure in the UK which is due to come into force later this year.

INTRODUCTION AND BACKGROUND

On 1 April this year the Financial Services Authority (FSA) will cease to exist and in its place will be three new regulatory bodies, the Financial Policy Committee (FPC), the Prudential Regulation Authority (PRA), and the Financial Conduct Authority (FCA). These reforms follow heavy criticism of the current financial services regulatory structure and its performance and handling of the financial crisis.

FINANCIAL POLICY COMMITTEE (FPC)

One of the main criticisms of the current regulatory structure leading up to and during the financial crisis was that there was no single body responsible for macro-prudential regulation and oversight. The FPC, which will be a Committee of the Bank of England (BoE), will fill this gap and will be tasked with considering and monitoring all macro issues affecting economic and financial stability. In responding to any macro issues of concern, the FPC will have the authority to direct both the PRA, and if required or necessary the FCA, to take such action as the FPC deems appropriate. This may include the use of a new set of macro prudential “tools” which the FPC will have available to it.

PRUDENTIAL REGULATION AUTHORITY (PRA)

While the FPC will be responsible for macro prudential regulation and oversight, the PRA will be responsible for micro prudential regulation of banks, building societies, insurers, and certain investment firms with systemic importance. These firms will be dual regulated firms as they will also be regulated by the FCA in relation to their day to day conduct of business. Whereas the FSA has been criticised as relying too much on “tick-box compliance” in carrying out its micro prudential regulatory responsibilities, it is envisaged that the PRA will take more of a judgment-focused approach. As the PRA will be a subsidiary of the BoE it is also envisaged that there will be better coordination of macro and micro prudential regulation as these functions will now effectively be under the same roof.

FINANCIAL CONDUCT AUTHORITY (FCA)

The FCA will be responsible for the conduct of business regulation of all authorised firms including dual regulated firms. The FCA will inherit the majority of the FSA’s market regulatory functions, including the FSA’s role as the UK listing authority. It will also be responsible for the prudential regulation of firms not regulated by the PRA.

TRANSITIONAL ARRANGEMENTS

HM Treasury has confirmed that it expects the new regulatory structure to be fully established on 1 April this year. This date is also referred to as “legal cutover”. Firms that are regulated by the FSA at legal cutover will have their permissions transferred or “grandfathered” across to the new regulator(s) and will not be required to submit a new authorisation application. In terms of each firm’s statutory status disclosure requirements, the FSA has confirmed that there will be a 6 month transition period from legal cutover for firms to make the necessary changes to their stationary or electronic equivalents.

HANDBOOKS

The FCA and the PRA will each have their own separate handbooks of rules and in the case of FCA, guidance. However, in the short term, both regulators will adopt relevant parts of the current FSA Handbook (with some parts being shared between the two regulators) and only minimal changes will be made to the current rules to reflect the new regulatory structure. Both the FCA and PRA have, however, indicated that they intend to review their Handbooks once they are formally established. Dual regulated firms will need to refer to both handbooks while FCA regulated firms will only need to refer to the FCA Handbook.

WHAT NEXT?

Between now and legal cutover the FSA has stated that it intends to publish a number of papers regarding the new regime and its implementation. Further information on the impending changes can be found on our website or on the FSA’s website.

For further information please contact Christopher Axford, Antony Cotton or Toby Stroh of Druces LLP’s Corporate & Commercial Department.

This note does not constitute legal advice but is intended as general guidance only. It is based on the law in force in January 2013