This note has been updated to reflect the new UK regulatory structure, with effect from 1 April 2013 and amendments to the Financial Services and Markets Act 2000 (FSMA) made by the Financial Services Act 2012.
A quick guide to the changes to the UK financial services regulatory structure made by the Financial Services Act 2012.
On 1 April 2013, the FSA was abolished and the majority of its functions transferred to two new regulators: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). On the same date, the Bank of England (BoE) took over the FSA's responsibilities for financial market infrastructures and the Financial Policy Committee (FPC) was established on a statutory basis.
For an index of PLC's resources on the new regulatory structure, see A guide to the new UK financial services regulatory structure: index.This is one of a series of quick guides: see Quick guides.
This quick guide provides an overview of the reforms to the structure of UK financial services regulation made by the Financial Services Act 2012 (FS Act).
On 1 April 2013, the FSA wasabolished and the majority of its functions transferred to two new regulators: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). These reforms were made by the FS Act, which also transferred supervisory responsibility for financial market infrastructures (FMIs), including clearing houses, from the FSA to the Bank of England (BoE) and placed the Financial Policy Committee (FPC), a committee of the BoE, on a statutory basis.
PLC has a suite of notes on the new regulatory structure. For details, see Practice note, A guide to the new UK financial services regulatory structure: index (www.practicallaw.com/0-505-0103).
For more information on the background to the reforms and for details of how the reforms have developed, see Practice note, New UK regulatory structure: how the reforms have developed (www.practicallaw.com/8-503-6293).
The FPC is a committee of the Court of Directors of the BoE responsible for macro-prudential regulation. This means that it considers prudential regulation issues across the UK financial system, in contrast to the PRA's micro-prudential role, which is focused on the supervision of individual firms. Unlike the PRA and the FCA, the FPC does not have direct regulatory responsibility for any particular types of firm.
The FPC's objective is to contribute to the BoE's achievement of its financial stability objective under the Banking Act 2009 by identifying, monitoring and taking action to remove or reduce systemic risks. For these purposes a "systemic risk" is a risk to the stability of the UK financial system as a whole or to a significant part of that system.
The FPC has a toolkit of macro-prudential powers that it can deploy to remedy emerging problems affecting UK financial stability. Although it will be for the FPC to decide whether a particular macro-prudential tool should be used, the PRA and, if necessary, the FCA, will be responsible for applying the tool directly to regulated firms.
The FPC is chaired by the Governor of the BoE. Other members of the FPC include the PRA chief executive (who is also the BoE Deputy Governor for prudential regulation) and the FCA chief executive.
For more information on the FPC, see Practice note, FPC: role, governance and powers (www.practicallaw.com/2-504-5436).
The PRA, a subsidiary of the BoE, is responsible for micro-prudential regulation of systemically important firms, including banks, insurers and certain investment firms. These firms are referred to as PRA-authorised firms and also as dual-regulated firms because, while the PRA regulates prudential issues, the FCA acts as these firms' conduct regulator (see Which regulator will regulate which firm? below).
The PRA has a general objective: to promote the safety and soundness of regulated firms. The PRA seeks to meet this objective primarily by seeking to minimise any adverse effects of firm failure on the UK financial system and by ensuring that firms carry on their business in a way that avoids adverse effects on the system. When dealing with insurers, the PRA must also have regard to an additional "insurance objective": contributing to the securing of an appropriate degree of protection for those who are or may become policyholders.
The PRA has operational independence from the BoE, and the FPC, for day-to-day regulation and supervision of PRA-authorised firms. Its focus is on setting institution-specific capital requirements.
The PRA's board includes the Governor of the BoE as chairman and the BoE Deputy Governor for prudential regulation as chief executive. The FCA chairman also sits on the PRA board.
For more information on the PRA, see Practice note, PRA: role, governance and powers (www.practicallaw.com/0-504-5437) and for details of PLC resources relating to the PRA, see Practice note, A guide to the new UK financial services regulatory structure: index: Materials on the Prudential Regulation Authority (PRA) (www.practicallaw.com/0-505-0103).
The FCA inherited the majority of the FSA's roles and functions and also adopted the legal corporate identity of the FSA. The FCA:
Is responsible for the conduct of business regulation of all firms, including those regulated for prudential matters by the PRA.
Is responsible for the prudential regulation of firms not regulated by the PRA. These firms are sometimes referred to as FCA-only firms or FCA-authorised firms.
Inherited the FSA's market conduct regulatory functions, with the exception of responsibility for systemically important infrastructure which was transferred to the BoE (see Financial market infrastructures below).
The FCA has a strategic objective and three operational objectives:
The strategic objective is to ensure that the "relevant markets" function well.
The operational objectives are:
to secure an appropriate degree of protection for consumers;
to protect and enhance the integrity of the UK financial system; and
to promote effective competition in the interests of consumers.
The FCA is also obliged to discharge its general functions in a way that promotes competition.
For more information on the FCA, see Practice note, FCA: role, governance and powers (www.practicallaw.com/6-504-5439) and for details of PLC resources relating to the FCA, see Practice note, A guide to the new UK financial services regulatory structure: index: Materials on Financial Conduct Authority (FCA) (www.practicallaw.com/0-505-0103).
For diagrams illustrating the responsibilities of the FCA and the PRA and the accountability mechanisms that apply to them, see Diagrams below.
The FS Act the primary legislation containing the core provisions for the government's structural reforms, received Royal Assent on 19 December 2012.
The FS Act largely amends existing legislation, and makes extensive changes to the Financial Services and Markets Act 2000 (FSMA), as well as to other legislation including the Bank of England Act 1998 and the Banking Act 2009. The government decided to retain FSMA as the main legislative framework for UK financial services regulation and most of the reforms made by the FS Act take the form of amendments to FSMA.
For more information about the FS Act, see Practice note, Financial Services Act 2012 (www.practicallaw.com/0-504-4659). For an overview of FSMA, as amended by the FS Act, see Practice note, FSMA overview (www.practicallaw.com/8-107-4005).
The following firms are PRA-authorised firms, and consequently are dual-regulated by the PRA for prudential purposes and the FCA for conduct purposes:
Insurers (including friendly societies).
Lloyd's of London and Lloyd's managing agents.
Certain systemically important investment firms that have been designated by the PRA.
The FCA is the prudential and conduct regulator for all other firms that were previously regulated by the FSA (that is, FCA-authorised firms or FCA-only firms).
For more information on which firms are PRA-authorised firms and the approach that the PRA takes to determining whether to designate investment firms, see Practice note, Scope of PRA regulation (www.practicallaw.com/0-504-5791).
The FS Act gave the FCA a number of powers additional to those that were held by the FSA, including powers to:
Make temporary product intervention rules, allowing it to block an imminent product launch or to stop an existing product (see Practice note, FCA product intervention powers (www.practicallaw.com/5-518-1026)).
Require firms to withdraw or amend misleading financial promotions with immediate effect (see Practice note, Financial promotion: sanctions, defences and FCA disciplinary action: New FCA power to withdraw or amend misleading financial promotions (www.practicallaw.com/3-201-8394)).
Publish details of the start of enforcement proceedings against a firm for rule breaches or compliance failings. The PRA also has this power. For more information, see Practice note, FCA disciplinary process: Warning notices (www.practicallaw.com/2-524-7509).
Impose requirements on certain unregulated parent undertakings that exert influence over authorised persons. The PRA and the BoE also have this power. For more information, see Practice note, FCA, PRA and BoE powers over unregulated holding companies (www.practicallaw.com/4-522-1792).
The FCA and the PRA each have their own separate handbooks of rules and, in the case of the FCA, guidance. In the short term, both regulators have taken over (or "adopt") relevant parts of the old FSA Handbook, with some parts being shared between the two regulators, and only minimal changes have been made to the FSA's rules where necessary to reflect the new regulatory structure.
For more information, see Practice note, FCA and PRA Handbooks (www.practicallaw.com/2-525-0988).
The FS Act introduced a new framework for handling crises affecting the UK's financial stability.
Under the framework, the Governor of the BoE must notify the Chancellor as soon as it becomes clear that a situation has arisen which may lead to a call on public funds. Such a notification must be made in sufficient time to allow the Chancellor to consider and discuss all options.
Following a notification, HM Treasury, the BoE and other relevant authorities, including the BoE's Special Resolution Unit (SRU), will work together to develop contingency plans intended to minimise the call on public funds whilst securing financial stability. The Chancellor will have the final decision on any use of public funds.
For more information, see Practice note, Financial crisis management arrangements (www.practicallaw.com/8-504-5141).
The FS Act transferred the FSA's current regulatory responsibility for settlement systems and recognised clearing houses (RCHs) to the BoE. These functions will sit alongside the BoE's existing responsibilities for payment systems oversight. The BoE refers to clearing houses, settlement systems and payment systems collectively as financial market infrastructures (FMIs)
For more information, see Practice note, Bank of England regulation of FMIs (www.practicallaw.com/4-504-8896).
The FS Act contains provisions allowing for the government to transfer regulatory responsibility for consumer credit.
The government's preference is to bring consumer credit into the same regulatory regime as other retail financial services under the FCA (within a legal framework based on the model set out in FSMA).
The government intends for the transfer of consumer credit regulation will occur in April 2014.