Bernadine Reese, managing director of consultants Protiviti UK, takes a look at the next chapter of financial services regulation...
Financial regulation has been regularly amended since the seismic change brought about by the original Financial Services Act in 1986, most notably by the Financial Services and Markets Act 2000 and a large number of European directives and UK regulations.
This month’s most recent changes, now that sections of the Financial Services Act 2012 have come into force, are the most significant in more than a decade.
The major change is that the government has created a new regulatory architecture, splitting out “prudential” and “conduct” regulation, as well as appointing the Financial Policy Committee (FPC) of the Bank of England (BoE), responsible for reducing risks to the financial system as a whole.
Here we go again... another day, another set of regulators
The new prudential regulator – the Prudential Regulation Authority (PRA) – is under the control of the BoE and is charged with ensuring stability in banking and financial services.
The PRA will regulate the major banks, insurance companies and a small number of systemically important investment firms, where such firms could present significant risks to the financial system. The PRA is not a ‘zero failure’ regime but, if businesses fail, it aims to ensure the wind-down will be in a controlled manner.
The Financial Conduct Authority (FCA) will supervise the conduct of approximately 26,000 firms across all financial industry sectors and the prudential standards of approximately 23,000 firms not regulated by the PRA.
The vast majority of UK regulated entities will be regulated by the FCA for both prudential and conduct matters. Only banks, insurance companies and a limited number of investment firms will have two regulators: the PRA for prudential regulation and the FCA for conduct regulation.
The FCA has one overall objective – to make markets work well – but it does have three operational objectives: ensuring consumer protection, market integrity and competition in the interests of consumers. It will be consumer-centric and have a clear mandate to make rules and ban products that pose unacceptable risks to consumers.
Wholesale markets are also expected to be a focus, particularly where products are designed for eventual sale to consumers. The ability to instigate product intervention early on will give the FCA a new regulatory feel compared to the FSA.
Firms must be prepared to adequately demonstrate their customer-centric approach; for example, in the developments of products and distribution channels.
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