The Financial Services Bill: The new regulatory architecture is finally revealed

The Government has now published its draft Financial Services Bill and it is clear that the Government has no intention to hold back on its comprehensive reform of financial services regulation in the UK. The draft bill is made up of 219 pages which, if implemented, will amend a number of existing Acts, most notably the Financial Services and Markets Act 2000, the Bank of England Act 1998 and the Banking Act 2009.

In general, the fine detail of the regulatory structure is left largely unchanged whereas the architecture of the regulatory structure is radically transformed. Even so, the Bill envisages a stricter and more judgemental form of regulation and therefore financial services practitioners will need to review the Bill (and its accompanying 460 paragraphs of Explanatory Notes) carefully to understand the extent of the changes.

In this article, we highlight the most notable amendments:

The new regulators:

The Bill provides for separate prudential regulation and conduct of business regulation:

• First, the Financial Policy Committee (the FPC) will be a committee of the Court of the Bank of England (section 9B of the Bank of England Act 1998) concerned with protecting and enhancing the stability of the UK financial system.
• Second, the Prudential Regulation Authority (the PRA) will be an operationally independent subsidiary of the Bank with responsibility for micro-prudential regulation (section 2A, FSMA). The PRA will regulate institutions that require a sophisticated level of prudential regulation.
• Lastly, the Financial Conduct Authority (the FCA) will be an independent conduct of business regulator designed to protect and enhance confidence in the UK financial system (section 1A, FSMA). 

Regulatory principles:

Both the PRA and the FCA will be subject to six principles (similar to the existing “Principles of Good Regulation” to which the FSA is subject) concerning, inter alia, proportionality, efficient use of resources and consumer responsibility (section 3B, FSMA).

Regulatory boundaries:

The Treasury may issue statutory instruments specifying the activities that are to be regulated by the PRA (section 22A, FSMA).

Product intervention:

The FCA will be given the power to make rules prohibiting firms from entering into certain types of contract. The same rules may provide that a breach of the prohibition renders the contract unenforceable against a firm’s customers (section 137C, FSMA).

Fit and Proper:

The FCA and PRA may issue statements of principle (similar to the FSA’s APER). Interestingly, there is no requirement for the two regulators’statements of principle to be the same, or even similar (section 64, FSMA).

Responding to a Warning Notice:

An individual will have not less than 14 days (rather than the current 28 days) to respond to a warning notice (sections 387 and 393, FSMA).

Publication of a Warning Notice:

The FCA or PRA will be able to publish “such information about the matter to which the [Warning Notice relates]… as it considers appropriate” after issuing the notice and consulting with the persons to whom the notice relates (section 391, FSMA). At present, Warning Notices are not published.

Past conduct:

The FCA or PRA may require a firm to take remedial action in respect of past conduct (section 55N(5), FSMA). This places on a statutory footing the FSA’s practice of requiring firms to carry out “root cause analysis” (see DISP 1.3.5R and the recent Bank of Scotland Final Notice issued on 23 May 2011).

Variation of Permission:

Both the FCA or PRA may vary an authorised person’s permission if it is failing to meet threshold conditions; however, the PRA must consult the FCA before exercising its power to vary the permission of an authorised person whereas the FCA must only consult the PRA if the relevant person is authorised by the PRA (section 55J, FSMA).

Threshold conditions:

Applicants for authorisation must satisfy the PRA and the FCA that their business model is suitable (Schedule 6(5A), FSMA).

Tribunal referrals:

In February, the Government suggested that it would restrict the powers of the Tribunal on appeal from judgement-based supervisory decisions (paragraph 3.32, “A new approach to financial regulation: building a stronger system”). However, the Government has decided to retain a full-merits review subject to one caveat: a tribunal that does not uphold a regulator’s decision in a supervisory matter will no longer be able to substitute its own opinion but must, instead, remit the matter to the regulator with a direction to reconsider the matter in light of its findings. The present practice of substituting its own view in a disciplinary matter will continue (section 133(6)(b)). What is not clear is the extent to which this change will make any practical difference.

The RDC:

The Bill does not expressly refer to the RDC however section 395, as amended, will require the FCA and the PRA to operate a decision making procedure when making certain decisions so that, in general, the decision maker is not the person directly involved in establishing the evidence on which the decision is based. This suggests that the PRA will need to establish a RDC-like body (although it could share the RDC with the FCA). Interestingly, the Bill also envisages that the decision could be made by two or more persons who include a person not directly involved in establishing evidence. It will be interesting to see how this amendment (if implemented) will affect the RDC’s current composition.