Financial Services Bill: new regime gets closer | Practical Law

Financial Services Bill: new regime gets closer | Practical Law

The Financial Services Bill was introduced to Parliament on 27 January 2012. While the basic framework of the Bill has not changed since consultation, some significant changes have been made to the government’s proposals following the pre-legislative scrutiny report by a joint committee of both Houses of Parliament, reports by the Treasury Select Committee and stakeholder feedback.

Financial Services Bill: new regime gets closer

Practical Law UK Articles 8-518-2005 (Approx. 4 pages)

Financial Services Bill: new regime gets closer

by Simon Orton and Chris Chapman, Freshfields Bruckhaus Deringer LLP
Published on 01 Mar 2012 • United Kingdom
The Financial Services Bill was introduced to Parliament on 27 January 2012. While the basic framework of the Bill has not changed since consultation, some significant changes have been made to the government’s proposals following the pre-legislative scrutiny report by a joint committee of both Houses of Parliament, reports by the Treasury Select Committee and stakeholder feedback.
The Financial Services Bill (the Bill) was introduced to Parliament on 27 January 2012. The basic framework of the Bill has not changed since consultation (see box “The framework”).
Some significant changes have been made to the government’s proposals, however, following the pre-legislative scrutiny report by a joint committee of both Houses of Parliament, reports by the Treasury Select Committee and stakeholder feedback, and these are considered below.

The Bank and the FPC

The Bank of England (the Bank) will be required to inform the Chancellor once it is clear that public funds may be at risk. The Chancellor will have the power in a crisis to give directions to the Bank on the provision of liquidity support and its use of the special resolution regime.
The Governor of the Bank will now be appointed for a single eight-year term to avoid the perception of political interference.
The Financial Policy Committee’s (FPC) accountability is being enhanced: it will now have to respond publicly to the remit given to it by the Treasury, setting out how it intends to comply with it or, where appropriate, stating why it does not intend to do so.
The Treasury will consult publicly on its proposals for the FPC’s macro-prudential tools before the relevant statutory instrument is laid before Parliament.

The PRA

The Prudential Regulatory Authority (PRA) will be given an express duty to supervise firms, going beyond mere rule-making and monitoring. There will be a review of whether changes are needed to the threshold conditions for authorisation. The Treasury will consult on this during the passage of the Bill.
Although no change has been made to the scope of firms that will be subject to PRA regulation, the Treasury is keeping this issue under review; in particular, whether some firms are “systemic as a herd” but not individually.
The PRA has been given more comprehensive powers over holding companies of PRA-regulated firms, including: power to make rules regarding provision of information; a wider trigger for use of the power of direction; and an enforcement mechanism (censure or fine).
The Bill now provides that the independent complaints system will have a single complaints commissioner covering both the Financial Conduct Authority (FCA) and PRA. The government is continuing to consider the regulation of mutuals and, in particular, the appropriate balance of PRA and FCA responsibilities. It will publish a consultation paper on this later in 2012.

The FCA

The FCA’s strategic objective has been revised to ensure that “the relevant markets function well” rather than to promote confidence in markets.
The operational objective relating to competition has been recast as “promoting effective competition in the interests of consumers”. This replaces the wording relating to promoting choice. The revised objectives will provide a mandate for the FCA to take the initiative to use its powers to tackle perceived competition problems; for example, by promoting switching, removing barriers to entry, or addressing asymmetries of information.
In deciding on the degree of protection afforded to consumers, the FCA will have regard to the general principle that regulated financial services firms should be expected to provide an appropriate degree of care, and to consumers’ need for advice and information that is accurate, timely and fit for purpose. This sharpens the consumer protection focus.
The FCA will also take account of the responsibilities of senior management in relation to a firm’s compliance with requirements under the legislation, including requirements that affect consumers.
The regulation of consumer credit business will be transferred from the Office of Fair Trading to the FCA, and the rights and protections for consumers in the existing consumer credit legislation will be retained. This change is intended to lead to more consistent regulation of lending to consumers, and to facilitate more proactive intervention to prevent detriment. An impact assessment will take place before the transfer.
There are, however, no changes to the FCA’s proposed new powers. These include a product intervention power to ban or impose requirements on products, although the government has stated that it does not expect the FCA to use this routinely in its work. The FCA will also be able to publish the fact that a warning notice has been issued against a firm or individual (and will consult before doing so), and to publish details of actions taken for misleading financial promotions.

Regulatory processes/co-ordination

The government has retained the existing measures to encourage co-ordination between the PRA and FCA, but with the additional requirement that they publish the proposed memorandum of understanding (MoU), to be reviewed annually, and to account in their annual reports how they have discharged the obligation to co-ordinate.
The FCA must give its consent for approval of persons in significant influence functions at dual-regulated firms, so that both the PRA and FCA are involved in applications for approved person status. The MoU provides for a single administrative process for seeking approval to reduce the administrative burden in dual-regulated firms.
The proposals for triggering an investigation of regulatory failure remain unchanged; however, they will be complemented by a statement explaining the criteria for meeting the triggers.

Timing

The government intends to ensure that the Bill completes its passage through Parliament by the end of 2012, so that it can take effect early in 2013.
Simon Orton is a partner, and Chris Chapman is a senior associate, in the financial institutions disputes group at Freshfields Bruckhaus Deringer LLP.
For more information on the new regime, see PLC Financial Services practice note “A guide to the new UK financial services regulatory structure: index”, www.practicallaw.com/0-505-0103.

The framework

The Financial Services Authority (FSA) will cease to exist in its current form. The Bank of England (the Bank) will be responsible for the regulation of systemic infrastructure. A new Financial Policy Committee (FPC) of the Bank will be responsible for macro-prudential oversight of the financial system as a whole. A new subsidiary of the Bank, the Prudential Regulation Authority (PRA), will be responsible for ensuring the safety and soundness of deposit-takers and some other systemically important firms. A new Financial Conduct Authority (FCA) will be responsible for regulation of firms’ conduct.
(For background, see News brief “UK financial regulation: reform gets closer”, www.practicallaw.com/6-506-6403, and feature article “Financial regulation reform: the role of competition”, www.practicallaw.com/0-511-1842.)