UK consults on fundamental regulatory reform | Practical Law

UK consults on fundamental regulatory reform | Practical Law

This article is part of the PLC Global Finance August 2010 e-mail update for the United Kingdom.

UK consults on fundamental regulatory reform

Practical Law Legal Update 3-503-1052 (Approx. 3 pages)

UK consults on fundamental regulatory reform

by Simon Lovegrove, Norton Rose LLP
Published on 31 Aug 2010 • United Kingdom
This article is part of the PLC Global Finance August 2010 e-mail update for the United Kingdom.
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In response to the UK's regulatory system failing to recognise and respond to emerging problems in the UK's financial system, the government published its first consultation paper on reforming the UK regulatory framework in July. The paper envisages three new authorities that are to replace the Financial Services Authority.
According to the UK government, to explain the financial crisis purely in terms of global trends ignores the fundamentally important point that there were real and significant failings in the UK regulatory framework. In particular, the UK's regulatory system failed to recognise and respond to the problems that were emerging in the UK's financial system.
In response to these failings the government has long supported fundamental changes to the UK's regulatory framework, particularly giving the Bank of England a greater role.
In July, the government published its first consultation paper on reforming the UK regulatory framework. As expected the paper envisages the Financial Services Authority being replaced by three new authorities:
  • A new Financial Policy Committee (FPC) will be created within the BoE. This will have ultimate authority to identify imbalances, risks and vulnerabilities in the UK financial system and take any necessary action to mitigate these in order to protect the wider UK economy.
  • A new subsidiary of the BoE, the Prudential Regulation Authority or PRA, will be responsible for the authorisation, regulation and day-to-day supervision of all firms that were subject to "significant" prudential regulation. In the consultation paper the government has not defined what it means by "significant" and has simply said that it expects banks, investment banks and insurers to come within the PRA's scope. However, the consultation paper is silent as to whether or not investment management firms will be prudentially regulated by the PRA.
  • A new independent authority, the Consumer Protection and Markets Authority or CPMA, will take responsibility for conduct of business regulation of all financial institutions, whether prudentially regulated by the PRA or not. The CPMA will also write the prudential regulatory framework for firms that were not regulated by the PRA.
The CPMA will also have a strong markets division that will lead on all market conduct regulation and be the lead authority in representing the UK in the new European Securities and Markets Authority. However, the regulation and supervision of settlement systems and central counterparty clearing houses will be dealt with by the BoE. These functions will sit alongside the BoE's existing responsibilities for payment systems oversight.
Whilst the consultation paper can be seen as a foundation paper which sets out the government's core concepts for reform much more detail is needed. A further consultation paper and draft legislation is expected in early 2011. However, even at this early stage by concentrating authority in the BoE the government is sending a clear message that it intends to create a powerful body with significantly increased influence over the UK's financial system and economy.