ADVANCED

UK financial regulation reform: Draft Bill and White paper published

Published on: Jun 21st, 2011

20th June 2011

Background

The most significant modification in a decade to the UK’s financial regulatory architecture began to take shape on 16 June 2011 with the publication of the Government’s financial regulation White Paper. This provides some further detail on the Government’s proposed reforms to the UK financial regulatory regime and also contains a draft Bill to amend the existing banking and financial services legislation. It is envisaged that a Bill will be introduced to Parliament before the end of 2011 in time for Royal Assent before the end of 2012 and the full implementation of the new architecture by early 2013.

At 413 pages long, the White Paper is a weighty milestone in a process which formally commenced with the (as he was then) new Chancellor of the Exchequer George Osborne’s Mansion House speech delivered 366 days earlier on 15 June 2010. The Government’s plans for reforming the regulatory system include:

  • establishing a macro-prudential regulator, the Financial Policy Committee (FPC) within the Bank of England to monitor and respond to systemic risks;
  • transferring responsibility for prudential regulation to a focused new regulator, the Prudential Regulation Authority (PRA) established as a subsidiary of the Bank of England; and
  • creating a focused new conduct of business regulator – the Financial Conduct Authority (FCA) – “to ensure that business across financial services and markets is conducted in a way that advances the interests of all users and participants”.

The Conservatives had actually flagged a year prior to their election win an intended move away from the much maligned “tripartite” model of shared responsibility for financial services regulation between HMT Treasury, the Bank of England and the Financial Services Authority.  By restoring the Bank of England to the central role of economic and financial stability, George Osborne is reversing Gordon Brown’s 1997 changes to the way banks and other institutions are overseen.

Blueprint for reform

The White Paper provides a summary of the 350 written responses received to the February consultation and describes how this latest articulation of policy has been extensively informed by the previous consultation.  Indeed, the White Paper does contain some new policy proposals as a result of stakeholder feedback which include:

  • a specific statutory objective governing the PRA’s responsibilities for the insurance sector
  • a proposed power for the FCA to order skilled persons reports in respect of sponsors as well as issuers
  • an updated and enhanced competition regime under the FCA
  • steps to strengthen the handling of cases of widespread consumer detriment, including misselling.

Notable features of the regime discussed in White Paper include:

  • the FCA’s new product intervention power enabling it to intervene quickly and decisively when it considers that a product or product feature is likely to result in significant consumer detriment
  • new powers for the FCA to direct a firm to withdraw or refrain from issuing misleading financial promotions with immediate effect, so as to prevent consumers from being misled
  • the Government’s decision to leave the Upper Tribunal’s scope of review of supervisory decisions unchanged.   However, the course of action available to the Tribunal will be limited in the event it chooses not to uphold the regulator’s decision. Other than in limited situations, the Tribunal will not be able to substitute its opinion for that of the regulator as to the regulatory action to be taken. The Tribunal will instead be required to remit the decision back to the regulator with such directions as it considers appropriate in relation to a range of findings.
  • the Government’s continued commitment to giving the FCA and PRA a controversial power (although not a duty) to publish the fact that a warning notice has been issued, and a summary of the notice.
  • in relation to Authorisation, the authority responsible for the prudential regulation of the applicant will manage the authorisation process and ultimately grant permission.

The White Paper poses a further 15 questions for response by 8 September 2011.  However, the high level nature of the questions (which ask for general “views” and “comments” rather than definitive expressions of satisfaction or dissatisfaction with specific policy positions) reveals the amount of detail still to be determined over the course of the next 18 months.  Accordingly, it appears that this is one regulatory initiative where the stock phrase of commentators “the devil is in the detail” won’t be appropriate as there actually isn’t that much detail yet. With so much still to determined, this should encourage regulated firms to take the opportunity to make their voice heard.

The present

As far as the present is concerned, the FSA announced by way of Dear CEO letter dated 4 April 2011 that it was replacing its Supervision and Risk business units with a Prudential Business Unit (PBU) and a Conduct Business Unit (CBU). The FSA’s CEO Hector Sants heads the PBU, supported by a Bank of England secondee Andrew Bailey. Margaret Cole is acting as interim head of the CBU until Martin Wheatley, most recently the CEO of Hong Kong’s Securities and Futures Commission, takes up this role on 1 September 2011. The change in the FSA’s structure will give regulated firms some advanced experience of what life will be like from 2013 onwards.  To many firms that are not systemically significant, this may not amount to a material change. With so many other regulatory changes to deal with at this time, this could prove to be a situation in which large dollops of status quo provide some relief and comfort.

Next steps

While this current process of regulatory reform still has another 18 months to run, it looks likely to be concluded more quickly than the prior process (known as “N2”) which ran for a full parliamentary term from May 1997 to June 2001 (and slightly beyond).

Firms should keep abreast of the form and substance of the regime which will commence in 2013 as the detail emerges. However, by then many firms will have had to have responded to many of the other regulatory initiatives taking place such as the US’s Dodd-Frank, not to mention the EU’s lengthy agenda of reform.

The White Paper consultation itself closes on 8 September 2011.  However, even before then more information will have been revealed on the future shape of the UK regulatory framework by then including:

  • a paper setting out the PRA’s approach to the supervision of insurers
  • a paper setting out the FCA’s regulatory philosophy (expected around the time of an FCA conference being held on 28 June 2011)
  • a consolidated version of the amended Financial Services and Markets Act 2000
  • the FPC’s first Financial Stability Report due on 24 June 2011.

Also later this year a paper detailing the coordination of the PRA and FCA will be published. So, keep watching this space!

The June 2011 white Paper builds on two previous HM Treasury consultations:

For previous IMS analyses of this subject please click here and here.

If you have any questions regarding this subject, please contact Peter Moore, Stephen Burke or Alan Leale-Green. Alternatively telephone 020 7408 2448 to speak to your usual IMS contact.

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