The last Regulatory Roundup (Issue 26) contained articles covering the proposed revision of the regulatory system which would see the end of the FSA and the birth of the Consumer Protection and Markets Authority (CPMA) and the Prudential Regulatory Authority (PRA) – with the Financial Policy Committee (FPC) having responsibility for ‘macro-prudential regulation’.
HM Treasury (HMT) has since released a consultation document: ‘A new approach to financial regulation: building a stronger system’ which adds more flesh to the proposals.
The CPMA has disappeared (it is explained that this was just a working title) and instead we are introduced to the Financial Conduct Authority (FCA). The HMT consultation document provides an illustration of the new regulatory architecture on page 5.
Although the PRA will be a new (limited company) subsidiary of the Bank of England, the FCA will be established by adopting the legal corporate entity of the FSA. The FCA’s core purpose will be protecting and enhancing the confidence of all consumers of financial services, ranging from retail customers “to a hedge fund engaging in multi-million pound derivatives trades”.
The paper sets out the strategic and operational objectives of both the PRA (section 3.6) and the FCA (section 4.14). The paper also addresses practical matters including authorisations, variation of permissions (VoP), the approved persons process and changes of control.
In respect of authorisations it is proposed that for firms that will be regulated solely by the FCA (the vast majority of firms) the FCA will operate the process in much the same way as the FSA currently does. However things get a little more complicated for those firms that will be under the wing of the PRA for prudential regulation. It will be recalled from the last Regulatory Roundup that whilst such a firm may be subject to the oversight of the PRA, the FCA (or, as it was then, the CPMA) will be responsible for regulating its conduct of business activities. Therefore dual-regulated firms will need the consent of both the PRA and the FCAin order for permission to be given. The paper puts forward two ways of how this could work in practice.
In the same vein, both the PRA and the FCA would have similar powers re VoPs that the FSA currently has. For dual-regulated firms the PRA will have the power of veto when it comes to removing a key permission.
There will be no let up in the prior scrutiny given to those applying to perform controlled functions. As might be expected, for firms regulated only by the FCA, the FCA will have the power to designate controlled functions and to approve individuals to undertake those functions. For dual-regulated firms responsibility will be split between the PRA and the FCA in line with their objectives and with both being able to specify new controlled functions and approve (or prohibit) individuals. The PRA will lead on approvals relating to the prudential soundness of a firm (the paper gives as an example the Chief Executive Officer), consulting the FCA where it has an interest in a particular function. Similarly the FCA would lead on functions concerned with a firm’s interface with customers (examples quoted are client assets and anti-money laundering), consulting the PRA where it has an interest. Both the PRA and the FCA would have the power to ban an approved person.
In the eyes of HMT, the main criteria for considering changes in control are primarily of a prudential nature. As a result, change of control applications will be considered by the relevant prudential supervisor. However the FCA will have the power to object to an application concerning a dual-regulated firm on money laundering or terrorist financing grounds.
On the international front, the PRA will hold the UK’s voting seat on the European Banking Authority (EBA) and the European Insurance and Occupational Pensions Authority (EIPOA) whilst the FSC will sit on the European Securities and Markets Authority (ESMA) – see Regulatory Roundup 15 for an overview of the changes in European supervision. Unfortunately whilst EBA, EIPOA and ESMA each cover both prudential and conduct of business issues, each Member State only has one voting seat on each so a degree of cooperation will be needed. Therefore when ESMA discusses matters that fall within the scope of the PRA, the FCA will have to invite the PRA to the meeting as an observer and take account of the PRA’s views in any vote.
The closing date for responses to the consultation is 14 April.
