Media Briefing Note: Hogan Lovells Raises Concerns for UK Financial Regulation as FSA Abolished

LONDON, 3 April 2013 - On Monday (1 April 2013) the UK regulatory landscape took a significant step when the Financial Services Authority (FSA) was replaced by two new regulators:

  • The Prudential Regulation Authority (PRA) - which will have a primary focus on ensuring the financial stability of systemically important financial services firms. It is a subsidiary of the Bank of England and tasked with tackling micro-prudential issues at a firm level.  A new Committee of the Bank of England, the Financial Policy Committee, has responsibility for the macro-prudential position: to identify, monitor and take action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system.
  • The Financial Conduct Authority (FCA) – designed to protect consumers, including the ability to ban the sale of particular products.

Hogan Lovells' London financial institutions partner Roger Tym considers the new structure:

A fresh start

"A great deal of careful thought has been given to constructing a new "twin peaks" regulatory framework that addresses the problems perceived with the previous regime, involving the triumvirate of HM Treasury, the Bank of England and the FSA.  There are many excellent aspects to the new framework and it is important for all to work together to ensure that the approach is successful.  There are some aspects that will need to be monitored to achieve a successful implementation, such as the following:

Potential for duplication

"There is potential for overlap, rather than the underlap the Government previously recognised between HM Treasury, the Bank of England and the FSA. The new structure is designed to plug gaps, but it could lead to duplication.

"The PRA and FCA both carry out reviews of dual-regulated firms using their respective regulatory tools which will lead to the same aspects being reviewed from different perspectives.  Also, what happens if the two authorities have a different view of what is required, for example, in relation to systems and controls?

"Unless the level of communication and co-ordination between the PRA and FCA is excellent, there could be confusion, time-wasting and possible gaps.  The new structure is good, but there appears to be a significant execution risk.

Balancing consumer protection with competition

"The FCA has said that its "actions will be bold and wide-reaching" but nevertheless acknowledges a need to upskill on competition to meet the new objective of promoting effective competition.

"If there is an action that would restrict competition but would protect a small group of consumers, what will the FCA choose to do? The impact of competition may prove difficult to measure, whereas customer impact will be much easier to measure.

Balancing consumer protection with customer responsibility and choice

"The FCA accepts that the need for disclosure to redress perceived "information asymmetry" has not achieved its objectives and has been given powerful new tools to achieve consumer protection and the new product intervention power in particular allows for a "shoot first, ask questions later" approach.

"The FCA has confirmed that "Treating Customers Fairly" remains at the heart of its regulatory approach.  The FCA's outcomes-focused approach to TCF discourages tick-box compliance but leads to uncertainty for business, and a potential reduction in innovation as firms tend towards the lowest common denominator position.

"There is a continuing drive towards simpler and simpler products.  The questions remain: is simple always best and what responsibility should customers bear for the choices they make?"

Too much, too soon?

"Has the Government asked the new regulators to implement too much and too quickly?  They have been tasked with overseeing a huge change to the infrastructure in a short space of time. The FCA is also working on transferring the Consumer Credit Act regime from the OFT whilst still coming to grips with its new role; and is expected to balance its customer protection objective with its new competition objective.

"These are potential issues, depending upon how the new framework is implemented in practice.  It will be important for the industry to engage with the new regulators swiftly and effectively to alert them to any problems with the operation of the new regime."

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