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The Financial Conduct Authority - Its Role in the New UK Regulatory Framework, Contributed by Sam Robinson, Nabarro LLP

Friday, August 5, 2011

By Sam Robinson, Nabarro LLP

A little over a year ago, the UK Government announced its proposals to reform the regulation of the UK's financial services industry.1 The UK's current financial services regulator, the Financial Services Authority (FSA), will be replaced with a number of different regulatory entities which will be responsible for different aspects of financial services regulation.

The Key Players in the New UK Regulatory Environment
The Financial Policy Committee (FPC) will be a committee of the Bank of England, generally responsible for identifying and monitoring systemic risks to the UK financial system and utilising new tools with the aim of preventing financial crises in the future. It will be able to direct the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) on matters relating to these issues.

The PRA will be responsible for the prudential regulation of (broadly) those financial institutions deemed to pose a systemic risk to the stability of the UK financial system, namely banks, insurance companies and the largest investment firms.

The FCA will have responsibility for the conduct of business and prudential regulation of all other authorised firms, as well as the conduct of business of those firms that are regulated by the PRA (for prudential purposes).

As the conduct of business regulator to approximately 27,000 firms and the prudential regulator to approximately 24,500 firms, the FCA will take on a large number of the functions that were previously conducted by the FSA. However, the new regulatory system is not just a "separating out" exercise, but at the same time a change in approach to regulation. This article considers some aspects of the FCA's new role and how these differ from the FSA's approach under the current regime.

The FCA's Change of Approach
The FCA will have the overarching strategic objective of protecting and enhancing confidence in the UK financial system. It must act in a way that is, so far as possible, compatible with this objective and which advances its three operational objectives of:

  • Protecting consumers;

  • Protecting and enhancing the integrity of the UK financial system; and

  • Promoting competition.


These objectives are not too dissimilar from the FSA's current objectives. The key to these regulatory reforms is not a change to the objectives of the current system, but more about how each new body approaches those objectives. They will have increased powers and more focused remits than was previously the case. Below are some examples highlighting the FCA's change in approach and its new powers.
Consumer Protection
The Treasury's recent consultation "A new approach to financial regulation: the blueprint for reform"2 states that the FCA will take a "more proactive approach to conduct regulation, with a clear focus on consumer outcomes." The protection of consumers is generally understood to mean retail customers. However, the definition of "consumer" in the proposed legislation is drafted widely with even the largest wholesale firms being caught. The intention is that the FCA has wide discretion over the interpretation of its objectives and will seek to ensure high standards across the financial services industry as part of its strategic objective. This being said, the FCA will use a differentiated approach to the particular risks stemming from different markets, products and firms which is intended to recognise the importance of the wholesale market to the wider economy.
New Product Intervention Powers
One message is clearer than all others in the FCA Approach Document3 published by the FSA in June: the FCA will be more interventionist than the FSA previously was. In particular, with a new product intervention power the FCA will have the "flexibility to intervene quickly and decisively where it considers that a product or product feature is likely to result in significant consumer detriment." The intention is that the FCA will deal with the root of the problem, rather than mitigating the effects when it becomes too late.

While consumer groups have welcomed this new power, the industry has questioned how it will be exercised and cautioned against the risk of poor decisions which could exacerbate the situation. The draft legislation requires the FCA to consult on the circumstances in which this power may be exercised and publish a statement of policy.

Early Publication of Disciplinary Action
There has been great debate relating to the proposed new power which would allow the FCA (and the PRA) to make public certain information relating to an enforcement investigation against an authorised firm at the warning notice stage. Currently, the FSA only makes an enforcement investigation public once the investigation has been concluded and a final notice is published. Earlier publication of an enforcement investigation at the warning notice stage, when the investigation is not yet complete, was thought by many in the industry as likely to lead to significant reputational damage and undermine consumer confidence. The Government has said that it will take these issues into account when setting the policy for this new power, but intends to progress with this new power as part of the FCA building on the FSA's credible deterrence approach.
The UK Listing Authority & Skilled Person's Reports
The FCA will take charge of the listing responsibilities currently carried out by the UK Listing Authority (UKLA), which is part of the FSA. Although, rather than more of a standalone function (as is the case with the FSA), the intention is to bring the UKLA's role within the general powers of the FCA. This will include the FCA being able to require relevant issuers to produce a "skilled persons report" on any matter which is reasonably required in connection with the exercise by the FCA of its listing responsibilities.

Apart from skilled persons reports, the draft legislation also contains provisions which will allow the FCA to impose harsher sanctions on sponsors who breach Part VI of the Financial Services and Markets Act 2000. This will include the ability to impose financial penalties which is not currently permitted.

Similarly the FCA will be able to make rules and impose sanctions on primary information providers (PIPs). PIPs are organisations approved by the FSA which operate as Regulated Information Services providers. Issuers use a PIP to disseminate information required to be disclosed under the applicable regulations to the market. This service was originally carried out by the London Stock Exchange's Regulatory News Service before this sector was opened up to more competition in 2002. PIPs have to comply with certain minimum standards, particularly for security, timely distribution and ease of use of the information they publish. Although PIPs currently have to be approved by the FSA, the proposed new powers do not currently apply to them.

Conclusion
The draft legislation gives the FCA the authority and powers to regulate much more intrusively than the FSA has done previously. Although the FSA has generally changed its approach in response to the financial crisis, the key message coming out of the reform process is that firms will see a more intrusive and proactive approach to regulation.

Sam Robinson is a senior associate in the financial services regulatory practice at Nabarro LLP. Sam has advised a number of clients including banks, stockbrokers, fund managers and investment advisers on all aspects of financial services regulation. Prior to working in private practice Sam worked for seven years at the FSA, the majority of that time in the FSA's General Counsel's Division. Telephone: +44 (0) 20 7524 6836; E-mail: Sj.robinson@nabarro.com.

Disclaimer
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