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UK Government Publishes Draft Financial Regulation Reform Bill, Bloomberg Law Reports®

Friday, June 17, 2011

A new approach to financial regulation: the blueprint for reform – HM Treasury Consultation Paper Cm 8083, June 2011; Government publishes financial regulation White Paper and draft Bill – HM Treasury Press Notice PN59/11, 16 June 2011 As announced by the Chancellor of the Exchequer in his Mansion House speech to the City of London on 15 June,1 HM Treasury has published a White Paper on the reform of UK financial regulation (White Paper) together with a draft Bill to amend the Financial Services and Markets Act 2000(FSMA). This is the third consultation paper published in the space of a year and according to the Government reflects the representations it has received to date and a careful honing of the proposals which abolish the existing tripartite system of regulation and establish new specialist prudential and conduct regulators.2 As well as seeking comments on the proposals, a three month period of pre-legislative scrutiny of the draft Bill by Parliament begins shortly.

Bank of England

The White Paper confirms the Government's intention to strengthen the Bank of England (BoE). In addition to the Monetary Policy Committee which controls interest rates, there will be a new Financial Policy Committee (FPC) with responsibility for macro-prudential regulation. Sir Mervyn King,3 Governor of the Bank of England, in his speech at Mansion House, expanded on the FPC's role to manage unsustainable patterns of demand and promote stability which it was said monetary policy itself could not achieve. Sir Mervyn announced that an interim FPC was to hold its first policy meeting the following day.

Prudential Regulation Authority

The second aspect of strengthening the BoE is the creation, as a subsidiary, of a specialist prudential regulator, the Prudential Regulation Authority (PRA) which will be responsible for the micro-prudential supervision of individual banks, building societies, insurers and larger more complex investment firms. The first PRA chief executive will be Hector Sants, currently chief executive of the Financial Services Authority (FSA) who will together with his deputy from the BoE, Paul Tucker, be members of the FPC to ensure a co-ordinated approach. The creation of the PRA is at the heart of the Government's attempt to resolve the perceived failings of the tripartite system during the financial crisis. Responsibility was spread across a number of authorities and the BoE was said to have lacked the information and tools required to safeguard the UK's financial stability. Following feedback to the earlier consultations, the PRA's objectives have been refined. As well as having responsibility for financial stability in respect of the "safety and soundness of individual firms" there will also be a separate objective for insurers reflecting the different risks they face compared to banks.4

Judgement-led Regulation

A key criticism by the Government of the existing system of regulation has been what it describes as the tick-box approach. Instead, the Chancellor wishes to create room for regulators to exercise judgement. To an extent this builds upon the approach already taken by the FSA under Sants' leadership since the financial crisis. Better qualified supervisors will have greater discretion although the White Paper emphasises that judgement-led decision-making must be based on firm evidence. Although firms will be able to challenge decisions by the PRA in the Upper Tribunal (Tax & Chancery Chamber), with the exception of disciplinary cases, the Tribunal will not be able to substitute its opinion for the authority's. It will instead ask for the matter to be reconsidered (i.e., a variation of permission to carry on regulated activity).

Financial Conduct Authority

The rump of the FSA becomes a specialist conduct regulator, to be known as the Financial Conduct Authority (FCA). While HM Treasury's July 2010 Consultation canvassed removing the UK Listing Authority (UKLA) and merging it with the Financial Reporting Council, the guardian of corporate governance and regulator of financial reporting, following opposition this proposal was quickly abandoned. Similarly, the Government has also already confirmed that the FCA, and its Enforcement and Financial Crime Division, will keep responsibility for the investigation and prosecution of criminal market abuse. The FSA's recent successful prosecutions of insider dealing which saw five convictions in 2010/11 no doubt played its part.5 On the other hand, supervisory responsibility for settlement systems and central counterparty clearing goes to the BoE which is already responsible for inter-bank payment systems under Part V of the Banking Act 2009. There was considerable support for the FCA's strategic and operational objectives. Under the former, the FCA will protect and enhance confidence in the UK financial system to be carried out through the three operational objectives which are to:
  • Secure an appropriate degree of protection for consumers;
  • Protect and enhance the stability of the UK financial system; and
  • Promote efficiency and choice in the market.


Perhaps the most controversial aspect of the FCA's objectives is the role of competition. The Parliamentary Treasury Select Committee and the Independent Commission on Banking (ICB) have wanted to give competition a primary role on the basis that it will bring benefits to consumers and investors.6 The Chancellor, in his Mansion House speech, said the Government had listened to representations and that the FCA would have a new primary duty to promote competition as well as protecting consumers. However, the White Paper suggests that "in discharging its general functions the FCA must promote competition unless this would be incompatible with its strategic and operational objectives."7

Product Intervention Power

Government policy sees the FCA continuing and building upon the FSA's more interventionist style of supervision and, in this respect, giving the new conduct regulator additional tools for this purpose. Consumer groups have welcomed the introduction of a new product intervention power. This is intended to allow quick, early and decisive intervention where a product is likely to result in significant consumer detriment. However, given the significance of this power the FCA will have to publish and consult on its policy, outlining in what circumstances it might be used. In addition, to consumer protection, it will be available for market integrity reasons. The FSA has recently published a Feedback Statement8 looking at the rationale for such intervention and its approach.

Transparent Regulation

HM Treasury's February Consultation highlighted the need for more regulatory transparency and disclosure to the public. The draft Bill proposes to achieve this by granting the FCA more effective and earlier powers to tackle misleading financial promotions and to allow disclosure of the fact that enforcement action is underway. Currently, the general rule prevents disclosure until, at the earliest, the issue of a decision or final notice which could be a year or more into an investigation. Allowing publication at the warning notice stage (which sets out the FSA's case before written and oral representations have been made to an administrative decision maker) has attracted much controversy; support from consumer groups and opposition from the industry. The Government considers that the benefits of transparency exceed the potential reputational damage to firms and individuals subject to investigation, although there remain arguments as to fair process.9 A distinction will be made between disciplinary proceedings and fitness to carry on a regulated activity, with disclosure in the case of the former on the basis that there is a beneficial effect through dissuading similar conduct by others.10 A topical addition to the powers of the PRA and FCA, first canvassed in the February Consultation, is the duty to investigate and report to HM Treasury on possible regulatory failure.11 This provision, in large part, arises from the difficulties encountered in publishing a report into the near collapse of the Royal Bank of Scotland Plc. This was a disciplinary investigation into whether any of the FSA's rules had been breached and where confidentiality requirements in FSMA impeded publication despite calls in Parliament for the facts to be made known.


As referred to, the FCA will retain the UKLA, although contrary to the existing position under FSMA, the listing function will be fully integrated into the new authority's legislative framework. The draft Bill will grant new powers to the FCA most of which have been uncontroversial.12 The exception concerns the proposal to extend "skilled person reports" from authorised firms conducting investment business to listed issuers and has been met with industry opposition on the basis that it would constitute a further regulatory burden. Nonetheless, the provision has been included in the draft Bill as part of a package of measures on the premise it enables London to maintain its reputation as a leading financial centre. The FCA will remain the general market regulator with responsibility for investment exchanges. The existing Part XVIII FSMA regime will remain subject to some amendment and the grant of additional powers, but may be subject to change in the future dependent on the outcome of the European Commission's review of Directive 2004/39/EC on markets in financial instruments (MiFID).

"Twin-peaks" Regulation

Considerable work has been undertaken on the relationship between and the co-ordination of the new regulators, especially in areas such as crisis management. This reflects the comments and concerns expressed during the past year on the Government's "two-peaks" regulatory scheme and how the constituent parts will function in practice. The draft Bill contains duties to consult, makes provision for the entering into of memoranda of understanding and the disclosure of confidential information through information gateways. As has been clear from the outset, it is the BoE and its subsidiary, the PRA, which will be the lead regulators and prevail in case of conflict over the FCA. The White Paper explains that feedback has been considered and steps taken to keep processes such as authorisations, where both the PRA and the FCA have overlapping interests, as efficient and coherent as possible for firms.13 There will of course be scope for more scrutiny and comment during the three months of PLS14 and, subsequently, once the draft Bill, perhaps with amendments, begins its legislative process before the end of the year, if all goes to plan.
1Speech at the Lord Mayor's dinner for bankers and merchants of the City of London, Mansion House, London – George Osborne MP, Chancellor of the Exchequer, 15 June 2011. 2 See A new approach to financial regulation: judgement, focus and stability – HM Treasury Consultation Paper Cm 7874 of July 2010 (July 2010 Consultation) and A new approach to financial regulation: building a stronger system – HM Treasury Consultation Paper Cm 8012 of February 2011 (February Consultation). 3 Speech at the Lord Mayor's dinner for bankers and merchants of the City of London, Mansion House, London – Sir Mervyn King, Governor of the Bank of England, 15 June 2011. 4 White Paper at para. 2.47. 5 Enforcement Annual Performance Account 2010/11 – FSA Account, 13 June 2011. 6 See Financial Regulation: a preliminary consideration of the Government’s proposals – House of Commons, Treasury Select Committee, Seventh Report of Session 2010-11, 3 February and Interim Report of the Independent Commission on Banking – ICB Report, 11 April 2011. 7 Supra. note 4 at para. 2.84. See also the draft Bill at clause 1B(4). 8 Product intervention: Feedback on DP11/1 – FSA Feedback Statement FS11/3 of June 2011. 9 See Harvey Knight and Colin Smith, Withers LLP, Warning Notices: Guilty until Proven Innocent?, Bloomberg UK Financial Services Law Journal, (1 April 2011). 10 Supra. note 4 at para. 2.189. 11 Id. at para. 2.130. 12 Id. at para. 2.123. 13 Id. at para. 2.151. 14 This is organised by a Parliamentary scrutiny committee.

Legal Topics:

Investment Services & Activities Investment Services FSA Enforcement Procedure Investment Firms Market Conduct Clearing & Settlement


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