Powering up

When the new coalition government came to power in 2010, it wasn't long before the chancellor, George Osborne, announced major changes to the UK's financial services regulatory system. Since then there has been a lot of consultation on the government's proposals. At last, the Financial Services Bill was published on 27 January 2012.

The bill will implement the government's proposals to reform the UK financial regulatory structure by replacing the Financial Services Authority (FSA) with two new bodies, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The bill will also formally establish the responsibilities of the Financial Policy Committee (FPC) at the Bank of England (BoE), which will be responsible for macro-prudential oversight.

The government is confident that each of the new regulatory bodies will have 'clarity of responsibility and the necessary powers to ensure the stability of the financial sector and the protection of consumers'. The government's primary objective in reforming financial regulation in the UK is to fundamentally strengthen the system by promoting the role of judgement and expertise. The government said that tick-box compliance with rules has been shown to be of limited use as a model of supervision, and that regulators must be empowered to look beyond compliance, to supervise proactively and to challenge.

The government has made some notable changes to the bill since it published a white paper in July 2011, in response to specific recommendations made by a joint committee of the House of Commons and the House of Lords report which was published in December 2011.

The new FPC will be in a position to have a direct impact on the supply of credit and to the rules governing risk taking in financial markets. One concern is that it might undermine the regulatory certainty that has made the UK a favoured jurisdiction for financial services firms. Although the UK has a strong legal regime for financial services transactions, regulatory interference could lead to potential uncertainty for parties entering into transactions in the UK.

The PRA will have responsibility for the micro-prudential regulation of firms that manage complex risks on their balance sheets and will be established as a subsidiary of the BoE. This will mean day-to-day supervision of banks, making the BoE one of the world's most powerful central banks. Concern about democratic accountability of the BoE has led the joint committee to call for stronger governance and accountability of the bank. In response, the new bill outlines plans to strengthen the court of the BoE, the central bank's governing body, turning it into an expert supervisory board with a wide oversight function.

The FCA, the new conduct of business regulator, has been given significant new powers. Possibly the most controversial are the FCA's product intervention powers which are wide-ranging and allow the FCA to ban the sale of products or mandate the inclusion or exclusion of specific product features. The FCA will be under a lot of pressure to use these powers fairly and sensibly and there will be a sense of the FCA having to earn firms' trust that these powers will be used proportionately.

Protecting consumers

The bill also includes provisions enabling a full transfer of consumer credit regulation to the FCA with the aim of better protecting consumers. Overall, this may lead to a higher standard of regulation for those firms that will transfer to the FCA, and, in particular, many consumer groups believe that this will lead to a tougher stance towards payday loan providers. The government will develop a model for FCA regulation of consumer credit firms in due course. The likely design work on the new regime will be time consuming, although the OFT has declared its commitment to working with the government and the FSA to help to design a model of regulation that enhances strong protections for consumers in the credit market.

The Financial Ombudsman Service, authorised persons, certain other financial institutions and consumer groups will be able to make references to the FCA where there may have been regular failure by one or more regulated persons to comply with requirements as a result of which consumers have suffered. These new powers reflect concern about there being inadequate mechanisms in FSMA for dealing with issues arising before the FOS which had 'wider implications' for the new regulatory regime; for example, PPI mis-selling and bank charges complaints.

The bill stops short of giving the FCA competition powers, but the FCA will be able to ask the OFT to consider whether a feature of the UK market for financial services may prevent, restrict or distort competition. However, the OFT is not required to take any specified action in response to the request. The OFT has given its support to the government's position on the FCA's competition powers and objectives and declared its commitment to build on its close working relationship with the FSA over the coming months to 'implement a new FCA framework that works well for consumers and the markets alike'.

The bill could still change significantly as it makes its way through the parliamentary process. The government is firmly committed to securing passage of the bill by the end of 2012, so that the changes can be implemented in early 2013.