Introduction of the Financial Conduct Authority (FCA)

A new regulatory regime has been established in the UK. Following the passage of the Financial Services Act 2012, the ground was set for the abolition of the Financial Services Authority and the creation of three new regulatory bodies: the Financial Conduct Authority, the Prudential Regulation Authority and the Financial Policy Committee. This new regime came into being on 1st April 2013.

The new regime consists of the following elements:

Financial Conduct Authority (FCA):

  • The FCA has an overarching strategic objective to “ensure that the relevant markets function well”.
  • It also has three operational objectives:

Consumer protection: securing an appropriate degree of protection for consumers.

Integrity: protecting and enhancing the integrity of the UK financial system.

Competition: promoting effective competition in the interests of consumers.

  • The FCA will take a more proactive approach, including taking action early, before consumer detriment occurs.

Prudential Regulation Authority (PRA):

  • The PRA is responsible for promoting the safety and soundness of systemically important firms, including insurers, and ensuring policyholders are protected in the event of a firm’s failure.
  • Its approach to regulation and supervision has three characteristics:

Judgement-based: using judgement in determining whether financial firms are safe and sound.

Forward-looking: assessing firms not just against current risks, but also against those that could plausibly arise in the future.

Focused: focusing on those issues and those firms that pose the greatest risk to the stability of the UK financial system and policyholders.

Financial Policy Committee (FPC):

  • A committee within the Bank of England responsible for horizon scanning for emerging risks to the financial system as a whole and providing strategic direction for the entire regulatory regime.
  • The FPC has the power to use so-called “macro-prudential tools” to counteract systemic risk. The tools could include imposing leverage limits on banks or enforcing particular capital requirements for given asset classes.
  • The Bank of England is now in charge of micro-prudential and macro-prudential regulation, on top of its existing responsibilities for monetary policy, and as a result is fast becoming one of the world’s most powerful central banks.

 

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