U.K. Reshuffles Regulatory Scheme and Creates Consumer Finance Watchdog

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Reform of U.K.’s financial regulatory system divides responsibilities among new agencies.

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When the Financial Services Act of 2012 took effect on April 1, the United Kingdom entered into a new system of financial regulatory oversight, including a separate regulator that will focus on providing greater consumer protections.  The Act’s regulatory overhaul eliminated the Financial Services Authority (FSA), the U.K.’s current primary financial regulator, and created three new bodies in its stead: the Financial Policy Committee (FPC), Prudential Regulatory Authority (PRA), and Financial Conduct Authority (FCA).

Recognizing that no regulatory body was responsible for oversight of the financial system as a whole, the drafters of the Act provided for the creation of the FPC, which is now responsible for monitoring widespread and systemic risks to the financial system, and is housed within the Bank of England.

The PRA operates as a subsidiary of the Bank of England and is responsible for the daily supervision of individual financial institutions (including deposit takers, major investment firms, and insurance companies) that manage significant risks on their balance sheets.  The PRA is intended to focus on regulating firms whose failure could have a significant effect on the financial system as a whole.  The PRA’s primary goal as a prudential regulator is to promote the safety and soundness of all of the firms it regulates—approximately 1,700 in all.  The Bank of England noted that housing the PRA under the Bank, and therefore closely linking it with the FPC, will allow authorities to better coordinate firm-specific safety and soundness measures with ensuring the safety and soundness of the financial system as a whole.

The FCA, on the other hand, will focus on regulating the business practices and conduct of all financial firms, whether they pose systemic risks or not.  The FCA will also serve as a prudential regulator for all firms not regulated by the PRA.  The FSA has noted that the vision of the FCA is “to ensure that markets work well so consumers get a fair deal.”  Its primary purposes are to ensure that markets operate with integrity, promote effective competition, and require that firms run their businesses with a focus on the well being of their customers.  Under the Act, for example, the FCA has the power to ban misleading financial promotions without having to make use of enforcement actions, to publicize the commencement of enforcement actions, and to consider super-complaints filed by certain consumer groups against financial services providers.  The FCA is also responsible for all consumer credit regulation.

The FSA has outlined the FCA’s approach to these regulatory objectives and its progress in implementing them in Journey to the FCA, published in October 2012.  In the report, the FSA argues that promoting competition in quality and price is essential to ensuring that consumers get the best and fairest deal, especially because the financial crisis led to a reduction in competition for many financial services products.  Notably, the report also emphasizes that the FCA should aim to regulate conduct in a way that promotes competition, instead of potentially impeding it with burdensome regulation.  Even so, the FCA intends to make strong use of its enforcement authority, noting that enforcement actions will help to reinforce and promote the Authority’s priorities to the industry and the public.

The Act created multiple regulators so that each body can focus on regulating the financial industry while concentrating on their own specific interests and risks.  In the wake of the financial crisis, regulators and policymakers have suggested that the problems facing the financial sector are too varied and numerous for a sole regulator to address.  Even so, critics have stated that the regulatory powers the new agencies hold are not any stronger than those held by the FSA, and they question whether the new regulatory structure will actually result in improved oversight.

In addition, some question how well the two agencies will interact and co-regulate.  Because the FCA and PRA focus on different priorities, it is likely that the two bodies will have different opinions on appropriate actions and conduct within financial institutions that are overseen by both regulators.  While some of the potential issues arising from this fact are foreseen by the FSA and Bank of England in a Draft Memorandum of Understanding between the Bank of England (and PRA) and the FCA, it seems unlikely that all of the potential conflicts that may arise between the two bodies are covered by the memorandum, especially in times of financial instability and uncertainty.  Even so, Andrew Bailey, the future head of the PRA, has noted that the two agencies, and particularly their heads, “have to make it work” and that “[t]he system won’t succeed if we don’t work together.”