The UK government announced plans to reform financial services regulation following the 2008 crisis. This will replace the tripartite system with three new bodies - the Financial Policy Committee, Prudential Regulation Authority, and Financial Conduct Authority. The FPC will monitor systemic risks while the PRA and FCA will take over microprudential and conduct regulation respectively. The Financial Services Bill will enact these changes, with the new system expected to be established by April 2013. Firms will transition between regulators with some becoming dual-regulated.

1. Regulatory
reform of
UK Financial
Services
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Introduction
As a result of the financial crisis in 2008, the
government announced its intention to reform
the regulatory system in the UK and replace the
current tripartite system, consisting of the Bank
of England, HM Treasury and Financial Services
Authority (FSA), with three new regulatory bodies
with effect from April 2013. The tripartite system
was strongly criticised for its performance during
the crisis, firstly, for failing to anticipate the crisis
itself and secondly, for failing to provide clear,
decisive leadership during the crisis, and the
government is seeking to address these concerns
through the proposed reform.
The three new bodies which will be established
are the Financial Policy Committee (FPC), the
Prudential Regulation Authority (PRA) and the
Financial Conduct Authority (FCA). It is envisaged
that the PRA and the FCA will inherit the majority
of the existing functions carried out by the FSA,
with the result that the FSA Handbook will be
split between the PRA and FCA to form two new
Handbooks, one for the PRA and one for the FCA.
Financial Policy Committee
(FPC)
The FPC will monitor the financial system as
a whole, but will not have direct regulatory
responsibility for any particular type of firm.
The FPC will sit within the Bank of England
and will focus on identifying and managing
macroeconomic and other risks to the stability
of the financial services sector as a whole or to
a significant part of the sector. It will respond
to any such issues which arise by directing the
PRA (and the FCA where appropriate) to take
necessary action to deal with the relevant issue.
The FPC will be given a ‘toolkit’ of macro-
prudential powers to address systemic risks,
including:
• imposing countercyclical capital buffers;
• liquidity limits; and
• maximum LTV ratios in the mortgage markets
to discourage unsustainable lending
The PRA (and the FCA where appropriate) will
be responsible for applying whichever tool, as
determined by the FPC, directly to the relevant
regulated firm(s).
Prudential Regulation Authority
(PRA)
The PRA, which will be a subsidiary of the
Bank of England, will be responsible for the
micro-prudential regulation and supervision of
systemically important firms i.e.
• banks;
• building societies;
• insurers;
• credit unions;
• Lloyds of London and Lloyd’s managing
agents; and
• certain investment firms with systemic
importance.
These firms will also be regulated by the FCA for
conduct purposes and are therefore known as
‘dual-regulated firms’.
The objective of the PRA is to promote the
safety and soundness of regulated firms by
seeking to minimise any adverse effects of firm
failure on the UK financial system as a whole.
It will be operationally independent from the
Bank of England and the FPC in respect of day
to day regulation and supervision of firms and
will focus on setting institution-specific capital
requirements.
Regulatory reform of UK
Financial Services
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Which investment firms will be dual-regulated?
The PRA shall be responsible for determining
whether an investment firm will be regulated
by it and will only be permitted to designate an
investment firm if the firm:
• holds, or is seeking to hold, permission to
deal in investments as principal or is a firm
based in another EEA state passporting into
the UK under MiFID to offer the service of
dealing on its own account; or
• is required to have initial capital of at
least EUR730,000 or would be if it were
established in an EA state (i.e. those
investment firms that are currently classed as
BIPRU 730K firms)
The PRA will also have regard to the following
non-exhaustive list of criteria when considering
whether to designate an investment firm:
• assets above a specified threshold (suggested
by the FSA as exceeding at least £15 billion
on the firm’s last accounting reference date);
and
• group issues, such as whether the investment
firm’s activities could impact on the safety
and soundness of other PRA-authorised
entities in the group and consideration of
the activities of investment firms in the
firm’s group as a whole (i.e. a group cannot
avoid designation of an investment firm by
establishing several eligible investment firms
that individually fall below the total asset
threshold, but which in aggregate are above
the threshold)
The PRA will consult with the FCA before
deciding whether to designate an investment
firm (or to revoke its designation) and will
consider periodically, or in response to a merger
or acquisition, whether the conditions for
designation for an individual firm are satisfied.
Financial Conduct Authority
(FCA)
The FCA will be independent from the Bank of
England and the FPC and will adopt the legal
corporate identity of the FSA and will inherit
most of the roles and functions of the FSA
accordingly:
• it will be responsible for the conduct of
business regulation of all firms, including
dual-regulated firms;
• it will be responsible for the prudential
regulation of firms not regulated by the PRA
(i.e. non-dual regulated firms);
• it will inherit the majority of the FSA’s market
regulatory functions, including the role of
UKLA (the UK listing authority); and
• it will be responsible for prosecuting criminal
offences involving insider dealing, other
forms of market abuse and other criminal
law breaches.
The FCA’s main objective will be to ensure
that the markets function well by: (i) securing
reasonable protection for retail investors; (ii)
protecting and enhancing the integrity of the
UK financial system; and (iii) promoting effective
competition in the interests of consumers.
It is intended that the FCA will also be given
additional powers, such as the power to make
temporary product intervention rules (which
means that it may block an imminent product
launch or stop an existing product) and the
power to require firms to withdraw or amend
misleading financial promotions.
NB. The FSA’s current regulatory responsibility
for settlement systems and recognised clearing
houses will be transferred to the Bank of England
to sit alongside the Bank’s existing responsibilities
for payment systems oversight.

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FSA transitional arrangements
The FSA is currently preparing for the transition
to the new structure and from 2 April it moved
to its ‘twin peaks’ operating model, with the
intention of moving the FSA as closely as possible
to the new regulatory structure within the
current legal framework. Two new supervisory
units have thus been created:
• a prudential supervisory group with
objectives aligned with those of the PRA; and
a conduct supervisory group with objectives
aligned with those of the FCA, although
the group will not be required to take into
account the new powers proposed for the
FCA mentioned above.
Firms that will be regulated solely by the FCA
are solely supervised by the conduct supervisory
group and firms that will be dual-regulated by
the PRA and the FCA under the new structure are
supervised by both groups.
The Financial Services Bill
The Financial Services Bill 2012-13 is the primary
legislation which will bring the reforms into force.
The Bill has completed the committee stage
in the House of Lords and will now pass on to
the report stage, although the date for this has
not yet been set. The date for Royal Assent is
expected to take place before the end of 2012
and HM Treasury has stated that it expects the
new regulatory structure to be fully established
on 1 April 2013.
Impact on FSA-authorised firms
Firms already authorised and regulated by the
FSA will be grandfathered into the new regime,
which means that they will not need to re-
apply to the FCA or the PRA for their existing
authorisations and regulatory approvals.
Firms designated as dual-regulated firms under
the new regime will face the most disruption,
as they will need to adapt to supervision by two
regulators and the fact that regulatory processes
such as the approved persons regime will be split
between the FCA and the PRA. Firms which will
be regulated by the FCA only will have a similar
relationship with the FCA as they currently have
with the FSA.

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