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Government Proposes Historic Overhaul of UK Financial Regulation Architecture

By Jim Hamilton

The new UK Government has unveiled a legislative proposal to end the current financial regulatory regime centered on the unitary Financial Services Authority and erect a new regulatory architecture of macro and prudential regulation revolving around the central bank alongside a new market regulation authority. A new Financial Policy Committee would be established in the Bank of England with the duty to consider the macro-economic and financial issues that may threaten financial stability. The Bank of England will have responsibility for the regulation of settlement systems and central counterparty clearing houses to sit alongside its existing responsibilities for payment system oversight. A new Prudential Regulation Authority would be established as a subsidiary of the Bank of England with the Deputy Governor for prudential regulation serving as chief executive of the Authority, which will oversee deposit-taking institutions, insurers, broker-dealers, and investment banks.

A new Consumer Protection and Markets Authority (CPMA) would have responsibility for consumer protection in financial services and for regulating conduct in financial services. A CPMA markets division will lead on market conduct regulation. The CPMA will also be responsible for the regulation of all firms not regulated by the Authority, including most investment firms, investment exchanges and providers of trading facilities.

The Government is also considering whether the UK Listing Authority (UKLA) should be merged with the Financial Reporting Council or whether it should remain within the CPMA markets division.

In the Government?s view, the current system failed in a number of ways during the financial crisis because it places responsibility for all financial regulation in the hands of a single, monolithic financial regulator, the Financial Services Authority, which is expected to deal with issues ranging from the safety and soundness of the largest global investment banks to the customer practices of the smallest financial adviser. Perhaps the most obvious failing of the UK system, however, is the fact that no single institution has the authority to monitor the system as a whole, identify potentially destabilizing trends, and respond to them with concerted action.

The Financial Policy Committee will have primary statutory responsibility for maintaining financial stability and will be given the tools to ensure that systemic risks to financial stability are dealt with. The Committee will monitor the financial stability of the UK?s financial system, identifying emerging risks and vulnerabilities, and cyclical imbalances. The Committee will receive such tools as leverage limits and capital requirements, as well as a loss provisioning tool. The FPC will be chaired by the Governor of the Bank of England and will include the existing Deputy Governors for monetary policy and financial stability and the newly created Deputy Governor for prudential regulation, as well as external members.

The Prudential Regulation Authority will have rulemaking and enforcement authority over the firms it regulates. It will also be authorized to exercise judgments about the safety and soundness of financial firms and take appropriate action. The core regulatory function of the Authority will be to adopt rules governing the performance of regulated activities by financial firms.

The regulatory architecture must ensure that macro-prudential regulation of the financial system is coordinated effectively with the prudential regulation of individual firms. To this end, the legislation will create two prudential regulators, the Prudential Regulation Authority will be responsible for the regulation of all deposit-taking institutions, insurers and investment banks, and will be housed in the central bank, while the Consumer Protection and Markets Authority (CPMA) will have primary responsibility for financial services and markets.

In its consumer-focused role, the CPMA will take on all the FSA?s responsibilities for conduct of business regulation and supervision of all firms. A markets division within the CPMA will regulate all aspects of the conduct of participants in wholesale markets, as well as various elements of market infrastructure such as investment exchanges. The CPMA will be governed by a board with a majority of non-executives, appointed by the Treasury.

Full post as published by Jim Hamilton's World of Securities Regulation on July 27, 2010 (boomark / email).