10.29.2012
By Terry Flanagan

New U.K. Regulator Flexes Its Muscles

The U.K.’s new financial services watchdog promises to wield significantly more power than its predecessor—as it bids to bring more order and competition to markets.

The Financial Conduct Authority, which will come into being early next year, will succeed the Financial Services Authority and will have enhanced investor protection and market supervision powers.

And in a significant change from the FSA, the FCA plans to name individuals and business when it starts an investigation into them. The FSA currently only names firms after enforcement action has been taken.

“The regulator has made clear it will take a more interventionist approach,” said Chris Hannant, policy director at the Association of Independent Financial Advisers, a trade body.

Martin Wheatley, the man charged by the U.K. government to head up the review into Libor practices earlier this year, and who was previously the FSA’s managing director, will be the new chief executive at the FCA.

He is promising that the FCA will carry on the work of the FSA but will also be better informed about the markets, have more tools to help consumers with their needs and also take the fight to insider dealing. While the premise of sound, fair and competitive markets is the centerpiece of the FCA’s agenda.

“The FCA offers a huge opportunity for the regulator and firms to start afresh, and work in partnership to reset how we deal with conduct in financial services,” said Wheatley. “We see it as the role of the regulator to not only make the relevant markets work well but also to help firms get back to putting their customers at the heart of how they do business.”

The FCA is also going to be more pro-active by monitoring social media outlets, such as Twitter, to keep an eye on developing industry concerns and worries over certain financial products.

“We need to understand the industry much better and their wares,” David Geale, head of investment policy at the FSA, told a recent Financial Planning Standards Board meeting.

“Blogs can be a source for information as can Twitter feeds. We will use social media, in some cases use it as a powerful tool to see if there is a huge amount of adverse comment on a particular organization or a particular product that can help drive our activity.”

However, there are others who are more skeptical of this new approach.

“As with any change we do have some concerns, notable among them the apparent ‘guilty until proven innocent’ approach to future enforcement publicity,” said Adrian Coles, director-general of the Building Societies Association, a trade body.

“Sadly, in the days of 24/7 media and Twitter, recovering a reputation after such an announcement—if events prove this warranted—will be very difficult. The innocent may well pay for the sins of the guilty.”

In 2010, the U.K. government announced its intention to replace the FSA as a single financial services regulator with three new successor bodies, and restructure the U.K.’s financial regulatory framework.

The Bank of England will assume control of U.K. macro-prudential regulation, through its new Financial Policy Committee, and oversight of micro-prudential regulation in the U.K of banks and insurers, through the Prudential Regulation Authority, a Bank of England subsidiary.

The FCA, meanwhile, will inherit most of the FSA’s old functions, will fulfill the role of U.K. financial services regulator and will be independent of both the government and the Bank of England. It will also be responsible for regulation of conduct in retail, as well as wholesale, financial markets and the infrastructure that supports those markets. In addition, the FCA will have responsibility for the regulation of firms that do not fall under the PRA’s scope.

The FCA will also be the lead authority representing the U.K. on the European Securities and Markets Authority, the pan-European regulator based in Paris that governs the region’s capital markets.

Although there was a word of warning on all of the changes from Sir Donald Cruickshank, the veteran competitions expert who had carried out two previous banking reviews for past Labour governments and is also a former chair of the London Stock Exchange.

“Do not implement the huge concentration of power in the Bank of England that is inherent in the government’s proposals for banking reform,” he told a U.K. parliamentary commission on banking standards. “Therein lie the roots of future crises and ineffective regulation.”

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