02.06.2012

U.K. to Overhaul Regulatory Structure

02.06.2012
Terry Flanagan

FSA to be replaced by Financial Conduct Authority.

The United Kingdom is moving ahead with financial regulatory reform, while acknowledging changes taking place at the international level.

The government plans to transfer prudential supervision for banks, insurers and major investment firms to a subsidiary of the Bank of England, called the Prudential Regulation Authority, and plans to rename the Financial Services Authority as the Financial Conduct Authority, which will focus on consumer protection and market regulation.

The current expectation is the cutover to the new structure will occur early in 2013.

The timetable is dependent on successful passage of the proposed new legislation through parliament. The Financial Services Bill was introduced to Parliament on Jan. 26, 2012, and is currently passing through the legislative process.

The new structure is intended to strengthen the hand of regulators in using a judgment-based approach, whereby they will look at the individual risk characteristics of firms in determining whether further action is warranted.

This is in sharp contrast to current practice, whereby regulators tended to adopt a more hands-off approach.

“The old FSA’s conduct approach was rooted in the days of ‘better regulation,’ efficient market theory,’ and dare I say it ‘light-touch regulation,’” Hector Sants, chief executive of FSA, said a speech Monday to the British Bankers’ Association.

“In future, the focus will be on whether the firms’ judgments, and in particular their business model, delivers good outcomes for consumers,” said Sants.

The new approach has both new rules and a new supervisory style.

“This will inevitably mean that supervision is more intensive and intrusive than it was before the summer of 2007,” Sants said. “But it should not involve unnecessary data collection and unnecessary questioning.”

Sants drew a sharp distention between the U.K.’s approach and that being taken by other European countries, which he characterized as being overly wedded to information gathering.

“The European approach to regulation seeks to ensure common standards across Europe,” Sants said. “This seems to be creating a ‘bias to data’ and runs the risk of being at variance with the necessity of having customized risk assessments of firms.”

“If there is a risk of tick box prudential regulation, it will come from Europe,” said Sants.

The U.K. recognizes that regulatory change can’t take place in a vacuum, and has engaged with European and international partners on strengthening the regulatory regime while protecting the interests of the U.K. and London as a global financial center.

On the Alternative Investment Fund Managers directives (AIFMD), for example, the Government succeeded in negotiating agreements to ensure that managers of hedge funds and private equity providers will be regulated in a consistent and non-discriminatory way, with third country fund managers able to qualify for a passport into the EU.

Ongoing negotiations on the new European capital requirements legislations are also of vital interest to U.K. regulators and financial market participants.

The Government, the Bank of England, and the FSA are engaging in Europe and with international partners to ensure that the latest Basel agreements be implemented in the new legislation, while retaining discretion for national authorities to go beyond agreed minimum standards.

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