The financial crisis has powerfully demonstrated the need for a new approach to financial regulation. Major reforms are therefore under way, aiming to establish a UK regulatory framework which is more focused on the issues that matter and better equipped to deliver financial stability.
The Financial Services Act (2012) will create an independent Financial Policy Committee (FPC) at the Bank of England and the Financial Services Authority (FSA) will cease to exist in its current form with its responsibilities transferred to two new bodies. The Prudential Regulation Authority (PRA) will be a part of the Bank of England, focusing on prudential issues. The Financial Conduct Authority, a separate body, will be responsible for business and market conduct. The reforms transfer responsibility for the supervision of financial market infrastructure to the Bank from FSA.
The reforms take effect on 1 April 2013.
Financial Policy Committee
On 1 April 2013 the new legislation will establish a Financial Policy Committee (FPC) charged with a primary objective of identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. The Committee will have a secondary objective to support the economic policy of the Government.
Previously, in February 2011 the Bank’s Court of Directors created an interim FPC to undertake, as far as possible, the future statutory role of FPC. Although lacking the statutory powers of Direction and Recommendation, the interim FPC contributes to financial stability by identifying, monitoring and publicising risks to the financial system and advising action to reduce and mitigate them.
The interim FPC held its first policy meeting in June 2011, and has met on a quarterly basis since then. The Committee publishes a record of its formal meetings, and is responsible for the Bank’s bi-annual Financial Stability Report.
Prudential Regulation Authority
Alongside the parliamentary process, the Bank and the Financial Services Authority have been preparing for a new prudential regulator, which will be part of the Bank of England and established on 1 April 2013. The Prudential Regulation Authority (PRA) will be responsible for the supervision of banks, building societies and credit unions, insurers and major investment firms. In total the PRA will regulate around 1,700 financial firms. The PRA’s role is defined in terms of two statutory objectives to promote the safety and soundness of these firms and – specifically for insurers – to contribute to the securing of an appropriate degree of protection for policyholders.
In promoting safety and soundness, the PRA will focus primarily on the harm that firms can cause to the stability of the UK financial system. A stable financial system is one in which firms continue to provide critical financial services to the economy – a precondition for a healthy and successful economy.
The PRA will work alongside the Financial Conduct Authority (FCA) creating a “twin peaks” regulatory structure in the UK. The FCA will be responsible for promoting competition, ensuring financial markets function well, and financial firms’ conduct of business so that consumers get a fair deal.
Prior to 1 April 2013, the Financial Services Authority will continue to be responsible for prudential and conduct regulation in the UK.