Treasury sets out further details of proposed new regulatory framework

HM Treasury has set out further details of its proposed new regulatory framework for financial services in a consultation document – ‘A new approach to financial regulation: building a stronger system’. The consultation period runs to 14th April, following which Government will issue a White Paper and draft Bill for pre-legislative scrutiny. The Bill is expected to be presented to Parliament in mid-2011 and to receive Royal Assent in mid-2012.

The consultation document provides further information concerning the objectives of the Financial Policy Committee in the Bank of England, which will identify and take action to ‘remove or reduce systemic risks, with a view to protecting and enhancing the resilience of the UK financial system’.

The Government also intends to create a Prudential Regulation Authority (the ‘PRA’), which will be an operationally independent subsidiary of the Bank of England, responsible for the ‘micro- regulation’ of significant financial institutions and a new specialist regulator, the Financial Conduct Authority (the ‘FCA’, previously referred to as the Consumer Protection and Markets Agency).

The document indicates that the FCA will have responsibility for conduct issues across the entire range of financial services, and that it will build on the recent work of the FSA to provide (p.5) ‘more intensive, issues-based supervision, earlier and more proactive intervention, and credible deterrence through enforcement’.

Both the PRA and the FCA will be subject to a set of regulatory principles, specifically:

• Efficiency and proportionality, to ensure that due regard is paid to value-for-money and cost-effectiveness considerations;
   
• The principle that senior managers (and not regulators) are ultimately responsible for managing their firms in a way that is compliant with the regulatory framework;
   
• The principle that consumers of financial services are ultimately responsible for their own decisions; and
   
• Principles relating to openness and transparency, highlighting the importance of openness and disclosure as a regulatory tool in promoting market discipline, and
   
• The desirability of transparency of process to support trust in the judgements and decisions made by the regulators.

The document also sets out the proposed strategic and operational objectives of the FCA as:

The FCA’s strategic objective is: protecting and enhancing confidence in the UK financial system

The FCA’s operational objectives are:
a facilitating efficiency and choice in the market for financial services;
a securing an appropriate degree of protection for consumers; and
b protecting and enhancing the integrity of the UK financial system

Government also indicates that the legislation will place the FCA under a duty to advance its operational objectives, where appropriate, by promoting competition.

However, Government states that it has now ‘ruled out’ requiring the FCA to have regard to financial inclusion. The consultation document indicates that although financial exclusion is an important issue that needs to be addressed, the FCA’s efficiency and choice objective and the proportionality regulatory principle provide the mandate for the regulator to engage in this agenda but a more formal ‘have regard would be inappropriate as this is a matter of social rather than regulatory policy and therefore should fall to Government.’

More positively, the document indicates that the FCA will be able to make rules to place requirements on products or product features; mandate minimum product standards; or restrict the sale of a product to a certain class of consumers, and that Government will also legislate to provide the FCA with the power to ban products or specific product features where it identifies a serious problem. However, the FCA will be required to publish and consult on a set of principles governing the circumstances under which it will use this new power.

The Government will also legislate to enable the FCA to make provision on the unenforceability of contracts made in breach of its product intervention rules, temporary or permanent. This will allow the FCA to make rules stipulating, for example, that any contract made in breach of a specific product ban will be void and the consumer will be entitled to recover any payment made under it.

The FCA will also be provided with a new power to direct firms to withdraw or amend misleading advertisements and Government is also considering ways in which the FCA could be given an enhanced role in dealing with competition issues, with a more detailed consultation paper expected shortly.

The full consultation document which also provides details of the implications of the proposed changes for the Financial Ombudsman Service and the Consumer Financial Education Body, which will be renamed as The Money Advice Service, is available here.