The new FCA Handbook
On 26 March 2013, the FSA published Policy Statement 13/5: The new FCA Handbook (PS13/5).
The new rules and guidance set out in PS13/5 are the result of earlier FSA consultations on the changes to the FSA Handbook that are required to accommodate the move to the new regulatory structure. As far as possible the FSA has transitioned existing FSA rules and other provisions to the FCA Handbook and have only made those changes to the existing Handbook that are necessary to implement the Financial Services Act 2012 and support the creation of the new regulatory structure.
PS13/5 sets out the changes consulted on in the following Consultation Papers:
- Consultation Paper 12/24: Regulatory reform: PRA and FCA regimes relating to aspects of authorisation and supervision;
- Consultation Paper 12/26: Regulatory reform: the PRA and FCA regimes for Approved Persons;
- Consultation Paper 12/28: Regulatory fees and levies: Policy proposals for 2013/14;
- Consultation Paper 12/34: Regulatory reform: FCA Handbook updates relating to supervision and threshold conditions and statement on the FCA’s new power of direction over qualifying parent undertakings;
- Consultation Paper 12/37: The Financial Services Bill: implementing markets powers, decision making procedures and penalties policies;
- Consultation Paper 13/3: Regulatory reform: Handbook transitional arrangements, the appointment of with-profits committee members and certain other Handbook amendments; and
- Consultation Paper 13/6: Regulatory reform: Handbook amendments relating to the enforcement guide.
The FSA stated that in response to the comments received to the above consultations it was making only a few significant changes to the policy and Handbook text on which it consulted. The most significant policy changes relate to:
- an extension of the six-month transitional period for status disclosure and the use of the FSA and FCA logos to 12 months;
- the division of responsibility for controlled functions for dual regulated firms; and
- FCA decision making regarding own-initiative requirements.
The new rules and guidance are set out in appendix 3 of PS13/5.
After legal cut over on 1 April the FCA and the PRA will be free to review and amend their respective Handbook as they see fit, in line with its objectives and functions, and in compliance with the consultation, cooperation and coordination mechanisms outlined in the amended Financial Services and Markets Act 2000.
View The new FCA Handbook, 26 March 2013
Policy Statement 1/13: Regulatory reform: amendments to the PRA Handbook
On 25 March 2013, the Prudential Regulation Authority (the PRA) published Policy Statement 1/13: Regulatory reform: amendments to the PRA Handbook (PS1/13).
In PS1/13 the FSA sets out the final PRA Handbook changes following consideration of earlier consultations. The changes have been made by the board of the PRA and will come into effect on 1 April 2013 (a date known as legal cut over). PS1/13 covers changes:
- to establish the PRA’s approved persons regime. These include the creation of a new chapter 10B of the Supervision manual (SUP), specifying the PRA’s controlled functions and the procedures relating to approved persons, and some changes to the Statements of Principle and Code of Practice for Approved Persons;
- to the wording of firms’ statutory regulatory status disclosure to reflect the dual-regulatory structure and removed the licence for firms to use the regulator’s logo. Firms are given a transitional period of twelve months to implement these changes;
- made to chapter 2 of the General Provisions and Definitions sourcebook (GEN) and the Glossary to ensure that the PRA Handbook is clear and legally sound;
- made to the rules and guidance in SUP 5 relating to Skilled Persons reports so that they are aligned with the powers provided for in the new section 166 and section 166A of the Financial Services Act 2012 (the FS Act);
- made to the rules and guidance to SUP 6 concerning the process for firms to apply to vary or cancel their permission to carry out PRA regulated activities;
- made to the rules and guidance in SUP 8 in relation to the waiver and modification of rules. The PRA has amended these to reflect changes made to the Financial Services and Markets Act 2000 (FSMA) and the existence of two regulators;
- made to the rules and guidance in SUP 11 relating to close links and proposed changes in control to align the material with the amendments made to FSMA by the FS Act;
- made to the rules and guidance in SUP 13, 13A and 14 relating to passporting firms which has been amended to reflect the PRA’s responsibilities under FSMA for notification procedures for the exercise of passporting rights under Single Market Directives;
- made to the rules and guidance in SUP 15 to clarify which regulator firms would be required to notify in relation to a significant incident, such as the firm failing to meet the Threshold Conditions;
- made to the rules and guidance in SUP 16 to make clear which regulator will review the different reports firms are required to submit; and
- made to the rules and guidance in SUP 18 concerning transfers of insurance business.
The PRA also deleted SUP TP 1.3 and 1.4.
The PRA also introduced general transitional provisions in GEN TP which covers all parts of the PRA Handbook not covered by a specific transitional arrangement.
The PRA also made changes to the rules and guidance related to fees.
The appendices to PS1/13 set out the new PRA Handbook text.
View Policy Statement 1/13: Regulatory reform: amendments to the PRA Handbook, 25 March 2013
FSA confirms approach to using temporary product intervention rules that will be used by FCA
On 25 March 2013, the FSA published Policy Statement 13/3: The FCA’s use of temporary product intervention rules (PS13/3).
In PS13/3 the FSA reported on the main issues arising from Consultation Paper 12/35: The FCA’s use of temporary product intervention rules and published the Financial Conduct Authority’s Statement of Policy on making temporary product intervention rules (TPIRs).
TPIRs are rules made before consultation, where the Financial Conduct Authority (FCA) identifies a significant risk to consumers which requires prompt action. In practice, they will allow the FCA to take action such as restricting the use of certain product features, requiring that a product not be promoted to some or all types of customers, or – in the most serious cases – requiring that a product not be sold altogether. Rules made before consultation would last for no longer than twelve months and could not be renewed. During this time, the FCA will either consult on a permanent remedy or will work to resolve the problem another way.
Martin Wheatley, chief executive of the FCA, said:
“The creation of the FCA is our opportunity to reset conduct standards. This power, along with our other new powers, helps define how we will regulate going forward.
“We know that some in the industry are concerned about us using this power too hastily; I want to be clear that we know proportionate judgement is needed, and that is what we will exercise. I do not expect us to use this power frequently, but both industry and consumers need to be clear that we will not hesitate to use these powers where we have serious concerns.”
View FSA confirms approach to using temporary product intervention rules that will be used by FCA, 25 March 2013
FSA and Bank of England Policy Statement on complaints scheme for the new regulatory structure
On 25 March 2013, the FSA and the Bank of England (BoE) published a joint Policy Statement on a scheme for complaints against the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA) and the BoE (PS13/7).
In PS13/7 the FSA and BoE summarised feedback received to their earlier consultation, sets out their response to that feedback and contains details of the finalised scheme.
Part 6 of the Financial Services Act 2012 requires the FCA, the PRA and the BoE to establish how they will investigate complaints against them. In PS13/7 the FSA and BoE state that they intend to proceed with the consultation proposals, which proposed that the new scheme would operate broadly in line with the FSA's existing complaints scheme. However, the new scheme includes additional processes to enable the regulators to investigate complaints where allegations have been made against more than one of them.
Appendix 1 of PS13/7 contains a copy of the finalised complaints scheme which came into effect at legal cut over on 1 April 2013. The scheme will not be a part of the FCA or PRA Handbook but will be a standalone document.
View Policy Statement 13/7: Complaints against the regulators (the Bank of England, Financial Conduct Authority and Prudential Regulation Authority), 25 March 2013
FSA Policy Statement on its review of the FSCS
On 25 March 2013, the FSA published Policy Statement 13/4: FSCS funding model review (PS13/4).
The FSCS is the UK’s statutory compensation fund for customers of authorised financial services firms. This means that it will pay compensation to eligible customers of a financial services firm that is unable, or likely to be unable, to pay claims against it.
In July 2012 the FSA published the conclusions of its review of the funding arrangements of the FSCS in Consultation Paper 12/16: FSCS Funding Model Review (CP12/16). In CP12/16 the FSA proposed:
- two separate approaches for funding compensation costs in excess of FSCS annual class thresholds: one for the Prudential Regulation Authority FSCS funding classes and one for the Financial Conduct Authority (FCA) FSCS funding classes with no funding support between the two; and
- a retail pool in which FCA classes would participate. Pay-outs from this pool would be triggered only if one or more FCA classes reached their annual threshold.
In January 2013, the FSA confirmed most of the rules proposed in CP12/16 but in response to feedback from industry, re-consulted on one element in Consultation Paper 13/1: FSCS Funding Model Review - feedback on CP12/16 and further consultation (CP13/1) ). In CP13/1 the FSA proposed that, in addition to the five FCA FSCS funding classes already included in the FCA pool by CP12/16, all FCA-regulated deposit takers, general insurers, life insurers and home finance providers should also contribute to the pool when it is triggered by costs arising from the intermediation classes.
In PS13/4 the FSA summarises feedback to the questions posed in CP13/1 as well as its response to the key themes that emerged. PS13/4 confirms that the:
- FSA will proceed as outlined in CP13/1; and
- final rules for the FCA Retail Pool.
All firms regulated by the FSA and the FCA after 1 April 2013 should consider PS13/4, whether they are current or potential contributors to FSCS compensation costs levies and/or annual management expenses levies (i.e. this may include some firms that are currently exempt from these levies).
View Policy Statement 13/4: FSCS funding model review: feedback on CP13/1, 25 March 2013
Fact sheets and FAQs on FCA firm classification revised
On 22 March 2013, the FSA published updated versions of the following documents:
- a fact sheet on how the FCA will supervise firms; and
- a set of frequently asked questions.
View FCA fact sheet, 21 March 2013
View FCA frequently asked questions, 22 March 2013
FSA consults on FCA power to publish warning notices
On 18 March 2013, the FSA has published Consultation Paper 13/8: Publishing information about enforcement warning notices (CP13/8).
The Financial Services Act 2012 has given the Financial Conduct Authority (FCA) a new power under section 391(1) of the Financial Services and Markets Act 2000 to publish such information about the matter to which a warning notice relates as it considers appropriate. CP13/8 sets out the FSA’s proposals on the FCA’s use of this new power.
The principal purpose of the new power is to promote early transparency of enforcement proceedings. The financial services industry and consumers will be able to understand the types of behaviour that the FCA considers unacceptable at an earlier stage. As the FSA’s Enforcement Guide (EG) will be adopted by the FCA, the FSA proposes to amend EG 6 (publicity) to explain when, and how, the FCA will exercise the power to publish details of a warning notice.
In considering the relevant circumstances of each case, the FCA will not publish information if publication would, in its opinion be:
- unfair to the person with respect to whom the action is proposed to be taken;
- prejudicial to the interests of consumers; or
- detrimental to the stability of the UK financial system.
In deciding whether publication would be unfair, the FCA will consider, amongst other matters, whether the person to whom the action was proposed to be taken, is a firm or an individual. The FCA will also consider the extent to which the person has been made aware of the case against him during the course of the investigation.
The FCA will publish the information about the warning notice in a statement. The published information will not normally contain details of the sanction proposed in the warning notice.
The FCA will adopt EG at legal cut over on 1 April 2013.
The deadline for comments on CP13/8 is 18 June 2013. The FCA will not use the power until the consultation period has ended and a policy on the use of the power is included in EG.
View Consultation paper 13/08: Publishing information about warning notices, 18 March 2013
View Norton Rose Briefing: FSA Consultation paper 13/8: publication of warning notices, 20 March 2013
FSA to publish new regulatory status disclosure requirements and guidance on FCA threshold conditions
On 14 March 2013, the FSA published frequently asked questions (FAQs) on a new web page relating to classification of firms by the Financial Conduct Authority (FCA).
The FAQs provide further information for small firms on the effects of the transition of the FSA to the FCA and the Prudential Regulation Authority. The FSA also announced in the FAQs that it will publish a:
- Policy Statement announcing the text of regulatory disclosure requirements for firms and transitional arrangements. This will be published on 25 March 2013;
- Policy Statement setting out final FCA guidance on the threshold conditions for authorisation. This will be published on 25 March 2013; and
- Consultation Paper on fees rates. This will be published in April 2013.
View FSA Frequently Asked Questions – Small Firms, 14 March 2013
FSA publishes draft FCA and PRA Handbooks
On 8 March 2013, the FSA published on its website:
- a draft version of the Financial Conduct Authority (FCA) Handbook;
- a draft version of the Prudential Regulation Authority (PRA) Handbook;
- a draft combined version of both Handbooks;
- a joint FCA and PRA guide to designation;
- five joint FCA and PRA Handbook instruments; and
- revised versions of existing FSA forms set out in the FSA Handbook.
The FCA and PRA Handbooks will come into force on 1 April 2013, although they do not appear to contain the final versions of rules that have been subject to consultation by the FSA.
View Draft FCA Handbook, 8 March 2013
View Draft PRA Handbook, 8 March 2013
Guides to using the FCA and PRA Handbooks published
On 11 March 2013, the following Handbook guides were published:
- a guide to the Handbooks of the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) published by the FSA; and
- a guide to using the PRA Handbook published by the Bank of England.
Both guides provided information to assist users of the FCA and PRA Handbooks, including information on the types of provisions that appear in them. The FCA and PRA Handbooks will come into force on 1 April 2013.
View FSA Guide to the Handbooks of FCA and PRA, 11 March 2013
View Bank of England Guide to using the PRA Handbook , 11 March 2013
FSA webpage on FCA firm classification
On 14 March 2013, the FSA published a new web page relating to the classification of firms by the Financial Conduct Authority (FCA).
The new web page outlined that during March 2013 the FSA will issue a letter to firms supported by an accompanying fact sheet which will provide firms with more information on:
- the FCA’s approach to the supervision of firms;
- the conduct and prudential categories firms have been assigned;
- what this means for firms; and
- next steps.
In late April 2013 the FSA will write again to all firms that have a dedicated supervisor to confirm the details of who their supervisor will be or if a firm has changed to no longer having a dedicated supervisor, what this means for the firm in more detail. If the firm does not currently have a dedicated supervisor, then it should continue to use the FSA Customer Contact Centre as the first point of contact.
View FSA Firm classification, 14 March 2013
FSA Discussion Paper on FCA’s approach to transparency
On 4 March 2013, the FSA published Discussion Paper 13/1: Transparency (DP13/1).
In the new regulatory regime the Financial Conduct Authority (FCA) will be required to have regard to two new regulatory principles relating to transparency:
- the desirability of publishing information about regulated firms/individuals, or requiring such persons to publish information; and
- the FCA should exercise its functions as transparently as possible.
In DP13/1, the FSA discusses the approach that the FCA might take to:
- improving its own transparency. The FSA outlined new formal mechanisms to scrutinise the FCA's work, including the FCA being held to account by the Public Accounts Committee. The FSA also outlined that the FCA will aim to be more open in the way it communicates and will aim to ensure its publications are easier to understand;
- information released by the FCA about firms, individuals and markets. The FSA is considering three ideas for increasing the transparency of the information the FCA will collect and the judgements the FCA will make in the pursuit of its regulatory objectives: transparency of the authorisation process; transparency of thematic work and early interventions; and transparency of the redress process; and
- information that firms might be required to release about their products and about other aspects of their performance and behaviour. In particular, there are two principles that the FSA has in mind: adjusting disclosure rules to help make products or markets more transparent (the price or value of the products firms offer); and mandating firms to release more or different data/information on other aspects of their performance that could be used to compare firms.
The deadline for comments on DP13/1 is 26 April 2013.
View DP13/1: Transparency, 4 March 2013
Latest update on the transition to the PRA
On 26 February 2013, the FSA published a letter that it sent to firms which provided the latest update on the transition to the new Prudential Regulation Authority (PRA).
The first part of the letter concerned changes in policy which included a discussion relating to individual guidance. The key points on individual guidance include:
- the PRA’s approach to supervision was outlined in two approach documents published last year - one for insurers and one for deposit takers and investment firms. Revised versions of these documents will be published at legal cut over;
- apart from four categories, FSA individual guidance will not automatically be permanently transitioned or confirmed by the PRA. The four categories of individual guidance are: individual capital requirements guidance, individual liquidity guidance, individual guidance given by the FSA that enables a firm to move from a higher proportionality tier to a lower proportionality tier as provided for in the FSA’s General Guidance on Proportionality: The Remuneration Code & Pillar 3 disclosures on remuneration and guidance on the completion and submission of regulatory returns;
- between now and 30 September 2013, firms may submit a list of those items of individual guidance which they wish the PRA to review, together with their own assessment of whether the behaviour or actions set out in the guidance would contribute towards the advancement of the PRA’s objectives;
- firms will be able to continue to rely on guidance referred to review until the PRA reaches a decision on whether the guidance remains appropriate or otherwise. The PRA will confirm the timetable for the review following the submission of the firm’s list; and
- reviews will be completed no more than 18 months after legal cut over.
The second part of the letter concerned firms' interaction with the PRA. A new web page for the PRA is available on the Bank of England website at www.bankofengland.co.uk/pra.
The third and fourth part of the letter covered the PRA Handbook and enforcement respectively. As previously stated the PRA Handbook will be published in March 2013.
The letter also had an annex which contained updated FAQs on the transition to the PRA. The annex discussed a number of topics under the following headings:
- general (including the submission of returns through GABRIEL);
- authorisations and transitional arrangements;
- policy material;
- fees and costs;
- co-ordination with the Financial Conduct Authority; and
- current and forthcoming publications.
View Latest update as we transition to the Prudential Regulation Authority, 26 February 2013
Consultation Paper 12/35: The FCA's use of temporary product intervention rules
On 4 December 2012, the FSA published Consultation Paper 12/35: The FCA’s use of temporary product intervention rules (CP12/35).
The purpose of CP12/35 is to explain the nature of some of the situations in which the Financial Conduct Authority (FCA) may choose to make temporary product intervention rules and provide examples of such situations. Temporary product intervention rules will last no longer than twelve months and may not be renewed. During this time, the FCA will either consult on a permanent remedy or aim to resolve the issue another way.
In CP12/35 the FSA examined the following:
- How making temporary product intervention rules might advance the FCA’s objectives, and provide some further explanation as to why the FCA might make these rules in practice.
- How temporary product intervention rules will be published, maintained and enforced, and how the FSA expects that the FCA will manage the impact of such rules upon innovation, products already in the market, fees, EU legislation and quality.
The FSA also set out the FCA's draft Statement of Policy on making temporary product intervention rules. The Statement of Policy does not introduce any rules and therefore it will be different from an FSA Policy Statement which is published following consultation on new rules, or a change to existing rules. It merely sets out what the FSA proposes that the FCA’s policy will be, and the process it will follow, when it considers making temporary product intervention rules.
The FSA intends to publish the final text of the Statement of Policy before legal cut over which is scheduled for 1 April 2013.
The deadline for comments on CP12/35 is 4 February 2013.
View Consultation paper 12/35: The FCA's use of temporary product intervention rules, 4 December 2012
Consultation Paper 12/34: Regulatory Reform: FCA Handbook updates relating to supervision and threshold conditions
On 30 November 2012, the FSA published Consultation Paper 12/34: Regulatory Reform: FCA Handbook updates relating to supervision and threshold conditions and statement on the FCA’s new power of direction over qualifying parent undertakings (CP12/34).
CP12/34 is part of a series of papers setting out proposed changes to the regulatory requirements needed to create the new rulebooks and policies for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The FSA explained in CP12/34 that when the FCA and PRA acquire their new powers, provisions in the existing FSA Handbook will be designated by the FCA, the PRA or by both regulators, to form the basis of the new FCA and PRA rulebooks. In addition to designation, some more substantive changes to the existing FSA Handbook are required to align the new rulebooks with the future functions of the FCA and PRA, and it is this category of substantive changes that CP12/34 primarily consults on.
In CP12/34 the FSA set out proposals relating to:
- A revised chapter 1 of the Supervision Manual (SUP 1) which will provide an overview of the FCA’s new supervisory model.
- Amendments to SUP 7 which will cover the FCA’s variation powers, revised as necessary to reflect the relevant new terminology and provisions in the Financial Services Bill (the Bill). The FSA stated that SUP 7 will be carried forward as Handbook material only by the FCA. The PRA will explain its approach to exercising its similar powers in material it will maintain outside its Handbook.
- Amendments to the Threshold Conditions sourcebook (COND). The FSA explained that amendments to COND are necessary to align the FCA Handbook with the FCA Threshold Conditions contained in the Treasury’s Threshold Conditions Order. After legal cutover, COND will only apply to the Threshold Conditions for which the FCA is responsible, the PRA has set out its approach in its approach documents.
- A non-Handbook element of the FCA’s new regulatory toolkit. The Bill will give the FCA and PRA some specific new powers in relation to certain qualifying parent undertakings that are the parent entities of regulated firms. The FSA explained in CP12/34 the context for these powers and consults on a draft statement of policy on the use of a power of direction.
These proposals are intended to be put in place in time for legal cutover, scheduled for 1 April 2013.
The proposed FCA Handbook text is appended to CP12/34. The FSA indicated throughout CP12/34 where it expects there to be transitional arrangements. The FSA will provide details of the transitional arrangements before legal cutover. The FSA also notes that as the Bill is still making its way through Parliamentary process, any changes to the Bill that may have a significant policy affect on the proposed FCA Handbook may signal a need for re-consultation.
The deadline for comments on CP12/34 is 29 January 2013.
View Consultation Paper 12/34: Regulatory reform: FCA Handbook updates relating to supervision and threshold conditions and statement on the FCA's new power of direction over qualifying parent undertakings, 30 November 2012
Improving trust: Client assets and markets regulation in the FCA
On 20 November 2012, the FSA published a speech by Martin Wheatley (Managing Director, Conduct Business Unit, FSA) entitled Improving trust: Client assets and markets regulation in the FCA.
In his speech Wheatley covered three themes:
- Markets regulation and the Financial Conduct Authority (FCA). Wheatley explained that previously the FSA would be concerned about preventing market manipulation and ensuring the stability of market infrastructure. Now, in addition to that, the FCA will put more emphasis on the fair treatment of counterparties and ensuring a level playing field for market participants. Wheatley added that the FCA will be a robust regulator of securities markets and firms should expect to deal with it in areas that regulators have not historically looked at. The FCA will also gain new powers in relation to recognised investment exchanges, sponsors and primary information providers. For recognised investment exchanges the FCA will seek to act more quickly. The Financial Services Bill allows simplified procedures for directing or removing recognition, powers to require the appointment of skilled persons and the ability for the FCA to levy financial penalties and issue public censures.
- Wholesale conduct. Wheatley mentioned that while it is not always easy, or even possible, to legislate for good conduct, the FCA will expect firms to incorporate the importance of integrity in their operations and adhere not only to the letter but to the spirit of the law. The FCA will care more about wholesale conduct because of the ways in which it can cause harm to all participants in financial activities. In addition where the FCA feels that wholesale participants are evenly matched it will still intervene where it believes that poor conduct between them has the potential to impact adversely on the integrity of markets or the reputation of the UK as a place to do business.
- Client assets. Wheatley explained that the FSA is currently taking a hard look at the client assets regime and has published a Discussion Paper to begin a debate as to what changes it and the FCA should consider. According to Wheatley there are different options available but central to the debate is the question of speed of return of assets, versus accuracy about who owns what. Alongside this is the question of the balance between who should bear the costs and where clients, general creditors of the failed firm and the wider industry fit within that.
View Improving trust: Client assets and markets regulation in the FCA, 20 November 2012
Combating financial crime: Key themes and priorities for 2013
On 15 November 2012, the FSA published a speech by Tracey McDermott (Director of Enforcement and Financial Crime Division, FSA) entitled Combating financial crime: Key themes and priorities for 2013.
In her speech McDermott briefly discussed legal cut over from the FSA to the Financial Conduct Authority (FCA) and then covered some of the FSA’s ongoing work including its thematic review into anti-money laundering (AML) controls in asset management firms.
In relation to legal cut over McDermott explained that enforcement in its traditional sense will remain a core part of what the FCA will do. The FSA’s credible deterrence strategy will remain and the FCA will take tough and meaningful action against those firms and individuals who fall short of the required standards. The FCA will also build on all of the FSA’s financial crime responsibilities.
McDermott then discussed what the new FCA regime will look like on the ground. Thematic work such as the review into AML controls for high risk customers or ABC controls in investment banks will be a key part of the FCA’s approach in relation to financial crime.
A new feature of the AML supervisory strategy will be systematic, recurrent, in-depth reviews of the biggest banks’ defences against money laundering and sanctions breaches. This strategy is called the ‘Systematic Anti-Money Laundering Programme’ and will be applied to the largest banks operating in the UK with reviews of one institution or another taking place on a permanent basis.
McDermott explained that in the last two years the FSA has performed thematic reviews which look at how banks deal with high risk clients and situations, and how investment banks contain the risks of bribery and corruption. The FSA is now moving on to asset managers. The FSA’s thematic review will begin shortly.
The imminent thematic review of asset managers will look at their systems and controls to counter money laundering, sanctions breaches and bribery and corruption as well as considering issues specific to the asset management industry. The results of the thematic review will be published in Q3 2013.
View Combating Financial Crime: Key themes and priorities for 2013, 15 November 2012
Designation of investment firms for prudential supervision by the PRA: Consultation on draft Policy Statement
On 26 October 2012, the The Bank of England and the FSA (together the Authorities) issued for consultation a short paper concerning the draft Policy Statement on the designation of investment firms for prudential supervision by the Prudential Regulation Authority (the PRA).
The Financial Services Bill 2012-13 (the Bill) adds a new section 22A to the Financial Services and Markets Act 2000 providing that HM Treasury may, by order, specify which regulated activities are ‘PRA-regulated activities'.
The draft Financial Services and Markets Act 2000 (PRA-Regulated Activities) Order 201* (the draft Order) provides that the regulated activity of accepting deposits and certain insurance related regulated activities are PRA-regulated activities. The draft Order also gives the PRA the power to designate certain investment firms for prudential supervision by the PRA.
The draft Order requires the PRA to issue a Policy Statement on designation. A draft Policy Statement is set out in Annex 1 to the paper, setting out the Authorities' views on how the PRA will approach the designation of investment firms. The draft Policy Statement lists proposed factors to which the PRA will have regard when deciding whether to designate an investment firm and explains the rationale for these factors. The draft Policy Statement also sets out the procedural arrangements for making these decisions.
The deadline for comments on the draft Policy Statement is 4 January 2013.
View Designation of investment firms for prudential supervision by the PRA: Consultation on draft Policy Statement, 26 October 2012
Andrew Bailey sets out details of the PRA’s approach to regulation
On 22 October 2012, the FSA issued a press notice concerning the speech that Andrew Bailey (Head of the prudential business unit, FSA) gave at the FSA's event for the PRA Approach documents.
The PRA Approach documents set out how the Prudential Regulation Authority (PRA) will supervise firms when it is established in April 2013. One document sets out the PRA’s intended approach towards regulating deposit-takers and significant investment firms. The other focuses on insurers.
On the PRA Approach documents Mr Bailey stated:
"The documents we published last week set out how we intend to implement the approach in practice. It will be based on setting clear and concise standards for all PRA regulated firms. The PRA's approach will be very clearly judgement-based rather than focussing on narrow rules, and it will be forward looking, taking into account a range of possible risks to our objectives and the stability of firms."
The FSA press notice also contains a link to a webcast of the event.
View Andrew Bailey sets out details of the PRA’s approach to regulation, 22 October 2012
The FCA: The future of conduct regulation
On 17 October 2012, the FSA published a speech given by Martin Wheatley (Managing Director, Conduct Business Unit, FSA) entitled The FCA: The future of conduct regulation.
Mr Wheatley's speech discusses the approach the FSA is developing for the Financial Conduct Authority (FCA) and builds on the points raised in the recent FSA paper entitled Journey to the FCA.
In particular Mr Wheatley covers the FCA’s three operational objectives:
- Consumer protection. The FCA wants consumers to get financial services and products that meet their needs from firms they can trust. This means that the FCA will focus more on how real people behave in the real world. It will look at the pressures that influence consumers' decisions and behaviour when it comes to choosing financial products and services. Mr Wheatley also explains that to help deliver the consumer protection objective the FCA will have a new division that will act as its radar. This division will bring together information-gathering, analysis, research and policy making functions into one place. This should help the FCA identify risks and take the right action at the right time. Mr Wheatley further mentions that the FCA will move to a more flexible type of regulation. It will reallocate FSA staff and go from having most of its supervisors dealing with specific firms to having more people who can be deployed to deal with emerging issues or for cross-industry reviews. As well as having more resource dedicated to dealing with emerging issues the FCA will also have more resource to do thematic work so that it can identify the issues that run across firms.
- Competition. The FCA wants firms to compete effectively with the interests of consumers at the heart of how they run their business. Mr Wheatley mentions that part of promoting competition is about making sure that there are no unnecessary regulatory barriers to new entrants. He explains that the FSA has carried out a review of what it does when it authorises new firms to look at whether it is getting in the way of allowing new banks to set up. The FSA will report on this review by the end of the year. Going forward Mr Wheatley also states that the FSA will expect firms to construct business models where the fair treatment of customers is central to their operation.
- Market integrity. Mr Wheatley explains that there will be increased focus on delivering good market conduct. There will also be an examination of the wider range of behaviour that damages trust in the integrity of markets or threatens consumer protection. The FCA will also have a renewed focus on wholesale conduct and will take a more assertive and interventionist approach to risks caused by wholesale activities.
In the final part of his speech Mr Wheatley discusses how the FCA, as an organisation, will operate. In particular he states that FCA staff will need to grasp the key issues in the firms they deal with. Staff will be talking to the CEO’s of firms, not just the head of compliance. Whilst this needs boldness and curiosity it also needs judgement which will require a new skill set.
View The FCA: The future of conduct regulation, 17 October 2012
The future of banking regulation in the UK
On 17 October 2012, the FSA published a speech given by Andrew Bailey (Managing Director, Prudential Business Unit, FSA) entitled The future of banking regulation in the UK.
In his speech Mr Bailey discusses the work of the Financial Policy Committee (FPC) and the role of bank regulation in macro-economic policy.
At the start of his speech Mr Bailey discusses the two objectives for the FPC. First, the 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. Second, the secondary objective of supporting the economic policy of the Government, including its objectives for growth and employment.
Mr Bailey notes that the two objectives contain the same "subject to that" language used in 1997 in the Monetary Policy Committee's objectives. This means that there is a hierarchy of objectives to which the FPC must observe. However, Mr Bailey mentions two further points which are relevant. First, resilience and economic growth interact and are therefore not fully independent. Second, policy is necessarily forward looking in that the FPC is concerned with stability and growth in the future. This means that in thinking about the hierarchy of objectives, it may be that a forward looking assessment of the probability of success should be used rather than saying that the FPC should complete one objective and then do the other.
Mr Bailey then moves on to discuss capital buffers. In particular he mentions that we are currently in a quite extended transitional phase whereby the capital buffers of the banks are being increased to the Basel III levels. This process has around six years to run on the transition timetable. Mr Bailey also notes that the FPC has recently said that it thinks banks should take steps to build up those buffers more rapidly than most firms have done recently under the Basel transition policy. However, it has not defined this objective as requiring banks to reach a level such as a 10 per cent Core Tier One ratio in the next year or so. This is on the basis that this would run the risk of encouraging banks to reduce their loan books. Instead, the FPC is defining the growth of capital in terms of the increase in the nominal stock of Core Tier One, or equity, capital.
Mr Bailey then notes that this raises three questions. First, by how much should the nominal capital bases of banks grow in short order? Second, why would we want this to happen? Third, what form should the capital take? In relation to the first two questions Mr Bailey states that there is some uncertainty that needs to be resolved. So far, the FPC has asked the major banks to try to maintain the projected growth of nominal Core Tier One capital over the next 18 months, according to the projections for growth that they provided earlier this year. This is their Basel III transition path.
Near the end of his speech Mr Bailey covers the Funding for Lending Scheme (FLS) which the Government and the Bank of England have introduced. He also notes that recognising the need to balance the FPC's macro-prudential objectives the FSA has taken certain steps. It has allowed banks to reduce the capital buffers they hold over the minimum Pillar One requirements in line with new lending that is consistent with the objectives of the FLS. However, to be clear banks do not need to use the FLS to obtain this benefit. The FSA's view is that it has allowed the use of the additional capital buffers built up since the height of the financial crisis by anticipating what will be in the future their partial use as the Basel III counter-cyclical buffer.
View The future of banking regulation in the UK, 17 October 2012
The PRA's approach to banking supervision
The Bank of England and the FSA have jointly published a paper concerning the Prudential Regulation Authority's (PRA) approach to the supervision of banks and those investment firms that could present significant risks to the stability of the UK financial system.
For deposit taking and significant investment firms the PRA will have one objective, to promote the safety and soundness of regulated firms. The PRA will meet this objective primarily by seeking to minimise any adverse effects that a firm failure may have on the UK financial system and by ensuring that firms carry on their business in a way that avoids adverse effects on the system. However, it will not be the PRA's role to ensure that no PRA authorised firm fails. Firm failures will happen, but the PRA will seek to ensure that they do not result in significant disruption to the supply of financial services.
The PRA's approach to regulation will consist of policy making to guard against a range of positive outcomes and the application of that policy through effective supervision. All firms will be subject to a baseline level of supervisory oversight designed to ensure that if a firm does fail, it does so in an orderly way.
The PRA's style of supervision will be judgement-based. This includes:
- The nature and intensity of the PRA's supervisory approach will be commensurate with the level or risk a firm poses to the stability of the system.
- PRA supervisors will focus on the ‘big picture’ and on understanding where the main risks to the stability of the UK financial system lie.
- The PRA will be forward looking, seeking to assess whether, on balance of risks, there are vulnerabilities in firms' business models, capital and liquidity positions, governance, risk management and controls that cast into doubt their future financial soundness.
- Where potential threats to the safety and soundness of an institution are identified, the PRA will take supervisory action at an early stage to reduce the probability of disorderly failure.
View The PRA's approach to banking supervision, 16 October 2012
The PRA’s approach to insurance supervision
The Bank of England and the FSA have jointly published a paper concerning the Prudential Regulation Authority's (the PRA) approach to insurance supervision.
The PRA's supervisory approach to insurance firms will be anchored in its statutory objectives. For insurers, the PRA will have two complementary objectives. It will promote their safety and soundness, as with all firms it supervises, thereby reducing the threat they can pose to the stability of the UK financial system and thus to the continuity of provision of critical financial services. It will also contribute to the securing of an appropriate degree of protection for those who are or may become policyholders.
Policyholders will be protected by both the PRA as prudential regulator and by the Financial Conduct Authority (FCA) as conduct regulator. The FCA will seek to ensure that consumers are treated fairly in their dealings with insurers, whereas the PRA’s focus will be to ensure that policyholders have an appropriate degree of continuity of cover for the risks they are insured against.
However, it is not the PRA's role to ensure that no insurer fails. Insurer failures will happen but the PRA will seek to ensure that they do not result in significant disruption to the supply of critical financial services, including by promoting an acceptable degree of continuity for policyholders' cover against insured risks (whether delivered through continuity of cover or the return of premiums paid).
Given the particular nature of insurance contracts and insurers' business models, the PRA's supervision of insurers will be framed in a different way to its supervision of banks. The PRA's statutory threshold conditions for insurers are designed to promote safety and soundness both to ensure insurers' ongoing ability to meet their obligations to policyholders and to support the stability of the financial system. The PRA will expect insurers not only to meet and continue to meet the letter of the threshold conditions, but also to consider the overriding principles of safety and soundness and the protection of policyholders.
In its approach to supervision the PRA will rely significantly on judgement. It will supervise firms to judge whether they are safe and sound, and whether they meet, and are likely to continue to meet, the threshold conditions. The PRA’s supervisory judgements will be based on evidence and analysis. The PRA's approach will also be forward looking in that it will assess firms not just against current risks, but also against those that plausibly arise in the future.
View The PRA’s approach to insurance supervision, 15 October 2012
Launch of the journey to the FCA
On 16 October 2012, the FSA published a speech given by Martin Wheatley (Managing Director, Conduct Business Unit, FSA) entitled Launch of the journey to the FCA. The speech repeats much of the content found in Mr Wheatley’s other speech entitled The FCA: The future of conduct regulation.
In particular Mr Wheatley repeats the point that the FCA represents a huge opportunity for the regulator and firms to start afresh and work in partnership to reset how conduct in financial services is dealt with. Mr Wheatley sees the role of the FCA 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.
View Launch of the journey to the FCA, 16 October 2012
FSA publishes paper entitled Journey to the FCA
On the 16 October, the FSA published a paper, Journey to the FCA (the Paper), setting out its current thinking on the transition to the Financial Conduct Authority (FCA) and how the FCA will operate once it is established.
The issues considered in the Paper include introducing the FCA's approach to:
- Its new powers and responsibilities, including powers relating to product intervention, financial promotions, markets regulation and super-complaints.
- Its competition objective and duty, including the steps it will take to promote competition and to embed competition in its regulatory approach.
- Regulatory processes, including authorisations and threshold conditions, approved persons, changes in control, waivers and passporting.
- Supervising firms, including details of the FCA's proposed supervision categories (C1, C2, C3 and C4) and the three pillars of its supervision model (the firm systematic framework (FSF), event-driven work and issues and products).
The Paper also highlighted that the purpose of the FCA’s approach is to ensure that consumers are placed as a central consideration in decisions taken by firms and that the FCA intends to make the market work well so as consumers are treated fairly.
The FSA is also using the Paper to consult on specific questions relating to the FCA's new competition role and its approach to gathering and receiving information. Responses are requested by 14 December 2012. The FSA intends to publish feedback on this consultation in early 2013.
The paper contained details of the papers relating to the FCA and its powers that the FSA intends to publish before legal cutover to the FCA in 2013.
View Journey to the FCA, 16 October 2012
FSA implements internal twin peaks model for authorisations
On 15 October 2012, the FSA published a statement announcing that both the Prudential Business Unit (PBU) and the Conduct Business Unit (CBU) will undertake authorisation assessments of firms that will be dual regulated under the new regulatory structure.
This change will mirror the future authorisation procedures under the new regulatory structure scheduled to take effect in April 2013, when the FSA splits into the Financial Conduct Authority and the Prudential Regulation Authority.
The FSA states that the application process itself will not change, but how an application is processed is altered. The internal processing of an application will be conducted by the CBU and PBU in tandem. The FSA also states that a CBU case officer and a PBU supervisor will be responsible for each application and they will co-ordinate in order to minimise duplication and the impact of the change on applicant firms and individuals. Ultimately, the final decision will need to be agreed by both the PBU and CBU to ensure a single FSA decision during transition to the new regulatory structure.
View FSA statement: Changes to authorisations, 15 October 2012
Consultation Paper 12/26: Regulatory reform: The PRA and FCA regimes for Approved Persons
On 3 October 2012, the FSA published Consultation Paper 12/26: Regulatory reform: The PRA and FCA regimes for Approved Persons (CP12/26).
The Financial Services Bill (the Bill) amends the powers to regulate approved persons and sets out how the powers may be exercised by the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). In CP12/26 the FSA sets out proposed amendments to the current approved persons' regime to make it fit for purpose for the PRA and FCA, including amendments required as part of the creation of the PRA and FCA Handbooks.
The key two aspects of change are:
- A split of the current list of controlled functions for firms regulated by both the PRA and FCA (dual regulated firms), seeking to minimise unnecessary duplication for dual regulated firms.
- An extension of the Statements of Principle in the Statements of Principle and Code of Practice for Approved Persons (APER) to a wider set of activities, and their application to people approved by either regulator (meaning that both regulators will have the ability to discipline certain categories of approved person).
The layout of CP12/26 is as follows:
- Chapter 1: Overview of proposals.
- Chapter 2: Background and high level approach.
- Chapter 3: Outlines the specific Handbook rule and guidance changes related to controlled functions that will affect dual regulated firms and FCA regulated firms. The changes will result in a SUP 10A in the FCA Handbook and a SUP 10B for the PRA Handbook. The chapter also contains tables to assist with the explanations as well as specific examples to illustrate what the proposed changes will mean for firms
- Chapter 4: Proposed changes to APER including an increase in the coverage of the activities APER applies to for both the PRA and the FCA.
- Appendix 1: Draft Handbook text for SUP 10 and APER setting out the proposed changes as a result of the transition.
- Appendix 2: Explains how the Handbook provisions will be designated between the PRA and FCA.
However, CP12/26 does not provide details on the treatment of people who are already approved, or how those approvals will be transferred to the new regulatory system. The reason for this is that the Government has not yet published details of its proposed legislation in this area. However, the FSA believes that the approvals currently held by individuals will be ‘grandfathered’ to one of the new regulators without the need to make any new application or notification.
The deadline for comments on CP12/26 is 7 December 2012.
View Consultation Paper 12/26: Regulatory reform: The PRA and FCA regimes for Approved Persons, 3 October 2012
Strengthening Defences: Tackling Financial Crime from the Regulator’s Perspective
On 26 September 2012, the FSA published a speech given by Tracey McDermott (Director of Enforcement and Financial Crime, FSA) entitled Strengthening Defences: Tackling Financial Crime from the Regulator’s Perspective.
At the start of her speech McDermott mentioned that the Financial Services Bill gives a clear mandate to the Financial Conduct Authority (FCA) in relation to financial crime. Its integrity objective explicitly requires the FCA not to let the UK financial system be used for the purposes of financial crime. The Prudential Regulation Authority (PRA) has no such mandate. However, from a prudential point of view fraud against financial institutions can be a significant source of operational and reputational risk. The PRA will need to know financial institutions are on top of these risks and that their safety and soundness is not at risk. The FCA’s focus will be different. It will focus on protecting consumers and stopping firms facilitating crimes for which they can be a conduit such as money laundering.
McDermott then turned to the topic of investment fraud stating that it remains one of the FSA’s top financial crime risks. However, she added that it is not all about what the FSA is doing to combat investment fraud. Industry also has a role to play. On this point she refered to the FSA’s recent thematic review of banks’ defences against investment frauds which looked at the steps banks take: (i) to protect their customers; and (ii) to detect when they are providing banking services to people perpetrating scams. The FSA published draft guidance on the thematic review in June and plans to issue finalised guidance in November.
McDermott then discussed high-risk customers and notes that it has now been over a year since the FSA published its findings on how banks handle customers and situations that present a higher risk of money laundering. At the time of this thematic review the FSA made it clear that it would continue focussing on anti-money laundering controls. She warned firms that they might like to reflect on whether they have a convincing story to tell twelve months on. In particular firms should ask themselves:
- What practically has changed from before?
- Has risk appetite been reviewed and is it properly reflected in the customers that are on the books?
- Has the way high risk customers are treated changed?
- What evidence is there that senior management are on top of this issue?
Turning to trade finance McDermott stated that the FSA is starting a new thematic review and this will look at how banks that finance international trade control the financial crime risks in these businesses.
Near the end of her speech McDermott covered a new feature of the anti-money laundering supervisory strategy. This new strategy is referred to as the ‘Systematic Anti-Money Laundering Programme’ and means that the FCA will consider each bank’s anti-money laundering defences as an end-to-end process - with new customers entering at one end and suspicious activity reports coming out the other, and all the intermediate stages probed to see how well they are tied together.
View Strengthening Defences: Tackling Financial Crime from the Regulator’s Perspective, 26 September 2012
My vision for conduct regulation and how it will affect asset managers
On 25 September 2012, the FSA published a speech by Martin Wheatley (Managing Director of the FSA) entitled My vision for conduct regulation and how it will affect asset managers.
In his speech Mr Wheatley expressed his interest in how asset managers respond to the idea of adopting a fiduciary duty to their investors. This is something that would offer an extra level of commitment beyond the FSA’s rules. Mr Wheatley focused his speech on how asset management fits in with the overall approach of the proposed Financial Conduct Authority (the FCA).
Mr Wheatley outlined some of the key issues within the asset management sector, in particular:
- How consumers are viewed.
Mr Wheatley also explained what changes the FSA is going through to become a ‘new type of regulator’ as the FCA, including:
- The publication of fewer Consultation Papers and when consultation on a rule is required it is intended that this will be done face to face.
- A focus on conduct at the very top of firms.
- Earlier intervention and more rigorous enforcement.
- Improved and more comprehensive communication with firms and consumers.
Mr Wheatley stressed that whilst the FSA appreciates the very important role of the asset management sector, there are issues that need to be addressed. The evolution of the FSA into the FCA will mean new expectations on asset managers but Mr Wheatley emphasised the need for this change and that it will help to enhance consumer confidence in financial services as a whole.
View My vision for conduct regulation and how it will affect asset managers, 25 September 2012
Supervision of asset managers under the Financial Conduct Authority
On 25 September 2012, the FSA published a speech by Clive Adamson (Director of Supervision of the FSA Conduct Business Unit) entitled Supervision of asset managers under the Financial Conduct Authority (the FCA).
In his speech Mr Adamson discussed the FCA’s planned approach to the supervision of firms, including asset managers. The new methods of supervision will include:
- Making forward thinking judgements about business models, strategies and governance.
- Acting faster, more decisively and robustly seeking redress for consumers.
- Categorising firms into four new supervision categories - C1, C2, C3 or C4 - according to their impact on the market and consumers. There will no longer be a ‘one size fits all’ approach.
- The introduction of a new FCA supervision model based on three key pillars - Firm Systematic Framework, Event Driven and Issues & Products.
Mr Adamson went on to describe the key risks the FSA currently see in the asset management sector and summarised the work being undertaken to mitigate these risks. The key threats and solutions Mr Adamson addressed in his speech are as follows:
- Risk 1: Asset management firms have structured themselves in such a way to avoid clear responsibility for consumer protection. To address this, the FSA will apply additional scrutiny to those firms focussing on competence to oversee funds.
- Risk 2: Certain instances of mismanagement of conflicts of interest in the asset management sector. In response the FSA plans to challenge firms to identify conflicts in their business model and to resolve these promptly.
- Risk 3: The potential for asset management firms to provide poor consumer outcomes in the development of new products. The FSA will intervene earlier to prevent products being sold that are unsafe for the markets they are intended for.
Mr Adamson concluded his speech by stressing that even though the FCA will be a tough and possibly more intrusive regulator, it will be a more open, engaged and listening regulator acting from a position of greater understanding in the asset management sector.
View Supervision of asset managers under the Financial Conduct Authority, 25 September 2012
Preparations and transitional arrangements towards the PRA
On 20 September 2012, the FSA published a letter and FAQs that it had sent to firms concerning preparations and transitional arrangements towards the Prudential Regulation Authority (PRA).
In the letter the FSA stated that in October it will issue two documents outlining the PRA’s supervisory approach - one for all deposit takers and investment firms designated for regulation by the PRA and one for insurers. The documents will:
- Describe the PRA’s statutory objectives and how it interprets them as the basis for its approach.
- Set out at a high level what the PRA will expect of firms in advancing these objectives and ensuring they satisfy the Threshold Conditions.
- Describe what firms can expect from the PRA in the course of supervision.
The FSA also stated that in addition to its recent consultation on authorisation and supervision it will produce a Consultation Paper on the approved persons regime for the Financial Conduct Authority and the PRA. This consultation will include the proposed split of controlled functions between the new regulators.
In addition, the FSA set out other forthcoming publications which will be made in the run-up to legal cutover. This will include a Policy Statement on the PRA’s power of direction over parent undertakings and a draft statement on the designation of investment firms.
View Preparations and transitional arrangements towards the PRA, 20 September 2012
View Transition to the PRA: Detailed information FAQs, 20 September 2012
Financial promotions: Keeping connected and compliant
On 18 September 2012, the FSA published a speech given by Clive Gordon (Conduct Risk Department, FSA) entitled Financial promotions: Keeping connected and compliant.
In this speech Mr Gordon discussed the current regulatory framework concerning financial promotions, specific issues when using digital media and the new powers of the Financial Conduct Authority (FCA) and the changes it will bring.
In relation to the FCA Mr Gordon briefly discussed its new power to ban misleading promotions. He stated that the FCA will be ready to take faster and more effective action from the first day it gets these powers. This does not mean that it will use them from day one. However, he added that if firms were thinking about reviewing their systems and controls for compliance with the financial promotion rules, now would be a good time to do so.
View Financial promotions: Keeping connected and compliant, 18 September 2012
How conduct regulation will be changing and how the new regulator will seek to get a fair deal for consumers
On 18 September 2012, the FSA published a speech by Martin Wheatley (Managing Director, FSA) entitled How conduct regulation will be changing and how the new regulator will seek to get a fair deal for consumers. The speech was given at the recent ABI conference “A way ahead for conduct regulation”.
In his speech Mr Wheatley discusses conduct regulation by the proposed Financial Conduct Authority (FCA) and what will be expected of firms. In particular at the start of his speech Mr Wheatley mentions that first and foremost firms should read the FCA Approach Document which will be published at the end of next month.
When discussing what is expected of insurance firms Mr Wheatley mentions that the FCA will look at the product lifespan, from the boardroom to the point of sale. He adds that the biggest difference will be a move from an essentially reactive approach to a more pre-emptive approach. This will be about identifying and heading off issues before they turn into big problems for consumers. This will be based on the FCA making forward-looking judgements about firms’ business models, product strategies and how they run their business. This will help the FCA to intervene earlier to prevent problems from turning into actual harm.
Mr Wheatley then explains how some firms will be expected to change their culture and the way they view consumers. Firms will need to balance the way products are developed and sold in the right way against making profits. This will, however, be balanced against consumers taking more of an interest in the products they purchase.
Mr Wheatley then discusses the product intervention power given to the FCA adding that a wider product pre-approval scheme has been looked at but ruled out for the moment. The FCA will be selective and proportionate when using the product intervention power but the point Mr Wheatley makes is that the power will be used when needed. The FCA will not adopt a tick box approach when using the power. The FCA will instead look across the whole process - the structure of the product, the target market, the distribution process and wider sales and marketing as well as detailed individual product issues.
Near the end of his speech Mr Wheatley covers the FCA’s objective to promote effective competition in the interests of consumers. This does not mean simply having more firms in the market. Instead, the FSA’s current thinking is that it broadly comes down to four areas:
- Firms competing for business by offering better services, better value and the types of products their clients want and need.
- No firms sustaining excess profits.
- Firms innovating and developing new products, or providing services in different ways.
- A market where the successful firms are the ones that respond most effectively to consumers’ genuine needs.
At the end of his speech Mr Wheatley describes three key themes that firms should take away from his speech:
- The FSA appreciates that the environment in which it operates is changing. As a regulator, the FSA are changing as it prepares to become the FCA. As part of this, the FSA’s expectations of firms’ are changing.
- The FSA wants to continue to work with firms to ensure that customers’ interests are at the heart of their business models.
- The FSA appreciates that the vital role that a stable and trustworthy insurance sector plays as part of a thriving financial services sector.
View How conduct regulation will be changing and how the new regulator will seek to get a fair deal for consumers, 18 September 2012
Beating the fraudster
On 13 September 2012, the FSA published a speech given by Bob Ferguson (Head of Financial Crime & Intelligence, FSA) entitled Beating the Fraudster.
In his speech Mr Ferguson discusses two topics:
- The current transition from the FSA to the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
- How the transition to the new structure will play out in relation to the work against insurance fraud.
In relation to the first issue Mr Ferguson notes that one of the more striking features is that the new set up gives a very clear mandate to the FCA in relation to financial crime. The FCA’s integrity objective explicitly tasks the FCA not to let the UK financial system be used for the purposes of financial crime. However, whilst the PRA has no such mandate that does not mean it can forget about insurance fraud altogether. From its prudential point of view, insurance fraud is operational risk, and the PRA needs to know that PRA regulated firms are on top of their operational risks and that their solvency is not being undermined by external or insider fraud.
When tackling its financial crime responsibilities the FCA’s priorities will be risk driven and the types of questions it will ask itself include:
- To what extent do non-regulatory players have natural incentives to guard against the type of crime in question?
- How good is the industry or sector at tackling the crime risk in question through collective action?
- Who else is on the pitch, tackling the risk?
Mr Ferguson states that taking into account all these factors, the FSA’s top concerns at the moment are money laundering risk, corruption risk, investment fraud against consumers and, on the markets side, insider dealing.
View Beating the fraudster, 13 September 2012
FSA issues consultation on PRA and FCA regimes relating to aspects of authorisation and supervision
On 12 September 2012, the FSA published its latest Consultation Paper on UK regulatory reform, Consultation Paper 12/24: Regulatory Reform: PRA and FCA regimes relating to aspects of authorisation and supervision (CP12/24).
The FSA's approach to amending its Handbook ready for the legal cut over to the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) is based on making only those changes that are required to implement properly the Financial Services Bill (the Bill) and to support the creation of the new regulatory structure. A key component of this approach is that when the PRA and FCA acquire their powers the provisions in the existing FSA Handbook will be adopted by the PRA, FCA or both to form the new PRA and FCA Handbooks. As a result of this approach the FSA believes that the majority of the provisions in the current FSA Handbook will be carried forward to the new regulators' Handbooks. From legal cut over the PRA and FCA will then amend the provisions within their Handbooks in line with their respective objectives and functions.
However, some substantive changes must be made to the current FSA Handbook in order to align the Handbooks of the PRA and FCA with their future objectives and functions. In CP12/24 the FSA sets out for consultation these substantive changes.
Each chapter of CP12/24 covers a particular part of the Handbook:
- Chapter 2: General Provisions and Common Definitions (GEN 2 and the Glossary).
- Chapter 3: Status Disclosure and use of the regulators' logos: Changes to General Provisions.
- Chapter 4: Skilled Persons: Changes to the Supervision Manual (SUP).
- Chapter 5: Applications to vary and cancel permissions and requirements (SUP 6).
- Chapter 6: Waiver and modification of rules (SUP 8).
- Chapter 7: Controllers and close links (SUP 11).
- Chapter 8: Passporting under EU Directives (SUP 13/14).
- Chapter 9: Notifications to the FSA (SUP 15).
- Chapter 10: Reporting requirements (SUP 16).
- Chapter 11: Insurance transfers of business (SUP 18).
- Chapter 12: Other changes to the PRA and FCA Handbooks (including deletions).
The deadline for comments on CP12/24 is 12 December 2012. The FSA states that the resulting Policy Statements will be issued by the PRA and FCA once they have acquired their legal powers.
The FSA also states that there will be further consultations on the PRA and FCA Handbooks over the coming months.
View Regulatory Reform: PRA and FCA regimes relating to aspects of authorisation and supervision, 12 September 2012
FAQs on the transition to the FCA
On 31 July 2012, the FSA published a set of FAQs on the transition to the Financial Conduct Authority (FCA). The questions and answers cover a wide range of issues including:
- Whether the FCA will be the sole regulator for insurance intermediaries.
- Whether the authorisation process will be quicker under the FCA.
- How the FSA will drive better culture within firms.
- The regulation of dual regulated firms.
- Whether the current fee structure will be adopted by the FCA.
- The new powers of the FCA including how the product intervention power will impact product innovation.
- Whether the FCA will keep the TCF outcomes and / or whether it will publish new consumer outcomes.
Key points made in the FAQs include:
- The FCA will not be a retrospective regulator and will judge what firms have done based on the rules and principles that were in place at the time.
- Firms that are already regulated by the FSA will be automatically transferred over and will not have to submit a new application for authorisation.
- Delivering culture change within firms is one of the main things that the FSA is working on. The FSA’s overall focus will continue to be on senior management as it believes that they are crucial in setting their firm’s culture.
- Boards need to understand the regulator’s priorities and need to challenge their executives to make sure they put customers at the heart of what they do.
- In relation to dual regulation there will be some co-ordination between the PRA and FCA to maximise the exchange of information but firms need to be clear that they are going to be dealing with two separate regulators. Each regulator will act on their own when dealing with firms because they will each have different objectives and different things that they will look at in firms.
The FSA will publish an approach document on the FCA in October 2012 which will give further detail on how it will work.
View FAQs on the transition to the FCA, 31 July 2012
FSCP review of the FSA’s conduct regulation regime
On 30 July 2012, the Financial Services Consumer Panel (FSCP) published a paper following its review of the effectiveness of the FSA as a conduct regulator. The FSCP review focused on three areas: payment protection insurance (PPI) replacement products; packaged bank accounts; and the impact of firms’ in-house reward and incentive structures.
The FSCP paper set out a series of recommendations for the proposed Financial Conduct Authority’s (FCA) approach to conduct regulation. In particular the FSCP called on the FCA to put in place a strategy for how it will get the most from its powers and how they can be used in combination to deliver its regulatory vision. In the case of PPI products the FSA raised questions about the structure of some products as long ago as 2005. Under the FCA the FSCP would expect such issues to be identified early and addressed without delay, probably by way of the product intervention powers.
View FSCP review of the FSA’s conduct regulation regime, 30 July 2012
Macro-prudential policy in deflationary times
On 20 July 2012, the FSA published a speech given by Lord Turner entitled Macro-prudential policy in deflationary times. In his speech Lord Turner discussed the work of the interim Financial Policy Committee (FPC) of which he is a member.
During his speech Lord Turner made the point that the challenge the FPC now faces is to determine what role it can play in helping to stimulate recovery. Lord Turner argued that the FPC has an important role in assisting economic recovery as its creation makes it possible to integrate and consider together different policy levers that were previously quite separate.
Near the end of his speech Lord Turner stated:
“And in the longer term, we should keep under review the appropriate tools and modes of application of macro-prudential policy. I have already mentioned the need for a debate on whether direct borrower constraints, such as LTV limits, should be part of the macro-prudential armoury. The other issue worthy of debate is the relationship between the role of the FPC and the Independent Commission’s recommendations on ring fencing.
“The FPC will….. have an ancillary objective of ‘supporting growth and employment in the UK’. And the tools we have available to support those objectives work primarily via bank balance sheets….. But if we apply our policy tools at a group balance sheet level, then for the more global of our banks the link between our policy tools and UK economic activity is a relatively loose one.
“That poses the question as to whether macro-prudential tools should be applied at the level of the ring fenced UK retail and commercial banks, which will emerge from the implementation of the Vickers’ Commission recommendations, rather than, or as well as, at group level. But that in turn may have implications for the range of activities which should ideally be included within the Vickers’ ring fence. If we wish to encourage a steady rather than volatile supply of credit to UK SMEs, the best way forward may be to ensure that all SME lending is included within the ring fence and to apply macro-prudential policy levers at that level.”
View Macro-prudential policy in deflationary times, 20 July 2012
FSA Annual Public Meeting: Chairman’s speech
On 3 July 2012, the FSA published a speech given by Lord Turner (FSA Chairman) at the FSA Annual Public Meeting.
At the start of his speech Lord Turner stated that the financial crisis made it clear that the pre-crisis system of prudential regulation had been severely deficient in three important respects:
- Woefully deficit rules on bank capital and liquidity.
- A deficient and under-resourced approach to prudential supervision.
- A dangerous vacuum, an “underlap” between the Bank of England and the FSA, an absence of systemic analysis and macro-prudential policy tools.
He then stated that at the core of good prudential supervision should be a focus on three things: capital, liquidity and asset quality. He argued that that focus was previously lacking, and the resource dedicated to the supervision of the major banks was insufficient. In light of this since the beginning of 2008, the FSA implemented a radical change in its approach to prudential supervision. This has led to a fundamental change both in the regulation and in the supervision of individual banks.
Lord Turner then discussed regulation on the conduct side and stated that one crucial determinant of whether the financial services industry meets customer needs, selling appropriate products to appropriate customer segments, is the structure of incentives. He noted that the FSA has paid increasing attention to the structure of incentives. For example the Retail Distribution Review has been designed to remove commission bias in the financial adviser space. In addition the FSA is consulting on policy in relation to the payments to platform service providers by fund managers.
According to Lord Turner better regulated incentive structures and a more efficient approach to early intervention will always need to be supported by the credible deterrence of potential enforcement action. Given this over the last five years the FSA has significantly increased the effectiveness and the robustness of its enforcement activities. Lord Turner then discussed the recent LIBOR scandal stating that it is a huge blow to the reputation of the banking industry.
Lord Turner then referred to supervision in the wholesale space and stated that in the past the FSA has tended to adopt a somewhat caveat emptor approach to wholesale conduct issues. However, the issue for the proposed Financial Conduct Authority (FCA) to consider is how far the caveat emptor approach is sufficient. Lord Turner stated: “We will therefore need to think carefully how far we should shift our past approach to the supervision of wholesale conduct, and what resources and skills we need to be more effective in this area. This is an issue currently under discussion between the executive and the Board, and one on which we will comment in the FCA approach document which we will publish in autumn.”
In the final part of his speech Lord Turner discussed the timing of the transition from the FSA to twin peaks regulation. He stated that the current estimate is that “legal cut over” will occur in April 2013. However, whether this is the date depends on the Parliamentary timetable up to Royal Assent and the time needed thereafter for secondary legislation and regulations.
View FSA Annual Public Meeting: Chairman’s speech, 3 July 2012
Credible deterrence: here to stay
On 2 July 2012, the FSA published a speech given by Tracey McDermott (Acting Director of the FSA Enforcement and Financial Crime Division) entitled Credible deterrence: here to stay. In this speech McDermott discussed what the FSA’s Enforcement Division has been up to in the past two years, and then what firms can expect from enforcement in the future.
At the start of her speech McDermott made the general comment that the job of enforcement is to help the FSA change behaviour by making it clear that there are real and meaningful consequences for those firms or individuals who do not play by the rules.
She then discussed enforcement action over the past two years noting that:
- The FSA has levied in excess of £94 million in fines in cases relating to the retail sector, £5 million of those on individuals. The FSA has also prohibited 96 individuals in relation to misconduct relating to retail customers.
- Formal disciplinary action is only part of the story. A key aspect of the FSA’s work is securing appropriate redress for consumers who have been harmed by misconduct. The FSA estimates that over the past two years redress paid by authorised firms solely in connection with enforcement related matters is in the region of £290 million.
When discussing consumer protection McDermott also covered the future stating that:
- Effective enforcement is only part of the answer but that it needs to get further up the chain of command. It needs to look increasingly at those in senior management who fail to recognise and manage the risks their firm is running, who fail to control the way their products are sold, and who fail to ensure that the interests of consumers are at the forefront of the minds of those designing, and working out profit projections and sales channels for new products.
- The FSA needs to be quicker to respond to emerging issues and to intervene earlier to minimise consumer detriment.
- The FSA needs to have a low tolerance for firms that constantly bump along the bottom. It will be much more prepared to intervene and limit business where each time it raises an issue or takes action against a firm when it sees the firm simply fixing the immediate problem but failing to think about the underlying causes.
McDermott also mentioned that whilst consumer protection is a key part of the FSA’s responsibilities, it is not its only objective. The FSA and then the Financial Conduct Authority (FCA) will continue policing the wholesale as well as the retail markets and will take action where misconduct in those markets threatens confidence in them or undermines their integrity.
View Credible deterrence: here to stay, 2 July 2012
The FCA - our vision for enforcement
On 2 July 2012, the FSA published a speech given by Martin Wheatley (CEO designate of the Financial Conduct Authority (FCA)). The speech was entitled The FCA - our vision for enforcement.
At the start of his speech Wheatley discussed the transition from the FSA to twin peaks supervision and briefly covered the FCA’s product intervention powers. In relation to these powers Wheatley made the point that they will not always be the first thing the FCA reaches for. However, he also warned that the powers are not window dressing and will be used when needed.
Wheatley then discussed putting consumers at the heart of what the FSA does. In particular he mentioned that the FSA will be focussing on how firms develop their products, their culture, how they incentivise their staff, and how decisions are made at the highest level.
In relation to the FSA’s approach to enforcement Wheatley emphasised that credible deterrence is here to stay. He also highlighted two important points:
- The FSA will continue to use the full range of its existing enforcement tools, which include pursuing criminal prosecutions where appropriate.
- There will be some changes to the way enforcement is delivered by the FCA. The FCA will be more prepared to use formal tools including enforcement action to support its emphasis on intervening earlier to stop problems occurring.
At the end of his speech Wheatley gave his audience three main messages:
- The FCA’s core purpose is to make sure markets work well so consumers get a fair deal - to do that it needs to have not only new powers, but a new supervisory approach and a new culture.
- Key to the success of this approach is ensuring that good consumer outcomes are built into the business models of regulated firms.
- While much of what the FSA is doing is changing, its enforcement approach and credible deterrence agenda is here to stay.
View The FCA - our vision for enforcement, 2 July 2012
Draft MoU between the PRA and the FSCS
On 26 June 2012, the FSA published a draft memorandum of understanding (MoU) between the Prudential Regulation Authority (PRA) and the Financial Services Compensation Scheme (FSCS). The draft MoU set out how the PRA and FSCS will co-ordinate and co-operate with each other under the new regulatory regime. The draft MoU covered:
- Roles and responsibilities of the PRA.
- Roles and responsibilities of the FSCS.
- Information sharing.
- Policy making.
- Supporting the resolution of regulated firms.
- Funding the FSCS.
- Reporting to the PRA.
- Disaster recovery.
In relation to the resolution of firms the draft MoU stated, among other things, that in support of the PRA, the FSCS will assist in monitoring the readiness of bank systems to conduct a rapid payout, including through the verification of deposit-takers’ ability to provide a single customer view.
View Draft MoU between the PRA and the FSCS, 26 June 2012
FSA Annual Report 2011/2012
On 19 June 2012, the FSA published its Annual Report for 2011/2012.
The report outlined how the FSA has performed against the priorities set out in its 2011/12 Business Plan and its statutory objectives.
In the chairman’s foreword to the Annual Report Adair Turner stated:
“Over the last four years, the FSA has changed radically its prudential supervisory approach, fixing the deficiencies which became clear in the financial crisis. That transformation has had to be implemented while also ensuring strong focus on major current financial stability risks.
“I am convinced that a ‘twin peaks’ model will deliver major benefits. The PRA will have a mandate to focus on prudential issues even when most people assume, as they did before the crisis, that prudential risks are low; and it will be located within the Bank of England, facilitating important synergies between macroeconomic and prudential analysis and insight. The FCA will have a dedicated focus on customer and investor protection challenges in both the retail and wholesale markets.
“Our successful transition to an internal twin peaks model and our advanced preparation for legal separation next spring wouldn’t have been possible without the hard work and commitment of our staff.”
View FSA Annual Report 2011/2012, 19 June 2012
Regulating in a new era of professionalism: What does the FSA want to see from the industry?
On 14 June 2012, the FSA published a speech by Clive Adamson (Director of Supervision, Conduct Business Unit, FSA) entitled Regulating in a new era of professionalism: What does the FSA want to see from the industry? The speech provides a high level view of the changes taking place in UK regulation and considers how the FSA expects professionalism to play a part in this.
In relation to UK regulatory changes, Adamson explained that the new Financial Conduct Authority (FCA) will look and feel different to the FSA. The aim is move away from a primarily reactive style, to a judgement based, confident and pre-emptive regulator that acts to ensure that consumers get a better deal and markets are fair and orderly. Adamson then explained that the new supervisory approach will comprise the following main elements:
- Be more forward-looking in its assessment of potential problems.
- Intervene earlier when problems arise.
- Address the underlying causes of problems not just the symptoms.
- Secure redress for consumers if failures do occur.
- Take meaningful action.
Adamson then considered how professionalism fits into the new supervisory approach. He explained that a key component of the FCA’s approach is to continue implementing the work that the FSA has already started. The Retail Distribution Review (RDR), which comes into effect on 31 December 2012, demonstrates progress towards the FCA’s operational objective of consumer protection. He stated that the RDR aims to create a resilient, effective and attractive retail market that consumers can have confidence in and trust at a time when they need more advice than ever with their retirement and investment planning. Adamson stated that in the FCA’s view consumers should have:
- Clarity in the service they receive.
- A transparent and fair charging system for the advice received.
- Advice from professional and respected advisers.
View Regulating in a new era of professionalism: What does the FSA want to see from the industry?, 14 June 2012
FSA one minute guide - Handbooks for the PRA and the FCA
On 1 June 2012, the FSA published a one-minute guide which summarised how the FSA Handbook will be divided into Handbooks for the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA).
The guide stated that at the legal cutover (when the FCA and PRA acquire their legal powers and the FSA is abolished) users of the FSA Handbook will be able to access the following online:
- The PRA Handbook, displaying provisions which apply to PRA-regulated firms.
- The FCA Handbook, displaying all provisions which apply to FCA-regulated firms.
- To support the transition, a central version which will show the provisions of both Handbooks, with labels indicating which regulator applies a provision to firms.
The guide stated that the FSA expects to publish drafts of the new Handbooks in early 2013. The new Handbooks will not be available in detail before this.
The FSA will continue to make changes to the FSA Handbook in accordance with the normal procedure, until the new regulators acquire their legal powers.
View FSA one minute guide - Handbooks for the PRA and the FCA, 1 June 2012
Designation of Investment Firms by the PRA
On 17 May 2012, the FSA and the Bank of England (the Bank) published a paper entitled Designation of Investment Firms by the PRA.
Following a request from the Government, this papers set out the FSA's and the Bank's initial views on how the Prudential Regulation Authority (PRA) will designate certain investment firms for prudential regulation by the PRA rather than by the Financial Conduct Authority (FCA). The designation powers have been set out in the Financial Services and Markets Act 2000 (PRA-Regulated Activities) Order 201* (the draft Order), which was published by HM Treasury in January 2012.
The paper comprises the following sections:
- Twin peaks. On 2 April 2012, the FSA moved to a twin peaks operating model with the establishment of separate prudential and conduct business units. The prudential business unit (PBU) supervises deposit-takers and insurers that will be regulated by the FSA once the Financial Services Bill (the Bill) comes into force. The PBU will also supervise those investment firms that are likely to be designated for prudential regulation by the PRA. Therefore, it has been necessary for the FSA to determine which investment firms fall into this group.
- Policy background. The PRA's power to designate certain investment firms for prudential regulation was consulted on in HM Treasury's Consultation Paper A new approach to financial regulation: building a stronger system. This Consultation Paper set out that the PRA should "designate certain investment firms for prudential regulation by the PRA where it determines that they could pose significant risks to the stability of the financial system or to one or more PRA‐regulated entities within their group."
- Legal context. To give legal effect to this policy, clause 8 of the Bill inserts a new section 22A into the Financial Services and Markets Act 2000, which provides that HM Treasury may specify by Order which activities are PRA-regulated activities. The draft Order provides that an investment firm would meet the conditions for designation by the PRA where it: (a) has, or has applied for, permission to deal in investments as principal; and (b) has, or would have if it were authorised, a minimum capital of EUR 730,000, or is a broadly analogous EEA passporting firm or non‐EEA firm (a 730K Investment Firm). The draft Order also sets out that the PRA must have regard to the assets of a firm and must make additional considerations where the firm is part of a group.
- Designation policy. The PRA's power to designate certain investment firms contributes to its objective of promoting the safety and soundness of regulated firms by seeking to minimise any adverse effects of firm failure on the UK financial system. In light of this, it should be noted that where the draft Order specifies factors that the PRA must consider, it is not an exhaustive list and the PRA may also have regard to other factors.
- Assets. The FSA and the Bank expect the PRA to consider the value of the total assets of a firm, when deciding whether it should be designated. The PRA should also consider a firm’s business model and book keeping practices to ensure that the assets booked to a particular firm do not give a distorted view of the firm's business
- Group considerations. Certain investment firms may be designated for regulation by the PRA because they are part of a group containing entities which are subject to PRA regulation. In deciding whether a firm is material to a group, the PRA will assess the share of the firm’s revenues, balance sheet or risk taking as a proportion of the group’s revenues, balance sheet or risk taking. The PRA will also consider the structure of the group. Therefore, it will not be possible to structure a group to avoid designation by the PRA.
- Periodic review of firms subject to designation. The PRA is required by the draft Order to keep all designations under review. A designated firm will be regulated by the PRA for a minimum period of time. If the PRA decides that a firm should no longer be designated it will follow the procedures set out in the draft Order and the prudential supervision of the firm will pass to the FCA.
- Review of the regulatory perimeter. The Financial Policy Committee's (FPC) statutory objective requires it to contribute to the achievement by the Bank of its financial stability objective. Therefore, the FPC may also make recommendations as to whether responsibility for supervision of firms engaged in a particular activity should be conferred on the PRA or FCA.
View Designation of Investment Firms by the PRA, 17 May 2012
Building Societies Association annual conference
On 9 May 2012, the FSA published a speech given by Martin Wheatley at the Building Societies Association.
In the first part of his speech Wheatley discussed regulation under the proposed Financial Conduct Authority (FCA). In particular he acknowledged that under the new regulatory regime it will be harder for firms as they will have to deal with two regulators rather than one. Firms will have to get used to two sets of supervisors asking questions and there may be times when the supervisors ask the same things but each will be looking at the answers from a different perspective. The FCA will be asking questions from the perspective of ‘how does this affect your members and customers?’, while the proposed Prudential Regulation Authority will ask questions from the perspective of how it impacts financial soundness. Wheatley noted that a key point is that there will be no prioritisation between the two supervisors. Firms will be expected to address actions from prudential and conduct reviews with equal focus.
Wheatley then discussed the approach the FCA will take to supervising firms. The key message in this part of Wheatley’s speech is that mutuals need to protect their members and customers first. According to Wheatley, the societies that have failed in recent years are the ones that did not think things through, and did not have the skills, on their boards in particular, to oversee what they were getting into and did not think through fully the implications for their members and customers of their business decisions. Wheatley warned that the FCA will be expecting senior management and boards to understand all of their business and the risks to their members. This will be especially true where the business is thinking of going into new areas in order to grow its bottom line.
View Building Societies Association annual conference, 9 May 2012
FCA statement of policy - making temporary intervention rules
On 2 May 2012, the FSA published a draft statement which sets out the proposed Financial Conduct Authority’s (FCA) policy on the making of temporary product intervention rules.
The temporary product intervention rules will sit alongside other regulatory tools, such as general rules (including non-temporary product intervention rules), guidance, variations of permission and supervisory and enforcement action. The statement of policy states that the choice of which approach is used in any particular situation will be made based on the facts of the case.
In the statement of policy the FSA provides a summary of the process that the FCA will use to develop temporary product intervention rules, and provides some examples of the factors the FCA will consider when making these rules.
The FSA has also published a draft of a paper which sets out examples of previous market issues where product intervention rules might have been considered.
The FSA has published these draft documents to assist members of the public and parliamentarians to consider these aspects of the Financial Services Bill during its passage through Parliament.
View FCA statement of policy - making temporary product intervention rules, 2 May 2012
View Examples of previous market issues where product intervention rules might have been considered, 2 May 2012
FCA draft guidance - super-complaints
On 2 May 2012, the FSA published draft guidance on how the proposed Financial Conduct Authority (FCA) might implement the super-complaints process in section 234B of the Financial Services Bill.
The guidance does not address everything that may be relevant to a specific complaint but it is intended to assist designated consumer bodies in making comprehensive and robust complaints so that the FCA may respond in a manner that addresses the complainant’s concerns most appropriately with regard to its objectives.
The FSA has published the draft guidance to assist members of the public and parliamentarians to consider these aspects of the Financial Services Bill during its passage through Parliament.
The FSA also states that while the super-complaints process is well established under the Enterprise Act 2002, it will be new for the FCA. The guidance may be amended in the light of the FCA’s developing experience in handling super-complaints.
View FCA draft guidance - super-complaints, 2 May 2012
The PRA’s approach to consultation
On 27 February 2012, the Bank of England and the FSA published a co-produced note which responds to the Government’s request for an explanation as to how the proposed Prudential Regulation Authority (PRA) will consult. The note will be reviewed by the board of the PRA once the PRA has been established.
The PRA’s general approach to consultation will be to give the firms it regulates, their representatives and other interested parties the opportunity to express views. In particular, it will look to expert practitioners to offer technical and detailed feedback on the different means to achieve the PRA’s aims. The PRA will want to seek from the consultation process informed views from firms as to how the proposed means of achieving its objectives on particular fronts will affect their particular business.
The PRA will not establish a standing practitioner panel comprising a fixed group of practitioners. However, the PRA will on occasions draw together temporary groups, comprising practitioners and other experts, where it judges that a focussed discussion of technical points will be helpful.
View The PRA’s approach to consultation, 27 February 2012
An update on the FSA’s investigations and enforcement regime
On 23 February 2012, the FSA published a speech given by Tracey McDermott (acting director of the Enforcement and Financial Crime division, FSA) entitled An update on the FSA’s investigations and enforcement regime.
In her speech McDermott looked at recent FSA enforcement action and then discussed the proposed enforcement responsibilities of the Financial Conduct Authority (FCA).
In particular McDermott stated that credible deterrence is here to stay. The FCA will carry on the enforcement work of the FSA, maintaining and strengthening its outcomes. Where it does not see improvements from its action, the FCA will be willing to take tougher action just as the FSA has done in prosecuting insider dealing.
McDermott also stated that the FCA will be clear on expectations: consumers can expect it to be more accessible and to communicate proactively, so they understand what they can expect from firms and the regulatory system. The FCA will seek to view issues through the eyes of consumers and understand the drivers of their behaviour as well as that of firms. Firms can expect more challenge from the FCA and more willingness to intervene.
In addition McDermott explained that central to the FCA’s approach will be a focus on early intervention, looking to take action before risk crystallises. She noted that early intervention can take many different forms including the proposed power for the FCA to ban products where it considers the risk of mis-selling those products significantly outweighs any benefit. However, early intervention will also include a willingness to take action - supervisory or enforcement - earlier in the cycle. Consumers might expect to see the FCA take action, including enforcement action, where its judgement is that a particular aspect of the firm’s business model - its product selection, its remuneration practices, its training or recruitment, for instance - is likely to give rise to poor consumer outcomes.
McDermott further stated that the FCA will have a lower tolerance for firms bumping along at the bottom - firms that only fix things when the FCA tells them to, and then do only enough to fix the specific problem. The FCA will be swifter and more willing to take action to restrict, or even prevent, such firms from doing business.
View An update on the FSA’s investigations and enforcement regime, 23 February 2012
Update on the regulatory reform agenda
On 7 February 2012, the FSA published a speech by Hector Sants (Chief Executive, FSA) entitled Update on the regulatory reform agenda.
In the first part of his speech Sants discussed the UK’s reform programme and the move to twin peaks supervision. Much of the discussion repeated the comments Sants made in an earlier speech entitled Delivering twin peaks within the FSA.
In the second part of his speech Sants discussed the challenge of Europe. He began by stating that engaging with the European regulatory process is central to delivering financial regulation in the UK. He also stated that it needs to be recognised that, in respect of prudential regulation, and increasingly over the longer-term in respect of conduct regulation, the rules will be made by Europe and the role of the proposed Prudential Regulation Authority and the proposed Financial Conduct Authority will primarily be one of supervision and enforcement. Essentially, the UK is moving to become a ‘supervisory arm’ of Europe.
Sants then turned to the European Supervisory Authorities (ESAs) and discussed how they will operate and how this will impact on the FSA. He started by stating that the FSA supports the concept behind the ESAs and the necessity of them being strong and independent organisations. He added that the ESAs will also bring profound changes for both the policy function and firm supervision.
In terms of policy function Sants referred to the shift in the FSA’s rule making authority to European bodies and that this trend has increased with the Commission opting to use regulations as opposed to directives and the further increase of detail through ESAs issuing binding technical standards.
In relation to firm supervision Sants made two points. Firstly, that there is pressure to harmonise the way that supervision is carried out. Secondly, the by-product of seeking to have common standards, which underpins the concept of the single financial market, runs the risk of removing supervisory discretion in terms of the measures supervisors can take to address firm-specific risk.
Sants acknowledged that there is momentum to have a common supervisory procedure manual and supports the importance of the ESAs having a role in maintaining standards and in doing so they need to be able to participate in peer reviews and have a full understanding of the way a supervisor assesses risk. However, he argued that supervision needs to be delivered locally and be tailored to a particular set of circumstances. Good supervision needs to be based on forward-looking judgements and a deep understanding of firm-specific circumstances. He warned that care needs to be taken to ensure that the philosophy of harmonisation does not undermine this principle. Sants did, however, make clear his strong support for colleges and data sharing. In particular, he stated that cooperation is crucial to establishing effective recovery and resolution regimes.
View Update on the regulatory reform agenda, 7 February 2012
Update on the transition to the new regulatory structure: Implementing ‘twin peaks’ within the FSA
On 6 February 2012, the FSA published a Dear CEO letter which provided an update on the transition to the new regulatory structure and the implementation of ‘twin peaks’ within the FSA.
The Dear CEO letter repeated many of the comments that Hector Sants (Chief Executive, FSA) made in an earlier speech entitled Delivering twin peaks within the FSA. In particular, Sants made the same points concerning the supervisory changes firms will see.
The Dear CEO letter also reminded firms that in the twin peaks world there will not be a consolidated list of the required actions arising from the two supervisory groups. Central to the concept of genuine twin peaks is that both sets of regulatory objectives are different and determined by Parliament to be of equal importance. Firms will be expected to address each set of actions arising from the prudential and conduct reviews with equal focus.
View Update on the transition to the new regulatory structure: Implementing ‘twin peaks’ within the FSA, 6 February 2012
Delivering twin peaks within the FSA
On 6 February 2012, the FSA published a speech given by Hector Sants (Chief Executive, FSA) entitled Delivering twin peaks within the FSA.
At the start of his speech Sants stated that implementing a twin peaks model is the next stage in the FSA’s reform process and that such model will be introduced from 2 April 2012.
The FSA intends to move as close as possible, subject to the framework imposed on it by the Financial Services and Markets Act 2000, to the new style of regulation outlined by the Government. Namely, that firm-specific supervision for banks, insurers and major investment firms will be carried out by two separate entities, one for prudential and one for conduct regulation.
Sants then discussed some of the general principles of the new model noting that its high level operating characteristics will be:
- There will be two independent groups of supervisors for banks, insurers and major investment firms covering prudential and conduct supervision. All other firms (i.e. those not dual regulated) will be solely supervised by the conduct supervisors.
- The supervisors will make their own, separate, set of regulatory judgements against different objectives.
- They will coordinate internally to maximise the exchange of information which is relevant to their individual objectives, but to be clear, they will act separately when engaging with firms. The FSA has termed this “independent but coordinated regulation”.
- The FSA will retain the principle of seeking to ensure that regulatory data is only collected once. It will retain its common, current data infrastructure.
Sants also mentioned that the move to twin peaks is an opportunity to drive home and further embed the move to forward-looking, proactive, judgement-based supervision.
Sants then discussed some of the operational changes. From a firm’s perspective the key operational change will be that the existing ARROW risk mitigation programme will be split between those actions which are relevant to the conduct supervisory group’s objectives and those that relate to the prudential supervisory group. From 2 April 2012 onwards, the two supervisory units will run their own risk mitigation programmes and firms will have two separate sets of mitigating actions to address. Sants also stated that in the remaining lifetime of the FSA, it will retain the current ARROW cycle so that if a firm is due to complete an ARROW assessment before spring 2013 it will still be subject to a supervisory review.
However, there will be two particular consequences of the new approach. First, each supervisory group may ask similar questions, but it needs to be understood that the purpose will be different. Second, in the twin peaks world there will not be a consolidated list of the required actions arising from the two supervisory groups. Firms will be expected to address each set of actions arising from the prudential and conduct reviews with equal focus.
In addition, the supervisory models of each group will diverge in a number of ways particularly in terms of allocation of supervisory resource and in the mechanism that each supervisor will use to reach judgements. In relation to the latter prudential supervisors will introduce the concept of a set of questions, which will be focused on ensuring the institution is minimising the risk of disorderly failure. In the conduct area, ARROW will be replaced by a more focussed assessment of conduct risk. In addition in the conduct space there will be more focus on thematic work.
Sants then discussed behavioural changes stating that it is not just supervisors but also firms that need to adopt a new approach. If the new approach is to work Sants argued that firms should also:
- Recognise the importance of aligning their goals with those of the supervisors and with society as a whole. Firms are encouraged to avoid gratuitous regulatory arbitrage.
- Show greater willingness to proactively comply with supervisory judgements.
- Recognise that there are times when both firms and the regulator will make judgements which in hindsight are wrong.
- Recognise that this new approach will require greater resources and expertise than the previous reactive model.
Sants also reminded firms that one of the key messages relates to the importance of boards managing their institutions responsibly.
In the final part of his speech Sants mentioned that the FSA and the Bank of England will publish, later this year, two further documents setting out in more detail the functionality of the supervisory regimes of the Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA). He also mentioned the principal areas of focus for further work over the next 12 months:
- Threshold conditions need to be recast to align them with the twin peaks model.
- Both the FCA and the PRA need to commence work on designing a new operating platform to support their new approaches to supervision.
- Both need to complete the detailed design work on their supervisory risk framework which will replace ARROW. For the PRA this includes documenting the detail of the new “proactive intervention framework” and for the FCA the “firm systematic framework”.
- The draft memorandum of understanding laying out how the FCA and PRA will coordinate has been published but the detailed procedures need to be agreed.
- The rulebook will need to be split between the responsibilities of the PRA and the FCA.
- Work needs to be undertaken to ensure that staff are effectively equipped to deliver the new model.
The FSA also published a press release concerning the speech.
View Delivering twin peaks within the FSA, 6 February 2012
View Delivering a twin peaks regulatory model within the FSA, 6 February 2012
On 25 January 2012, the FSA published a speech by Clive Adamson (Director of Supervision, Conduct Business Unit, FSA) entitled FCA supervision.
In his speech Adamson gave an insight into how the Financial Conduct Authority (FCA) will supervise firms.
He began by discussing conduct strategy and mentioned that one of the building blocks is the FSA’s revised conduct strategy which was launched in 2010. This, in essence, set out the key change in approach which was to move from a primarily reactive to a pre-emptive style of retail conduct supervision. The FCA’s approach will build on this and will emphasise five main elements to:
- Be more forward looking in its assessment of potential problems.
- Intervene earlier when it sees problems including earlier intervention in the development or marketing of retail products.
- Attack the underlying causes of problems it sees, not just the symptoms, on the basis that this will be more effective and efficient in the longer term for consumers and firms.
- Secure redress for consumers if failures occur.
- Take meaningful action against firms that fail to meet standards through fines that will have a deterrent effect.
Adamson then turned to the supervision model that is being developed to deliver more intensive conduct supervision. The key components of this model are:
- A clearer sector-based approach.
- Greater use of forward looking analysis to understand what is happening in particular sectors and to help in determining risks.
- More focus on intelligence and data.
- Greater use of thematic reviews.
- Continued, but more focused, programme of firm level assessments.
- More responsive and flexible use of resources with fewer firms having a fixed team facing off against them.
Adamson also touched on the firm assessment aspect of the supervision model. At the moment this is conducted through the ARROW process for large firms and through the Revised Approach to Small Firm Supervision for smaller firms. According to Adamson the intention is to keep a firm assessment framework across the firm population but to replace the ARROW framework with a new process that is easier to communicate to the senior executives and boards of firms so that they can align good business practice with good regulatory practice.
According to Adamson the new framework will focus much more on the main drivers of conduct risk at the firm level, but the overall assessment, which will continue to be in the form of a letter to the board, will be based on all the work that has happened on the firm, including thematic work. At the most intensive end of the spectrum the firm’s business model and strategy will be reviewed to see whether these deliver good outcomes for consumers.
The key message is that the FCA will be a conduct focussed regulator to ensure that firms do not trade consumer treatment off against financial performance or prudential strength. The FCA will look at product design and delve into sales to see whether firms have appropriate systems and controls in place to ensure the delivery of fair outcomes to consumers. The FCA will also look to firms’ boards and other governing bodies to set, put in place and maintain a culture that will bring about good outcomes for their customers.
Adamson also discussed wholesale conduct and the FCA’s focus here will be to ensure the integrity and resilience of wholesale markets rather than to seek to introduce concepts of detriment and redress that it will use in the retail markets. However, the FCA will place more emphasis on three areas where:
- Wholesale products filter down or are distributed to retail consumers.
- Certain behaviours in wholesale markets can cause damage to market integrity.
- Market structures can result in participants being disadvantaged or the market being inefficient.
In the final part of his speech Adamson discussed the transition from the FSA to the FCA. A key milestone for the FSA occurred last April with the creation of the Conduct (CBU) and Prudential business units within the FSA. At that time the FSA moved all firms that will be solo regulated in the future into the Supervision Division within the CBU. The next milestone is the splitting of conduct and prudential supervision of firms that will be dual regulated in the future and the move of these into CBU Supervision for conduct purposes.
View FCA supervision, 25 January 2012
The Mansion House City Banquet speech
On 20 October 2011, The FSA has published Adair Turner’s (Chairman, FSA) speech at the City Banquet at the Mansion House, London. The FSA has also helpfully published a press release which provides a summary of the speech.
In his speech Lord Turner said that the Government’s reform of the UK regulatory structure would help ensure better results than in the past, but also highlighted remaining uncertainties and issues that needed detailed consideration by Parliament and by society at large before legislation was passed into law.
In particular Lord Turner:
- Argued that the Financial Policy Committee (FPC) is the most important element to address the failures that led to the financial crisis - filling the gap previously left between a central bank and the micro-prudential regulator.
- Warned that forthcoming European regulation, particularly around maximum capital levels, had the potential to reduce the flexibility of the FPC to act according to the needs of the UK.
- Raised the question of whether the FPC should focus solely on financial stability or on the adequacy of credit supply to the real economy as an end in itself. This would imply making choices about the relative merits of different uses for bank balance sheets.
- Stated that the Prudential Regulation Authority (PRA) would build on the approaches to regulation and supervision that the FSA has put in place over the last few years. He argued that there needed to be a clear understanding in society that the PRA’s approach would not be a zero failure approach and said that there was a real commitment to end the “too big to fail” issue.
- Stated that in relation to customer and investor protection the Financial Conduct Authority (FCA) would need the powers and teeth to act early to intervene and prevent customer detriment. However, he did stress that there will still be limits on what can be done and there can never be a no risk or a no failure regime.
- Recognised that the move towards the new regulatory structure was taking place against the backdrop of the Eurozone problems. He emphasised that the FSA remained totally focussed on its current objectives of ensuring the UK financial system was robust to withstand challenges. However, he also mentioned that it was making good progress towards preparing for the new structure in 2013.
View Adair Turner’s speech at The Mansion House City Banquet speech
View FSA press release
Why prudential regulation matters
On 11 October 2011, the FSA published a speech given by Andrew Bailey (FSA Director of UK Banks & Building Societies). The speech is entitled Why prudential regulation matters.
At the start of his speech Bailey argued that in the existing tripartite system there is insufficient clarity and understanding concerning the objective of financial supervision. He added that it is vital that the Government’s legislation which will change the system of financial supervision should be grounded in sensible principles that can explain the objectives of the supervisors and provide a framework within which to hold them accountable for their actions.
He continued by adding that for prudential supervision and the role of the Prudential Regulation Authority (PRA) there is a clearly stated new objective, which is to pursue its role in relation to the safety and soundness of firms in order to achieve the stability of the financial system. In relation to what this means he gave the following examples:
- The PRA will not be pursuing the competitiveness of firms for its own sake. Rather, the belief is that a stable financial system is the best way to promote the competitiveness of the system and its members.
- The intention is not to pursue a ‘no-failure’ regime. Orderly failure, which is consistent with the PRA’s objective of maintaining the stability of the financial system, is an acceptable outcome, and does not indicate that the supervisory system itself has failed.
Bailey then turned to another point that is central to regulatory reform, namely the role of judgement on the part of supervisors. According to Bailey exercising judgement well requires focus on the things that really matter to the objective. In the case of the PRA it is about judging financial soundness. Bailey expects the PRA to engage with the boards and senior management of firms only on a handful of issues that really matter to the prudential objective. He does not expect the PRA to have a long list of compliance points, arguing that these will be a matter for firms’ internal auditors and risk management. In relation to this point Bailey stated that he does not believe that we are in the right place today in terms of the role and influence of these functions. Boards and senior management are at the heart of the responsibility for running a firm. They must be supported by robust and well-functioning risk and audit functions (internal and external) to support them.
In his conclusion Bailey stated that we are somewhere near to half time in the process of turning the Government’s proposals for regulatory reform into a new statutory framework of supervision. However, he argued that in the second half there is a crucial prize to play for, namely establishing the public policy rationale which will determine the success of the new regime.
View Why prudential regulation matters
Dear CEO letter - 7 February 2011
On 7 February 2011, the FSA published a Dear CEO letter which provided an update on its progress towards the new regulatory structure proposed by the Government. In the Dear CEO letter the FSA stated that to ensure a smooth transition it would be making changes to its management structure. These changes would begin on 4 April 2011 when the FSA would replace its current Supervision and Risk Business Units with a Prudential Business Unit (PBU) and a Consumer & Markets Business Unit.
The FSA has now updated its management structure web pages to reflect the new regulatory structure proposed by the Government (the Consumer & Markets Business Unit is now called the Conduct Business Unit (CBU)).
On the PBU web page the FSA stated that it has five divisions: (i) UK Banks and Building Societies Division; (ii) Investment Banks and Overseas Banks Division; (iii) Insurance Division; (iv) Risk Specialists Division; and (v) Policy Division.
On the CBU web page the FSA stated that it has four divisions: (i) Supervision Division; (ii) Conduct Policy Division; (iii) Markets Division; and (iv) Authorisations Division.
The FSA also stated that the changes to its management structure marks the start of a gradual process which will see it design and pilot new processes and train staff. However, until this process is complete the FSA will continue with integrated supervision and carry on with existing ways of working, such as its ARROW operating framework.
View FSA - Prudential Business Unit
View FSA - Conduct Unit
View Dear CEO letter - Update on transition to new regulatory structure
Dear CEO letter - 4 April 2011
On 4 April 2011, the FSA published a further Dear CEO letter providing an update on the transition to the new regulatory structure. In the Dear CEO letter the FSA confirmed that its Supervision and Risk business units had been replaced by the PBU and CBU.
In the Dear CEO letter the FSA also stated that it would give firms more information on the high level philosophies of the new authorities later in the year.
View Dear CEO letter - Update on transition to new regulatory structure
The PRA Insurance Conference
On 20 June 2011, the FSA published the speech that Hector Sants (Chief Executive, FSA) gave at the PRA Insurance Conference.
At the start of his speech Sants reminded his audience that the Bank of England and the Prudential Regulation Authority (PRA) understand that insurers are different from banks. For example banks are typically involved in the maturity transformation of short term liquid liabilities into longer term assets which enables the non-bank sector in total to hold shorter term, more liquid assets than liabilities. In contrast insurers typically take no such maturity transformation risk. Another major difference Sants discussed was that the failure of insurance firms is not as likely to be systemically significant as that of banks. Whilst not saying that there are no systemic risks posed by insurance failures, Sants suggested that they are different to those posed by banks and certainly less prevalent.
Sants then discussed the PRA’s insurance objective which will be “to ensure the insurer has a reasonably high probability of meeting claims from and material obligations to policyholders as they fall due.”
Sants stated that at the heart of this role will be an objective of ensuring that an insurer is likely to have sufficient financial resources to meet its obligations to policyholders as they fall due. However, recognising that firm failure is always possible the PRA’s role will not be to ensure that policyholders are protected in all circumstances, nor will it be to ensure that no insurer it has authorised fails. These responsibilities lie primarily with each insurer’s management, board of directors and shareholders.
Sants then discussed lessons from the past pointing out that the UK has not seen any significant insurance failures involving policyholder detriment since Equitable Life in 2000. However, the events surrounding Equitable Life lead to two consequences. Firstly, the importance of ensuring capital, governance and risk management standards are as effective as possible. This objective is being addressed by Solvency II. Secondly, the issue of ensuring that management and boards understand the risks to their ability to honour their contracts. In relation to this point Sants stated that it should be recognised that a regulator cannot and should not absolve management from the primary responsibility of running their firm responsibly, nor will the regulator always be right. Sants argued that inherent in a judgement-based system of supervision there has to be a recognition that both management and regulators will at times with hindsight make mistakes.
Sants then turned to the PRA’s supervisory approach which will have three main tools:
- Rules and regulations, primarily in case of insurers for capital, governance and risk management standards. Sants noted that Solvency II builds on the UK’s existing ICAS regime which will provide the prudential standards framework which the PRA will operate in. However, he went on to state that the PRA should always be alert to the need to update and modernise such frameworks in light of experience and that in particular the PRA needs to be aware of the limitations of risk mitigation based on modelling.
- Supervisory oversight of management actions and strategies including recovery plans. Sants stated that the consequence of the limitations on the capital standard framework is the importance of ensuring effective going concern oversight. The PRA will engage in baseline supervision of all insurance companies, and relative to their size and complexity it is likely that this oversight will be more intense than that of an equivalent bank given the need to address the obligation to look after policyholders’ forward looking expectations.
- Resolution plans. Sants noted that at the moment there is no special resolution regime for insurers and that an early priority has to be to ensure that there are mechanisms across all types of insurers to enable the PRA to manage their orderly failure.
In the final part of his speech Sants discussed certain other key issues which will arise in the context of the PRA and insurers:
- The need to effectively coordinate with other regulatory bodies, notably the Financial Conduct Authority (FCA).
- The need for effective accountability.
- The need to influence the international agenda.
In relation to coordination Sants argued that a twin peaks approach which separates conduct from prudential oversight carries more risks in insurance than it does in banking, since the obligation on the regulator to deliver policyholder protection necessarily creates the risk of both underlap and overlap between a conduct and prudential authority. This is particularly the case in relation to with profits business. To address this concern, Sants pointed to the draft Financial Services Bill which makes clear that the responsibility for securing the appropriate degree of protection for policyholders under with profits policies is the PRA rather than the FCA. However, this obligation does not remove the need for the PRA to properly consult with the FCA and ensure effective regulatory oversight across the entire product chain.
View The PRA Insurance Conference
The supervisory approach of the Prudential Regulation Authority
On 20 June 2011, the FSA published the speech that Julian Adams (Director, Insurance Division, FSA) gave at the PRA Insurance Conference. Adams’ speech was entitled The supervisory approach of the Prudential Regulation Authority.
At the start of his speech Adams stated that for insurers, as for banks, the philosophy of the Prudential Regulation Authority (PRA) will be that firms are subject to the general disciplines of the market, with the role of the regulator being to address residual market failures. When addressing those failures the PRA will be obliged to secure an appropriate degree of policyholder protection, and to minimise the wider system effect of a firm failure. The PRA will not be responsible for bringing about a position where there can never be firm failure.
In the remainder of his speech Adams discussed how the PRA will seek to reduce firm failure, starting with changes to the risk assessment framework.
Adams stated that the PRA will replace the FSA’s ARROW process with a new framework for assessing the risks posed by individual firms. The new model will take into account the firm’s overall impact on the PRA’s objectives, along with a number of other factors. For example, where the PRA has responsibilities as consolidated supervisor, it will be mindful of the wider group and its international operations, as well as the individual UK entities.
The PRA will start with an assessment of the vulnerability of the firm’s business model. Second, it will look at whether there is a reasonable resolution approach which could be adopted in the event of failure. Thirdly, it will undertake detailed analysis of firm’s financial strength. Fourthly, it will take into account the quality of a firm’s risk management and governance arrangements. A major input into this assessment will be firms’ Own Risk and Solvency Assessments. In relation to governance, Adams stated that the PRA will be focusing not only on the structure and operation of the system but also on the quality and competence of the senior management of the firm and the quality of information available to the board and a firm’s executive management to enable them to manage risk effectively.
Having outlined the areas that the PRA will examine Adams stated that the approach the PRA will adopt when undertaking this assessment will vary from firm to firm. The tools available to the PRA will involve baseline monitoring, investigation and assurance, and greater reference to the business context and environment. The way in which the PRA will deploy these tools will be proportionate, subject to a minimum level of activity, with the greatest use of resources deployed in the supervision of firms which pose the highest level of risk to the PRA’s objectives.
Adams then discussed the PRA’s approach to judgement based supervision. Adams stated that the PRA will only seek to substitute its own judgements for that of a firm in circumstances of genuine regulatory importance. Major supervisory judgements and the action firms will be expected to take will be subject to rigorous interview review involving the PRA’s senior management, who will also undertake regular contact with the largest and most important firms.
Adams also stated that the PRA’s supervisory work will also examine whether a firm is not only compliant with prudential rules in its current condition, but also whether it is likely to remain financially viable under a range of different future scenarios. Much of this latter judgement will be based on forward looking stress tests, with analysis at individual firm level overlaid by extensive use of peer comparisons to ensure that outliers can be properly identified.
Adams also confirmed that the PRA will be introducing a new framework for proactive intervention with a set of trigger points at which regulatory action would be presumed. The purpose of this framework, Adams explained, is to formalise the resolution mechanisms which are needed in the event of firm failure.
In relation to policy making Adams stated that much of the PRA’s policy in relation to insurers will be determined by Solvency II. He adds that in terms of the transposition of Directives, the PRA will make maximum use of copy-out where available and appropriate.
In the final part of his speech Adams discussed co-ordination with other UK regulatory authorities. The PRA will deal with all matters relating to the interests of policyholders which could have an effect on the financial position of a firm. However, recognising the expertise that the Financial Conduct Authority (FCA) will have in consumer matters, the PRA will consult the FCA on material issues. However, what this means in practice will depend on the individual circumstances of the firms and funds concerned.
View The supervisory approach of the Prudential Regulation Authority
Financial crime from the FSA to the FCA
On 22 June 2011, the FSA published the speech given by Tracey McDermott (Acting Director, Enforcement and Financial Crime Division, FSA) at the FSA’s Financial Crime Conference. The speech was entitled Financial crime from the FSA to the FCA.
At the start of her speech McDermott discussed the Government’s proposals to abolish the FSA and create in its place the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA). The Government has confirmed that the FCA will take forward the FSA’s financial crime remit.
McDermott stated that the FSA expects the FCA to continue a lot of its work in tackling financial crime. For example the FSA anticipates its formal legal duties to monitor firms’ efforts to tackle money laundering and to stamp out anonymous inter-bank payments will shift to the FCA. The FCA will also be responsible for overseeing the industry’s systems and controls to comply with asset freezes and financial sanctions. The FCA will also continue the FSA’s work to crackdown on insider dealing and have a strong presence in relation to unauthorised business.
McDermott then discussed three documents published by the FSA:
- The consultation on a new guide on financial crime.
- The findings from its review of lenders’ anti-mortgage fraud controls.
- The findings from its review into how banks deal with situations that present a high risk of money laundering.
View Financial crime from the FSA to the FCA
FSA launches FCA approach document
On 27 June 2011, the FSA published a document entitled The Financial Conduct Authority - Approach to regulation.
The approach document set out the FSA's initial thinking as to how the Financial Conduct Authority (FCA) will approach the delivery of its objectives. It complements the Treasury’s earlier consultation documents particularly the June 2011 consultation document entitled A new approach to financial regulation: the blueprint for reform.
Hector Sants (Chief Executive, FSA) stated: “The document is designed to stimulate debate on the key questions to be resolved, which includes finding the right balance between the benefits of early intervention and the consequent risks of reducing choice and raising costs, and also clarity regarding the balance of responsibilities between consumers and industry.”
Margaret Cole (Interim Managing Director of the FSA’s Conduct Business Unit) stated: “At this early stage in the development of the new regulatory structure, the publication sets out the approach the FCA plans to take and raises issues that need to be considered by industry, legislators and consumer representatives. This open debate, seeks to find consensus on the type of regulator needed to restore customer trust in a sector which has generated billions in consumer detriment due to mis-selling scandals.”
In the approach document the FSA stated that a key task will be to ensure that the conduct of participants is compatible with fair and safe markets. The FCA will focus more closely on wholesale conduct than the FSA. It will adopt a more issues and sector-based supervisory approach across the firms that it will regulate for conduct and prudential purposes.
The approach document also stated that the FCA’s actions will need to be based on judgemental trade-offs between different, desirable objectives - whether, for instance, to protect some consumers from detriment even if this necessarily restricts choice for others. It will be essential for the FCA to consult widely about how it should strike these trade-offs, to explain clearly the basis for its judgements and to be clearly accountable.
The FSA stated that the FCA’s culture will be based on judgement and sound analysis. It will be essential that the purpose of the FCA is fully understood and supported, from the outset, by the public and Parliament. The FCA will need this support if it is to play an effective role and retain high calibre people.
The deadline for comments on the approach document is 1 September 2011. The FSA will use the next 18 months to develop the FCA’s operational capability, to build the skills needed and to ensure a smooth transition from the FSA. The approach document describes the direction of change, but is also intended to stimulate debate about the details that need to be got right before the FCA begins operations. The FSA also stated that it will publish further proposals on the FCA’s operating model in “the coming period.”
View FSA launches FCA approach document
View Financial Conduct Authority - Approach to regulation
FSA CEO speech at the FCA conference
On 28 June 2011, the FSA published the speech that Hector Sants (Chief Executive, FSA) gave at the FCA conference. In his speech Sants made certain personal remarks on the challenges the Financial Conduct Authority (FCA) faces.
He began by stating that there was little or no evidence that the financial services industry has significantly changed its attitude towards customers. Whilst the FSA’s Treating Customers Fairly (TCF) initiative has created greater awareness of this issue complaints against financial services firms in 2010 were 3.5 million compared to 2.7 million in 2006.
Sants argued that a radical new approach is needed to change firms’ behaviour. He then addressed five key trade offs:
- Responsibility and suitability. Sants stated that the presumption in the FCA’s operating model is that it would be reasonable for it to make suitability judgements on behalf of consumers. The consequence of this would be to diminish personal freedom and to a degree undermine the concept that we all take responsibility for our own actions.
- Intervention and innovation. Sants noted that the most controversial forms of early intervention are likely to be banning individual products where the regulator judges that the risk of mis-selling significantly outweighs a product’s utility, or, intervention to ban individual firms from selling perfectly useful products where their sales processes look likely to lead to significant mis-selling. The underlying premise is that the regulator is able to successfully identify that detriment is going to occur. However, Sants explained that it is not reasonable to presume certainty of outcome and at times the intervention itself runs the risk of creating more harm than good. It could be seen to: (i) reduce innovation in the marketplace; (ii) potentially reduce choice; (iii) potentially reduce competition; and (iv) raise the cost of regulation.
- Transparency and efficiency. Sants stated that generally transparency promotes confidence, helps equip consumers to make better decisions and is in tune with a modern society. However, the risk with transparency is that it will hamper the efficiency of the regulator and potentially lead to problems in the market place caused by unintended consequences of consumer actions.
- Cost and effectiveness. A more interventionist and proactive regulator offers prospects of greater success but comes with extra cost. Sants argued that the judgement of where that balance is pitched should not be made by the regulator alone.
- Accountability and judgement. Sants explained that the trade off is that society wants regulators to make difficult, brave and forward looking judgements, but inevitably with hindsight some will prove not to lead to the desired result. In addition he also stated that: “It is important to recognise that it is not the regulator’s role to determine its own mandate; that is for society as a whole to determine. An independent regulator’s job is to then select the best tools to use; that is the job for technical specialists. Unless the outcomes those tools are designed to achieve are aligned with society’s expectations the regulator will not have the necessary mandate to operate; nor will it be a sustainable institution. As I have said before this was undoubtedly a problem for the FSA.”
However, Sants went on to mention that radical change requires a change in attitude not just by regulators but also by the senior management of firms. They need to make real their commitment to give consumers better service.
View FSA CEO speech at the FCA conference
View FSA hosts conference to launch debate about the future of conduct regulation
Financial Conduct Authority: A new regulatory approach
On 28 June 2011, the FSA published a speech by Margaret Cole (Interim Managing Director of the FSA Conduct Business Unit). The speech was entitled Financial Conduct Authority: A new regulatory approach.
In her speech Cole argued that the main challenge ahead for the Financial Conduct Authority (FCA) is to devise new approaches which prevent consumer detriment in the first place, not just focusing on ensuring redress after the fact. This will mean pushing the boundaries of its competition mandate. It will also mean making difficult judgements about the point at which intervention can and should be made and how that reconciles with the trade-offs referred to in an earlier speech made by Hector Sants (Chief Executive, FSA).
Cole stated that getting the wider regulatory architecture right is the starting point of any new model of regulation. The FCA will be an important component of the new model and will have a critical role. If the new model is to work well Cole stated that close co-ordination between the new regulatory authorities will be vital. This will be particularly important where the firm is dual regulated. In relation to authorisation Cole stated that it is expected that the fundamentals of the FSA’s authorisation process will be carried forward.
Cole then went on to describe some of the key differences between the FSA and FCA. The FCA will have new powers including new product intervention powers. The FCA will also develop a new culture and put a premium on analysis and good judgement. Central to the FCA’s decision making process will be a new senior level business and market analysis team. This team will provide the analysis required to understand how markets work and how they interact with consumer behaviour.
Cole then discussed the FCA’s supervisory model and some of the main elements:
- Like the FSA, the FCA will be a risk based regulator. The intention is to replace the ARROW framework with a revised risk assessment process that is easier to communicate to the senior executives and boards of firms so that they can align good business practice with good regulatory practice.
- The FCA will have a lower risk tolerance than the FSA. The FCA will be prepared to step in early to prevent consumer detriment.
- The fair treatment of customers will be a central part of the FCA’s role in regulating the financial services industry.
- The FCA will recognise that not all markets are the same and that there will need to be a differentiated approach to regulatory activity.
- The FCA will be forward looking and preventative. It will move to a more forward looking assessment of potential detriment to identify the problems that need to be tackled.
- For both conduct and prudential regulation there will be a small number of firms that will require a more active supervisory programme. This will apply to firms whose failure, even if orderly, could threaten the integrity of particular markets. Cole gave the example of inter-dealers.
Cole also mentioned that the establishment of the FCA gives the opportunity to take a fresh look at how wholesale conduct issues are addressed. Key points include:
- As an integrated conduct regulator, the FCA will look across the whole financial services sector, not only in investment and capital markets but also in banking and wholesale insurance markets.
- The FCA will also recognise that wholesale activities can have a direct impact on retail markets.
- The FCA will look at intervention further up the chain, targeted at product governance.
View Financial Conduct Authority: A new regulatory approach
BBA speech: The Future of Banking Regulation in the UK
On 29 June 2011, the FSA published a speech given by Hector Sants (Chief Executive, FSA) at the BBA Annual Conference. The speech was entitled The Future of Banking Regulation in the UK.
In his speech Sants discussed the changing shape of banking regulation in the UK. These changes, in essence, give the Bank of England overarching responsibility for financial stability through the creation of the Financial Policy Committee (FPC) and establishes ‘twin peaks’ style regulation with the creation of a new prudential regulator, the Prudential Regulation Authority (PRA) and a new conduct regulator, the Financial Conduct Authority (FCA).
Sants principal message was that the opportunity presented by the Government’s reforms must force a ‘root and branch’ change by both regulators and banks. The root and branch change must affect both the behaviour and the processes of banks and regulators.
When discussing the PRA Sants refered to its single objective - to promote the safety and soundness of regulated firms. He made four points which arise from this objective:
- It is clear that the purpose of the PRA is to focus on the overall stability of the financial system, albeit through firm specific supervision. This will require close coordination with the FPC whose role will be to manage the risks in the system as a whole.
- The PRA will always seek to reduce the risk of individual firm failure but will give particular focus on ensuring that if failure occurs, it does so in an orderly manner.
- The obligation of baseline supervision should not detract from a key strand of the PRA’s approach, namely to ensure that the role of regulators is to complement and promote the disciplines of the market place, not act as a substitute for them. The presumption remains that the ultimate responsibility for managing a firm prudently rests with its management, board and shareholders.
- The failure of firms should be seen as a necessary element of a healthy, innovative system and the PRA should not be held accountable for all such failures. Particularly in those cases where the process of failure is an orderly one with minimal impact on the financial system or the firm’s customers.
Sants then discussed the PRA’s supervisory approach stating that it will be delivered by replacing the FSA’s ARROW process with a new simplified framework for assessing the risks posed by individual firms. The PRA’s supervisory assessment framework will capture three elements:
- The potential impact on the financial system of a firm coming under stress or failing.
- The impact on the viability of a firm’s own business model of the overall external risk environment.
- The firm’s overall safety and soundness.
Sants then briefly commented on the FCA stating that it is clear that the Government’s intention is for the FCA to intervene in a more intrusive way than was the case for the FSA. To deliver this intention the FCA will require new powers, particularly in relation to product intervention and financial promotions. The FCA’s supervisory model, as with the PRA, will also involve a new supervisory assessment framework to replace ARROW. This will include both firm-based assessments and comprehensive market, sectoral and product chain analysis. Central to this design though will be simplicity and a recognition that the approach must be understandable not just to regulatory specialists but to boards as a whole.
In the final part of his speech Sants acknowledged that for the new regulatory architecture to be successful the PRA and FCA must engage with:
- The firms they regulate.
- Other regulators both domestically and internationally.
- The public.
- Those to whom they are accountable, notably Parliament.
In relation to coordination Sants argued that there must be a clear understanding about how the PRA and FCA will interact, particularly in relation to firm-specific supervisory decisions.
View BBA speech: The Future of Banking Regulation in the UK