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Financial services bulletin - New FSA regime | Norton Rose Fulbright

Financial services bulletin - New FSA regime

9 March 2012



Whilst the draft Financial Services Bill is slowly moving through the House of Commons there is a lot of activity going on at the FSA. Most of you would have seen the Dear CEO letter and recent FSA speeches that have been produced concerning the FSA’s implementation of the ‘twin peaks’ structure.

The FSA is moving towards what it calls “independent but coordinated” regulation which will see it divide its work force into two independent units of supervisors. One unit will cover prudential and conduct of business supervision for banks, insurers and major investment firms. The other unit will cover all other firms.

The ARROW framework is also changing. The existing ARROW risk mitigation programme is being split with the new units running their own risk mitigation programmes. This means that firms will have two separate sets of mitigating actions to address. A key point for firms to remember is that whilst the units may ask similar questions they need to understand that the purpose will be different. Firms will also be expected to address each set of actions arising from prudential and conduct reviews with equal focus.

Firms should also be aware that the supervisory models of each unit will be different, in particular the mechanism that each will use to reach judgements. The prudential unit is expected to introduce the concept of a set of questions focusing on ensuring that the firm is minimising the risk of disorderly failure. In the conduct space the focus will be on the main drivers of conduct risk at firm level and 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. The overall assessment in the conduct space will continue to be in the form of a letter to the board, but it will be based on all the work that has happened on the firm, including thematic work. It is said that some firms concluded that they wouldn’t need to bother about the Government’s reforms until the Financial Services Bill comes into force in 2013. However, taking that approach would be a mistake. The new regime is being introduced sooner than you may have thought.

Simon Lovegrove is a lawyer with the financial services team at Norton Rose LLP