Following the 2010 general election, the incoming UK government announced its decision to reverse many of the provisions of the FSMA 2000. The underlying reasons for this regime change relate to perceived failures in banking regulation; nevertheless the regulation of insurance, investment and other financial services will also be affected significantly.
The transistion to the new regime will take place at the end of 2012 or early 2013, therefore the vast majority of the regulations currently in place are expected to remain in place until 2013 at the earliest. Most will continue well beyond that date but, as we shall see, the names of the regulatory bodies will have changed.
The establishment of the FSA as a single regulator for all financial services addressing prudential, conduct of business and financial crime issues was extremely ambitious and undoubtedly led to problems in resourcing and prioritisation. However, the biggest problem, which was exposed by the financial crisis, was a lack of clear lines of authority between the FSA, the Bank of England (BoE) and HM Treasury. There was no single body with the powers and authority to monitor the overall state of the financial markets and intervene if necessary. This so-called "macro-prudential" role included dealing with excessive credit, spiralling asset prices, and various systemic risks. The solution, which involves splitting the FSA into its component parts, is shown below.
The BoE will become the dominant UK financial regulator, making it one of the most important central banks in the world. It will have overall responsibility for financial stability and will be expected to watch for systemic risks and act to defuse them (macro-prudential supervision). The Bank will also be given the power to require institutions to hold more capital if asset prices rise. There will be four new bodies:
1) For an independent view of the issues threatening financial stability a Financial Policy Committee will be set up. This will be chaired by the Governor of the BoE and its reports scutinised by the Treasury Select Committee in Parliament.
2) The prudential supervision presently undertaken by the FSA will be transferred to a new subsidiary of the BoE, which is to be called the Prudential Regulation Authority (PRA) (micro-prudential supervision).
3) Outside the BoE, the conduct of business, investor protection and other regulatory activities will be transferred to a new Financial Conduct Authority (FCA).
4) The financial crime fighting roles of the FSA, the Serious Fraud Office and the Office of Fair Trading will be united in an Economic Crime Agency.
The Chief Executive of the FSA will stay on to oversee break-up of the FSA and the transition to the new regime. At this stage, plans still exist only in broad outline, so it is advised that you consult the FSA website and the technical press on a regular basis to keep abreast of these important developments.
