Roger Tym, London financial institutions partner at Hogan Lovells, has raised concerns for UK financial regulation after the Financial Services Authority (FSA) was replaced by two new regulators: the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
The PRA will focus primarily on ensuring the financial stability of systematically important financial services firms. It is a subsidiary of the Bank of England and tasked with tackling micro-prudential issues at a firm level. A new Committee of the Bank of England — the Financial Policy Committee — has responsibility for the macro-prudential position: to identify, monitor and take action to remove or reduce systematic risks with a view to protecting and enhancing the resilience of the UK financial system.
The FCA is designed to protect consumers, including the ability to ban the sale of particular products.
Considering the new structure, Tym said: ‘A great deal of careful thought has been given to constructing a new “twin peaks” regulatory framework that addresses the problems perceived with the previous regime, involving the triumvirate of HM Treasury, the Bank of England and the FSA.
‘There are many excellent aspects to the new framework and it is important for all to work together to ensure that the approach is successful. There are some aspects that will need to be monitored to achieve a successful implementation.
‘There is potential for overlap, rather than the “underlap” the government previously recognised between HM Treasury, the Bank of England and the FSA. The new structure is designed to plug gaps, but it could lead to duplication.
‘The PRA and FCA both carry out reviews of dual-regulated firms using their respective regulatory tools, which will lead to the same aspects being reviewed from different perspectives. Also, what happens if the two authorities have a different view of what is required, for example, in relation to systems and controls?
‘Unless the level of communication and co-ordination between the PRA and FCA is excellent, there could be confusion, time-wasting and possible gaps. The new structure is good, but there appears to be a significant execution risk.’
Tym added: ‘The FCA has said that its “actions will be bold and wide-reaching” but nevertheless acknowledges a need to up-skill on competition to meet the new objective of promoting effective competition.
‘If there is an action that would restrict competition but would protect a small group of consumers, what will the FCA choose to do? The impact of competition may prove difficult to measure, whereas customer impact will be much easier to measure.
‘The FCA accepts that the need for disclosure to redress perceived “information asymmetry” has not achieved its objectives and has been given powerful new tools to achieve consumer protection and the new product intervention power in particular allows for a “shoot first, ask questions later” approach.
‘The FCA has confirmed that “Treating Customers Fairly” (TCF) remains at the heart of its regulatory approach. The FCA’s outcomes-focused approach to TCF discourages tick-box compliance but leads to uncertainty for business, and a potential reduction in innovation as firms tend towards the lowest common denominator position.
‘There is a continuing drive towards simpler and simpler products. The questions remain: is simple always best, and what responsibility should customers bear for the choices they make?’
Tym concluded: ‘Has the government asked the new regulators to implement too much and too quickly? It has been tasked with overseeing a huge change to the infrastructure in a short space of time. The FCA is also working on transferring the Consumer Credit Act regime from the OFT while still coming to grips with its new role; and is expected to balance its customer protection objective with its new competition objective.
‘These are potential issues, depending upon how the new framework is implemented in practice. It will be important for the industry to engage with the new regulators swiftly and effectively to alert them to any problems with the operation of the new regime.’