A summary of the UK government’s recommendations for regulatory change

On July 26th the UK’s Treasury department published a paper on “A new approach to financial regulation”.

The paper amounts to a firm policy commitment by the UK government on how it sees regulations evolving in a post-financial crisis world.

Lloyd’s provided the following neat summary of the recommendations.

Financial Policy Committee

The Government will create a new Financial Policy Committee (FPC) in the Bank of England, with primary responsibility for maintaining financial stability. The FPC will have control of macro-prudential tools, so that it can deal with systemic risks to financial stability.

Most FPC members will be Bank executives, “to bring the expertise and understanding of the financial system that only a central bank can provide”. The Governor and Deputy Governors for financial stability and monetary policy will be joined by new Deputy Governors for prudential regulation and two other Bank executives. The FPC will also include external members to ensure that wider perspectives are fed into the Committee’s work, including from other regulatory bodies and from markets.

Prudential Regulation Authority

The Government will transfer operational responsibility for prudential regulation from the FSA to a new Bank of England subsidiary, the Prudential Regulation Authority (PRA). It will be responsible for prudential regulation of all deposit-taking institutions, insurers and investment banks. The PRA will have a board chaired by the Governor of the Bank and a chief executive who will also be the newly-created Deputy Governor for prudential regulation.

The FPC will be able to require the PRA to take regulatory action with respect to all firms. The PRA will provide firm-specific information to the FPC to illustrate the potential impact of emerging system-level risks on specific types of institution. The PRA board will delegate responsibility for significant regulatory decisions affecting firms, for example, on authorisation, supervision, or enforcement of rules to an executive committee, which, where conflicts of interest allow, may include non-executive directors. The PRA will represent the UK on the new European supervisory authorities for banking and insurance.

Consumer Protections and Markets Authority

The Government will create a Consumer Protections and Markets Authority (CPMA) with a primary statutory responsibility to promote confidence in financial services and markets. This objective will have two important components. First, the protection of consumers through a strong consumer division with the CPMA, and second, through promoting confidence in the integrity and efficiency of the UK’s financial markets.

In its consumer-focused role, the CPMA will take on the FSA’s responsibilities for regulating conduct in financial services and markets, as well as arms-length oversight of the Financial Ombudsman Service, the Consumer Financial Education Body, and the Financial Services Compensation Scheme. The CPMA’s markets division will regulate conduct in wholesale markets, as well as various elements of market infrastructure such as investment exchanges. The CPMA markets division will represent the UK in the new European Securities and Markets Authority.