Are they really getting rid of the FSA?

Tony Watts discusses the future of the Financial Services Authority and the changes underfoot. Implementation is scheduled for 2013, but have the Government underestimated the task?

Abolition of the Financial Services Authority was a key Conservative policy in the general election, so is it really going to disappear? The answer for most regulated firms seems to be "not really". Proposed changes appear to be mainly cosmetic and for most firms regulation will be business as usual.Primary legislation is planned for mid-2011 with implementation in 2013, but the Government may have underestimated the task.

The Government’s plans are outlined in a Consultation Paper: "A new Approach to Financial Regulation: Judgments, Focus and Stability". The paper repeats the justified claims that the confusion regarding the roles of HM Treasury, the Bank of England and the FSA was partly to blame for the banking crisis and that the FSA was not equipped to assess the risks banks were running against their capital.Their proposed solution is to have three regulatory bodies overseeing three key areas:Conduct – The Consumer Protection and Markets Authority (CPMA) will be responsible for regulating the conduct of all financial services businesses i.e. how they deal with their clients. It will also be responsible for all other non conduct-related aspects of regulation of firms which are not banks, investment banks or insurers. It will continue to have most of the FSA’s present responsibilities for markets. However, there will be further consideration of:

• its role as UK Listing Authority;
• whether its criminal prosecution powers for offences, such as insider dealing, shouldbe transferred to the new Economic Crime Agency; and
• whether the CPMA should take on the OFT’s role as regulator of consumer credit.

Micro-prudential regulation – the regulation of the prudential requirements of banks, insurers and investment banks, such as questions of sufficiency of capital and liquid resources will be carried out by the Prudential Regulatory Authority (PRA), an independent subsidiary of the Bank of the England. Macro-prudential regulation – will be handled by the Financial Policy Committee (FPC), also part of the Bank of England, which is to have an overview of the financial system, looking at the big picture risks in the financial system and making policy in relation to them.It is intended to introduce primary legislation in mid-2011, pass it within two years and fully implement the changes by the end of 2013. However, the government may have underestimated the complexity of the task. Issues include:

• definitions – the ambit of the PRA may be too widely drawn;
• how the bodies work together – there are elaborate proposals for consultation and cross- representation, prompting questions about how separate the bodies will actually be;
• difficulties for firms – it seems likely that banks and some other financial service organisations may have to be authorized by both the CPMA and the PRA. In addition, they may need to get their relevant management individuals approved by both bodies and face parallel enforcement provisions. The alternative is to nominate one body – again questioning the need to separate the regulatory functions.

Whilst the future shape of financial services regulation is not entirely clear, contracts currently being concluded need care with regard to references to the FSA, FSA rules and the Financial Services and Markets Act, making sure that these include appropriate references to successors.For further information about how these changes affect your business, please contact Tony Watts.