HM Treasury consults on sweeping reforms to UK regulatory architecture

Today, HM Treasury published its first paper seeking views on the Government's proposals for wholesale reform of the UK financial services regulatory architecture. The paper contains some further detail of the reforms proposed on 16 June 2010 by the UK's Chancellor of the Exchequer, George Osborne. The deadline for responses is 18 October 2010.  This briefing summarises the key points arising from the paper and the next steps.  A more detailed briefing which considers the issues will be published in due course. 

Click here for a table of the key features of the Prudential Regulation Authority (PRA), Consumer Protection and Markets Agency (CPMA) and the Financial Policy Committee (FPC), including their respective scope of regulation, key responsibilities and functions.

Interplay between the new regulatory bodies

A fundamental question to be resolved is how the new regulatory bodies will interplay with one another, given the potential overlap of regulatory responsibility and functions. The consultation paper goes some way towards explaining how the regulatory responsibilities and functions will be divided and coordinated, however it is hoped that further clarification will emerge in due course.

How will the PRA and CPMA interplay with each other?

Secondary legislation will specify precisely which regulated activities will be regulated by the PRA and CPMA.  Whilst it is not yet clear which activities will be regulated by each body, the paper suggests that the PRA will be responsible for prudential regulation of institutions which take deposits, effect and carry out contracts of insurance, and deal in investments as principal.

The PRA and CPMA will each be responsible for taking decisions and action in relation to the activities they regulate. As such, the Government acknowledges that the two authorities will need to work closely in making their respective decisions, including in the coordination of enforcement action, so as to avoid duplicating effort.

Coordination between the PRA and CPMA will be formally managed through:

• Statutory Memoranda of Understanding
• Formal "college-style" mechanisms to support joint working on the supervision of firms where both the CPMA and PRA have a supervisory interest
• Requiring each authority to have regard to the objectives of the other
• Establishing information gateways
• Cross-membership of boards
• Requiring consultation in specified circumstances

How will the PRA and CPMA interact with the FPC?

The PRA and CPMA will be instrumental in implementing the FPC's decisions. The FPC will be able to require the PRA to implement the FPC's decisions through the use of macro-prudential economic tools, applying them across all relevant firms. For example, the PRA may be required to compel firms to increase capital held during periods of economic expansion. Similarly, the CPMA will be required to implement the tools in a similar way, should the measures relate to conduct regulation. The paper states that neither the Bank of England nor the FPC will have any formal power of direction in relation to firm-specific decisions.

The Government accepts the need for close cooperation between the FPC, and the PRA and CPMA. Cooperation will be facilitated through the membership of the Chief Executives of the PRA and CPMA on the FPC, and the PRA and CPMA being statutorily obliged to consult the FPC on any rule changes with material implications for financial stability. The Government will legislate to create the necessary mechanisms needed for information exchanges between the three bodies.

The legislative framework

The Government will examine the adequacy of FSMA as the suitable legal framework going forward. If FSMA is to be the model for the legal framework, the Government will legislate to divide the powers and functions set out in FSMA into separate standalone prudential and conduct regulation frameworks. It is acknowledged that in some cases there may be overlapping powers and functions.

Regulation of listing and related activities

It is still uncertain which regulatory body will assume the functions of the UK Listing Authority (UKLA), currently sitting within the FSA. The Government is consulting on whether the UKLA should be merged with the Financial Reporting Council (FRC) under the Department for Business, Innovation and Skills (BIS), (thereby bringing it alongside the FRC's functions relating to company reporting, audit and corporate governance), or with the CPMA markets division. There will be a separate consultation on this by BIS in due course.

Economic crime

The Government had indicated previously that it would transfer responsibility for the prosecution of criminal offences relating to market abuse and other criminal law breaches which the FSA and other regulatory bodies such as the Serious Fraud Office and Office of Fair Trading currently prosecute, to a new Economic Crime Agency. No further details are revealed in the consultation paper – this will be subject to separate consultation in due course.

Consumer credit

HM Treasury and BIS will publish a joint consultation on how the legislative framework for consumer credit regulation might be simplified and whether it should be brought under a single regulatory regime.

The contents of this publication, current at the date of publication set out above, are for reference purposes only. They do not constitute legal advice and should not be relied upon as such. Specific legal advice about your specific circumstances should always be sought separately before taking any action based on this publication.

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© Herbert Smith LLP 2010