The new Financial Conduct Authority will have a central strategic objective of promoting confidence in the financial system and a number of other objectives including protecting consumers and facilitating market choice.
The FCA, formerly known under the working title Consumer Protection and Markets Authority, will take on the FSA’s responsibilities for conduct of business and markets regulation.
Its strategic objective will be promoting confidence in financial system with operational objectives to facilitate efficiency and choice in the market, secure an “appropriate” degree of protection for consumers and protecting and enhancing the financial system’s integrity.
It must promote competition in the market when this is compatible with its other objectives.
The Government says the FCA will be an independent regulator accountable to its own board.
Under the new regulatory framework, which will cost up to £240m to introduce, the Financial Policy Committee will lead, with an ability to direct other regulatory bodies to act. The Prudential Regulatory Authority and the FCA must implement directions relating to the committee’s macro-prudential tools.
The committee will have a wider power of recommendation relating to anything it believes relevant to financial stability with the regulators having to “comply or explain” their opposition.
However, action against individual firms will be down to the appropriate regulator and the FPC must avoid impeding the regulators pursuing their objectives.
Cross-board membership will promote cooperation, with the chief executive of each regulator sitting on the board of the other and both also on the FPC.
The PRA and FCA will have to consider that consumers are ultimately responsible for their own decisions, plus principles relating to openness and transparency. In addition, the regulators will have to ensure there is transparency in their proc- esses to foster trust in their judgements.
The PRA will have a veto over the FCA if it considers actions it is taking will threaten financial stability. To improve accountability of the FCA, a new panel for markets practitioners will be set up along with the current small business, consumer and practitioner panels.
The FPC will primarily be responsible for identifying and taking action against structural risks, the distribution of risk or unsustainable levels of leverage and debt or credit growth which threaten the stability of the financial system. It will not have a target but should make sure the level of each factor does not threaten the entire system.
The committee’s work should contribute to the Bank of England’s financial stability objective but it should not do anything which “in its opinion” will affect the ability of the financial sector to contribute to economic growth.
The FPC will advise the Treasury on the macro-economic tools needed to achieve its objective. It will have the power to send out public warnings, influence European and international policy and make representations to the PRA and FCA, as well as directing them if required.
Like the MPC, the FPC will sit within the bank, be accountable to its court and have to produce a biannual report on risks and responses which is laid before the court, Treasury and Parliament.
Every six months, the governor of the bank will update the Chancellor on developments and the Treasury select committee will also have a role in its accountability.
The PRA’s operational objective will be promoting stability of firms it regulates and to minimise adverse effects any firm’s failure could have on the financial system.
As an operationally independent regulator within the bank, it will be accountable to the bank’s court for administrative issues such as its bud- get and pay but on regulatory issues it will be accountable to its own board.
The objectives of all three should be carried out with regard to five regulatory principles (see box below).
The PRA and FCA should have regard to a set of regulatory principles intended to shape how they regulate. They are:
- Efficiency and proportionality: to ensure that due regard is paid to value for money and cost- effectiveness considerations.
- Senior managers (and not regulators) are ultimately responsible for managing their firms in a way that is compliant with the regulatory framework.
- Consumers of financial services are ultimately responsible for their own decisions.
- Openness and transparency: highlighting the importance of openness and disclosure as a regulatory tool in promoting market discipline.
- That transparency of regulatory process supports trust in the judgements and decisions made by the regulators.