Last month, the Chancellor announced the new financial regulatory structure which will replace the FSA and now the Treasury has published its consultation paper on the proposals for reform.
The new structure comprises four new bodies: the Financial Policy Committee and Prudential Regulation Authority will be accountable to the Bank of England and the Consumer Protection and Markets Authority and the Serious Economic Crime Agency will report directly to Parlia-ment. In its consultation paper, the Government claimed that this reshuffle will create a more powerful regulator with “significantly increased influence over the UK’s financial systems and economy”.
The FPC will assume responsibility for macro-prudential regulation and will make recommendations to the PRA for it to implement and the PRA will be respon-sible for micro-prudential regulation and will be a subsidiary of the BoE. So, will this mean another layer of bureaucracy?
On the one hand, to sit macro and micro prudential regulation within the BoE makes sense, as the BoE already has the responsibility of setting monetary policy and therefore has a strong grip on how the economy operates.
However, there is a danger in creating separate bodies. Macro and micro economics are closely intertwined in terms of assessing market stability and institutional risk and therefore care will be required to ensure appropriate engagement between the FPC and the PRA at all levels.
Fundamentally, the FPC needs to funnel its knowledge and set clear guidance to the PRA’s supervisors to ensure effective supervision of firms’ risk management and corporate governance. We expect that splitting the functions will place more emphasis on each body’s responsibility and accountability and provided that they are operating as one overarching unit, this may be an improvement.
Since the BoE does not have experience in being a consumer champion, it makes sense that the CPMA will be responsible for consumer protection and business conduct regulation.
The SECA will take over the work currently undertaken in the areas of the Serious Fraud Office, the FSA and the Office of Fair Trading. We expect more enforcement actions as the FSA enhances public perception of it being the body to take charge/lead the SECA.
During the transitional period, firms are advised to review their budget contin-gency as there is no doubt there will be extra cost involved with rebranding.
It is too early to say whether the new structure will mean the UK regulatory landscape has changed for the better. Provided that the Government has clear direction and understanding of each body’s role and responsibility, the new structure could provide improvement but will involve expense.
Suzanne MacDonald is a partner and head of financial services regulation at TLT