After a series of market failures and the ensuing fierce criticism for the lack of regulatory protection, the government felt obliged to update the supervisory framework of the financial services industry and pass responsibility for financial stability to the Bank of England.
“The driver for the new model is twofold,” explains Simon Morris, financial services partner at CMS Cameron McKenna. “The FSA failed as it was an inept prudential authority – look at RBS and Hbos - and it was an incompetent conduct supervisor – look at Arch Cru and Keydata.
“It’s been replaced by what is meant to be a more effective pair of bodies.”
From 1 April 2013 the Financial Services Authority has been replaced by the ‘twin peaks’ of the Financial Conduct Authority and the Prudential Regulatory Authority, with the latter overseen by the Bank of England.
A third new body, the Financial Policy Committee, reports directly to the BoE and is able to force banks to cut lending to certain sectors to relieve systemic risks building up in the economy.
In simple terms, the FCA is responsible for ensuring that relevant markets function well and is the conduct and compliance supervisor for around 26,000 firms across the whole industry, as well as the prudential supervisor for around 23,000 firms not regulated by the PRA.
Its primary operational objectives are consumer protection, integrity and effective competition.
The PRA is responsible for promoting the safety and soundness of banks and insurers and systemically important firms and is the prudential supervisor of roughly 3, 000 firms. These 3,000 firms will be dual regulated: the FCA for conduct and the PRA for prudential issues.
“It is only deposit takers, insurers and SIFs that will be dual regulated under the twin peaks model, the remainder of financial services firms will be regulated solely by the FCA,” says Sona Ganatra, senior associate at Fox Williams.