New 'twin peaks' regulatory system faces questions as post-FSA era gets underway
On April Fools' Day, with the banks closed and the public scanning the news for prank stories, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) officially launched amid promises of tougher regulation and enforcement for the UK financial services sector. Given the long run-up to the Financial Services Authority's (FSA's) demise and the numerous announcements about its successors, the new bodies are not joking about their ambitions. But just how seriously they will go about addressing the failings of the FSA remains to be seen. Charged with regulating financial firms providing services to consumers and maintaining the integrity of the UK's financial markets, the FCA has already targeted a renewed focus on consumers, as well as continuing to address issues of misconduct (including those such as the recent Libor scandal), market abuse and competitiveness.
April 11, 2013 at 07:03 PM
5 minute read
Lawyers warn of challenges ahead as new financial regulation model takes effect. Alex Newman reports
On April Fools' Day, with the banks closed and the public scanning the news for prank stories, the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA) officially launched amid promises of tougher regulation and enforcement for the UK financial services sector.
Given the long run-up to the Financial Services Authority's (FSA's) demise and the numerous announcements about its successors, the new bodies are not joking about their ambitions. But just how seriously they will go about addressing the failings of the FSA remains to be seen.
Charged with regulating financial firms providing services to consumers and maintaining the integrity of the UK's financial markets, the FCA has already targeted a renewed focus on consumers, as well as continuing to address issues of misconduct (including those such as the recent Libor scandal), market abuse and competitiveness.
The PRA – part of the Bank of England – works alongside the FCA in a 'twin peaks' operating structure, and is responsible for the regulation and supervision of roughly 1,700 banks, building societies, insurers and investment firms.
Despite the visible crackdown on enforcement and the raft of recent financial scandals, some UK lawyers remain sceptical about how the bodies will work in practice.
"No amount of trialling the twin peaks model, or advance guidance materials and handbooks, disguises the fact that there remains a great deal of uncertainty around the new system," says Jeremy Hill, a corporate partner specialising in financial institutions work at Debevoise & Plimpton.
"The PRA and the FCA will overlap. They've detailed the systems they'll use to co-operate and share information. But until we see the system in action, some financial institutions will remain in the dark as to who they will be dealing with in certain enforcement situations. That uncertainty is clearly unhelpful."
Hogan Lovells financial institutions partner Roger Tym adds: "Unless the level of communication and co-ordination between the PRA and FCA is excellent, there could be confusion, time-wasting and possible gaps. The new structure is good, but there appears to be a significant execution risk."
Focusing on the FCA, Tym identifies a number of areas where questions remain. "If there is an action that would restrict competition but would protect a small group of consumers, what will the FCA choose to do?" he questions, adding that the "new product intervention power in particular allows for a 'shoot first, ask questions later' approach".
Some of those closest to the workings of the FCA will be the firms, such as Hogan Lovells, appointed to the body's newly formed 'skilled person panel', which is intended to provide the FCA with an independent view of the activities of financial institutions via a transparent panel system. Though most of those appointed are accounting firms, seven law firms have been handed a mandate to advise on legal matters across five categories of work until 31 March 2017. Clifford Chance (CC) has won the largest number of appointments, with DLA Piper, Eversheds, Hogan Lovells, Ashurst, Macfarlanes and Pannone also appointed to various sub-panels.
While the appointments are not a guarantee of instruction, the FCA will not consult firms outside the panel and will instead invite firms to pitch for individual projects, assessing their technical capabilities, resources, and commercial skills as well as looking at conflicts of interest.
Much of the work will involve the production of skilled person reports (SPRs), which can form the basis of enforcement cases. The use of SPRs has increased rapidly in recent years, with 82 commissioned in the first three quarters of 2012-13 alone.
Carlos Conceicao, CC's FCA relationship partner and former head of the FSA's wholesale enforcement group (pictured), explains: "Ultimately, regulators are responsible for decisions made on the basis of SPRs. As the reports feed into decisions being made by the regulators, and as regulators have felt more accountable for the judgements that they are making on firms, there has been an increase in the formality around assignments and more rigorous testing of skilled persons' conclusions."
For those firms not appointed to the FCA panel, the more crucial aspects of the new structure will be around how it plays out in practice. Backing up its stated intentions to clamp down on enforcement, the FCA this week confirmed that its annual funding requirement for 2013-14 stands at £432.1m, rising to £646.3m when combined with the PRA – a 15% increase over the equivalent figure at the FSA for 2012-13 of £559.8m.
Commenting on the wider implications for law firms advising financial institutions facing investigation, Conceicao warns: "The FCA has talked about using its powers more quickly and robustly. If that is the case, firms and their legal advisers will have to be fleet of foot as there will be a much shorter lead time before important decisions have to be made about challenging the FCA. The FCA has also emphasised that it will expect firms, and therefore their legal advisers, to think more about risks that may be on the horizon."
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Timeline to the new regulatory structure
1997 Securities and Investments Board changes name to Financial Services Authority (FSA)
2001 Statutory powers granted to FSA come into effect
2010 Chancellor George Osborne announces plans to abolish FSA
2012 Financial Services Act creates new regulatory framework, creating FCA and PRA
2013 FCA and PRA come into effect from 1 April
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