Regulation overhaul shifts power to BoE

Finance

Caroline Butcher, reporter, The Lawyer

The repercussions of the financial crisis continue to reverberate around all corners of the market, but the regulation of financial services is a particular hotspot for change.

Politicians have reacted to the credit crunch by shining a spotlight on who is responsible for the UK’s future financial stability, leading to a radical overhaul of the Financial Services Authority (FSA) and its regulatory remit.

While the role of regulating financial responsibility has so far been shared between the Treasury, the Bank of England (BoE) and the FSA, a new framework will place financial stability regulation firmly at the BoE’s door.

The Treasury released a consultation paper in February that began to hammer out the new model, with prudential regulation seeing some of the most significant change.

The new system will include microprudential regulation, which relates to individual companies and will be implemented by the Prudential Regulatory Authority (PRA), a new subsidiary of the BoE.

A new BoE policy committee will also assume responsibility for macroprudential regulation covering the entire market, and will require companies to hold ‘regulation capital’ to act as a buffer against future financial shocks.

The reforms will also see a new watchdog, the Financial Conduct Authority (FCA), take responsibility for consumer protection and regulation of business and markets.

Acting almost like a reinvigorated FSA, the new agency will act to build confidence in the UK financial system and secure protection for retail consumers. It will also regulate the way companies conduct themselves in terms of financial promotions, advice and conflicts of interest.

The FCA will also take over the regulation of markets from the FSA, as well as the power to enforce against market abuse.

A draft bill for the new regulation is expected imminently, with the legislation due to be implemented at the end of next year.

The EU continues to be one of the most active regulators in the wake of the crisis, with proposed regulation including a crackdown on over-the-counter derivatives and central counterparties and the Solvency II Directive, which is due to kick in at the end of 2012 and wield major changes for insurance companies.

A controversial directive on Alternative Investment Fund Managers is making slow progress through the legislative process, with some of the asset management industry arguing the directive is an unnecessary layer of protection for professional investors who are capable of managing their own interests.

The host of changes and new legislation certainly guarantees a busy couple of years for City law firms and in-house counsel at major banks and financial services companies, as they strive to keep on top of the changing legislation.