The Financial Services Bill – Supplementary documents
The Financial Services Bill was introduced to parliament on 26 January 2012. The Bill will implement the Government’s commitment to strengthen the financial regulatory structure in the UK. The legislation will fundamentally reform the current regulatory system, which divides responsibility for financial stability between the Treasury, the Bank of England and the Financial Services Authority (FSA).
The new system will give the Bank of England macro-prudential responsibility for oversight of the financial system and, through a new, operationally independent subsidiary, for day-to-day prudential supervision of financial services firms managing significant balance-sheet risk. The FSA will cease to exist in its current form. A proactive new conduct of business regulator will also be created to protect consumers, promote competition and ensure integrity in markets.
To accompany introduction of the Bill the Government has committed to publishing draft Statutory Instruments (SIs), and other documentation such as memorandums of understanding (MOUs).
Draft statutory instruments
Currently the FSA has responsibilities (functions) for mutuals under separate legislation from FSMA, covering building societies, credit unions, friendly societies, and industrial and provident societies.The Government has prepared a draft Mutuals Order to transfer these functions to the PRA and the FCA, and will publish a consultation paper later this year on the policy approach and detail of the Order.
The Government is considering whether the PRA’s objectives should be applied to its functions under mutuals legislation, and will consult on this as well. The draft Mutuals Order has been published with the PRA objective applied for illustration.
The Government is publishing a draft order which would be made under s22A of the draft Bill – designating activities for regulation by the PRA – at introduction. This fulfils the PLS Committee’s recommendation that “given that the initial designation of PRA regulated activities is a key factor in understanding the intentions and scope of the Bill, a draft of the Order must be available when the Bill is introduced into parliament.”
The Government is publishing an indicative draft Order which would be made under s55C of the draft Financial Services Bill currently before the House of Lords – amending the Threshold Conditions set out in Schedule 6 to the Financial Services and Markets Act 2000, in order to divide them between the Prudential Regulation Authority and the Financial Conduct Authority. As set out in the Government’s command paper 'Securing stability: Protecting Consumers, the new Threshold Conditions' have been reviewed and redrafted to support the Government’s objective of judgement-led supervision by the new financial regulators. This indicative draft is being published now to assist the Lords Committee in their scrutiny of the provisions in the Bill concerning the authorisation of firms. Formal public consultation on the draft Threshold Conditions Order will take place later this year, and the final Order will be subject to approval from both Houses of Parliament.
The draft Order inserts four new Parts into Schedule 6 of FSMA. Part 1B covers the conditions for firms authorised and regulated by the FCA. Part 1C covers the FCA-specific conditions for firms authorised by the PRA and subject to dual-regulation. Part 1D covers the PRA-specific conditions for insurance firms authorised by the PRA and subject to dual-regulation. Part 1E covers the PRA-specific conditions for non-insurance firms authorised by the PRA and subject to dual-regulation. The proposed amendments to the Threshold Conditions do not yet take account of Managing Agents and the Society of Lloyds, and the PRA-designated Investment Firms. These will be included in the fuller draft of the Order to be published later this year.
The Government has included in the proposed amendments a new requirement for those responsible for managing the affairs of a firm to act with probity, in order to satisfy the regulators that the firm is fit and proper. This has been done to send a clear signal to the financial services industry and its senior management, that they are expected to act consistently with honesty and decency in the conduct and management of their business. Where managers and directors do not act with probity, their firms can be held to account by the regulators. The regulators can take actions against the firm including imposing requirements on the firm to take certain steps, and where necessary the regulator can consider the removal of permissions held by the firm. Regulatory action can also be taken against a manager or director via other means, for example through the Approved Persons Regime.
The draft Orders will be subject to Parliamentary scrutiny alongside the Bill.
A Memorandum of Understanding on crisis management provides detail of the arrangements the Treasury and Bank of England will put in place to manage potential financial crises.
A Memorandum of Understanding on international organisations provides detail of the arrangements the Treasury and the regulatory authorities will put in place to ensure that engagement with international organisations is coordinated effectively.
Both of these documents can be found as Annexes of the Government’s paper 'A new approach to financial regulation: securing stability, protecting consumers'.
PRA’s engagement with the industry and consumers
As set out in the document A new approach to financial regulation securing stability, protecting consumers and in line with the recommendation by the Joint Committee, the Government has asked the Bank and FSA to publish details of the PRA’s proposed consultation arrangements for consideration alongside scrutiny of the Bill in Parliament.
Further information on the reforms can be found in the Financial Services Bill section of this website.
The Bank of England and FSA have published a draft Memorandum of Understanding which provides important additional detail about how the regulators will coordinate their activities so that they both can achieve their distinct objectives. The Memorandum of Understanding gives reassurance to firms that the new regulators will set up efficient processes to manage the input of both authorities where it is required, and will work together to minimise any unnecessary duplication.
You can find further information on either of the following external websites (both will open in a new window):
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