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The regulators

The diagram depicts the new structure for financial services regulation that took effect from 2013. The figure indicates the lines of accountability between the various bodies that comprise the regulatory structure. At the top of the diagram is Parliament, which has responsibility for the legislative framework for regulation. Below, and with accountability to, Parliament are the Chancellor of the Exchequer and the Treasury. These have responsibilities for the regulatory environment and for the use of public funds used to support regulation. Below them comes the Bank of England with its responsibilities for financial stability and, through its Financial Policy Committee (FPC), for the monitoring and managing of systemic risks within the financial system. Below the Bank of England come the two regulatory bodies that have superseded the Financial Services Authority (FSA): the Prudential Regulatory Authority (PRA) which is a subsidiary of the Bank of England, and has responsibility for the supervision of financial firms and the Financial Conduct Authority (FCA) which regulates markets and protects the interest of consumers of financial products.Roles and accountabilities in the new regulatory system. (Click to expand)

Source: HM Treasury (2011) A new approach to financial regulation: the blueprint for reform, June 2011, permitted under the terms of the Open Government Licence. © Crown Copyright 2011. http://www.nationalarchives.gov.uk/ doc/ open-government-licence/p. 8

The aftermath of the financial crisis saw a major overhaul of the regulation of financial services – both in terms of the institutions charged with regulatory responsibilities and in terms of how regulation is applied to business in the sector.

With effect from April 2013 the regulation of the financial services industry was formally passed to the Prudential Regulation Authority (PRA) – a subsidiary of the Bank of England – and the Financial Conduct Authority (FCA).

The PRA

The PRA’s statutory objective is to promote the safety and soundness of PRA-authorised firms. It aims to achieve this by ‘seeking to avoid adverse effects on financial stability, and in particular seeking to minimise adverse effects resulting from disruption to the continuity of financial services that can be caused by the way firms run their business or upon their failure’ (Bank of England and FSA, 2012, p. 5).

This, however, does not mean ensuring that no financial firm goes out of business: ‘firm failures will happen, but the PRA will seek to ensure that they do not result in significant disruption to the supply of critical financial services, including depositors’ ability to make payments’ (Bank of England and FSA, 2012, p. 5).

While the PRA has inherited the FSA’s detailed prudential policy framework, it is developing this to ensure that it can achieve its core statutory objective.

The FCA

The FCA has the strategic objective of ensuring that the relevant markets function well. To support this, it has three operational objectives (FCA, 2013):

  • to secure an appropriate degree of protection for consumers (the consumer protection objective)
  • to protect and enhance the integrity of the UK financial system (the integrity objective)
  • to promote effective competition in the interests of consumers (the competition objective).

As with the PRA, the FCA has inherited and is reshaping many aspects of the FSA’s regulatory framework. It is particularly focused on the senior management and board-level involvement in decisions made by financial firms about their products and how these are marketed to their customers – an area of regulation referred to as ‘conduct risk’.

Liaison between the PRA and FCA

Clearly the PRA and FCA cooperate closely. The fact that the FCA is the conduct regulator for PRA-authorised firms and the conduct and the prudential regulator for many other smaller UK firms is suggestive of potential overlaps – and perhaps conflicts – between the regulatory activities of the two organisations. To address these potential operational problems, a Memorandum of Understanding between the two authorities has been drawn up. This addresses the need for, and the process of, coordination between the PRA and FCA while recognising their separate, independent mandates and statutory objectives.

Regulation of pensions

The PRA and FCA’s responsibilities do not extend to the regulation of work-based pension schemes. The responsibility for these was passed from the Occupational Pensions Regulatory Authority to the Pensions Regulator in 2005 following the enactment of the Pensions Act 2004.

The Pensions Regulator has three statutory objectives (Pensions Regulator, 2007):

  • protecting the benefits of members of work-based pension schemes
  • reducing the risk of situations arising that may lead to compensation being payable under the Pension Protection Fund
  • promoting, and improving understanding of, the good administration of work-based pension schemes.

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This article is from the free online course:

Finance Fundamentals: Financial Services after the Banking Crisis

The Open University

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