Financial Services Regulation

Prior to the Financial Services Act 1986, the UK financial services industry was largely self-regulating. The 1986 act, which coincided with the big bang in terms of technology and deregulation, introduced the system of self-regulation within the statutory firms. The firms were authorized by self-regulating organizations covering relevant factors. The 1986 Act dealt with investment activity. Banking, insurance, and mortgages are subject to other more basic legislation.

In 1997, the Labour Party came to power and introduced, as part of its policy, a radical form of financial services regulation. It established the Financial Services Authority as a single regulator across financial services, including banking, insurance, and investment.

The functions of the Bank of England in respect of banking supervision must be transferred to the Financial Services Authority under the Bank of England Act 1998. The Bank of England remained responsible for maintaining the financial stability of the banking system and obtained its role as lender of last resort to provide funds when banks lacked liquidity to meet their obligations. It was also given functions to set interest rates, intended to be depoliticized from the government.

The Financial Services and Markets Act 2000 implemented the above principles and created statutory regulation in investment, insurance, and banking. It became responsible for both prudential regulation and supervision of firms, including managing the adequacy of their financial resources, management, and systems and control. The Financial Services Authority was responsible for conduct of business regulations, dealing with the interaction and terms in which regulated firms provided business to the public.

The entire regulatory system is highly influenced by EU regulations and directives, including the Markets and Financial Instruments Directive, Transparency Directive, Prospective Directive, and Market Abuse Directive.

The financial crisis from late 2007 onwards revealed weaknesses in the banking system, including excessive lending, poor credit decisions, and contingent risks. In 2010, the Conservative-Liberal Democratic government introduced provisions to increase the powers of the Bank of England to prevent the buildup of risk. It provided for the new subsidiary of the Bank of England, the Prudential Regulation Authority, to be responsible for the operation of deposit-taking institutions, insurers, investment banks, and similar institutions.

The FSA became the Financial Conduct Authority, responsible for consumer protection in financial services and the regulation of the conduct of business. European supervisory authorities set EU standards for consumer protection and financial innovation.

The Financial Conduct Authority has assumed the role of the UK authority under the European Securities and Markets Authority and is active in other European-based bodies in consumer protection.

The Bank of England is the United Kingdom’s central bank, with the key objective of securing monetary and financial stability. Monetary stability relates to price stability and confidence in the currency’s value, measured with reference to the government’s inflation target. Bank decisions are made through the Monetary Policy Committee, which sets interest rates transparently and rationally, implementing them in the money markets.

Financial stability aims to identify and reduce threats to the financial system as a whole, undertaken through oversight, surveillance, and functions as lender of last resort.

The Prudential Regulation Authority is a subsidiary of the Bank. In cases where there is a risk to deposits, the Bank of England has a duty to notify the Chancellor. A special crisis management MOU exists, allocating the responsibilities of the Treasury and the Bank in crisis scenarios. There is a duty to coordinate functions during the crisis.

The Treasury may require the Bank to provide liquidity support during the crisis and may exercise controls over the banking system under a special resolution regime. These powers are only exercised where there is a real risk to financial stability or where public funds have been used. The Bank of England retains autonomy when managing trusts’ ability, where financial stability and public funds are not at risk.

A Financial Policy Committee was established, including representatives of the Financial Conduct Authority, the Treasury, and the Bank. It meets four times annually and more frequently during times of crisis, publishing records of its meetings.

The committee exercises its function with a view to contributing to the achievement of the financial stability objective of the Bank of England and, subject to that, supporting the economic policy of the government, including objectives for growth and employment. Part of the committee is responsible for achieving financial stability by identifying, monitoring, and taking action to remove systematic risks to protect and enhance the UK financial system. Systemic risks include those attributable to features of financial markets, such as connections between financial institutions, as well as the distribution of risk and the buildup of unsustainable levels of leverage, debt, or credit growth.

The FPC may set system-wide cyclical capital requirements for financial firms, adjusting them as needed during a crisis while tightening them during more favorable times. It may alter risk ratings, enabling the Bank of England to require banks to hold more capital against specific classes of assets in risky market conditions.

It may limit leverage to prevent excessive lending when changes in risk ratings would not suffice. It may require forward-looking loss provisioning during periods of strong lending growth. It may specify limits on borrowing, including maximum loan-to-value ratios. It may limit lending through other regulations.

The FPC publishes biannual financial stability reports, including a summary of its activities and an assessment of the effectiveness of its actions. Sensitive and market-sensitive information may be excluded from publication.

The Prudential Regulation Authority is responsible for the prudential regulation of insurance companies, banks, and large investment firms, often subject to dual regulation with the FCA. It focuses on financial stability as a whole and must coordinate with the Financial Policy Committee. Its function is to manage systematic risks in the financial system, providing information and analysis for the FPC’s purposes.

The Prudential Regulation Authority extends its focus to large international banks and considers the viability of UK subsidiaries in relation to their groups. It takes a judgment-based approach to supervision, emphasizing forward-looking assessment. Baseline monitoring occurs for all firms, with an annual review of firms’ resolvability, analysis of financial positions, discussions with senior management, and compliance with minimum prudential standards, including liquidity requirements and large exposure limits. Early intervention, as appropriate, is undertaken under a proactive intervention framework.

The Financial Conduct Authority assumes many of the functions of the Financial Services Authority. Modern investment firms are regulated by the FCA for both prudential and conduct of business purposes. The Financial Conduct Supervisory Model includes a revised assessment procedure aligning good business practice with good regulatory practice. It permits lower risk tolerance, which may involve prohibiting products before they reach the market or prohibiting sales and marketing processes that are unacceptable.

In its role as an integrated regulator, the FCA oversees the entire financial services sector, including consumers and even large wholesale firms. Its objective is to implement and ensure high standards across the financial services industry.

The FCA intervenes in the financial chain when necessary, including actions, principles, targeted governance. It intervenes at the wholesale market level when activity may lead to complex or ill-conceived products aimed at the mass market.

The Chancellor of the Exchequer, as the head of the Treasury, is ultimately responsible for the financial services regulatory system under the 2000 act. The FCA is accountable to the Treasury and is judged against the requirements outlined in the legislation. The regulatory burdens on financial services should be proportionate to the benefits they achieve.

The Financial Conduct Authority is responsible to the Treasury, with the authority to appoint and dismiss the board and chairman. It submits an annual report to the Treasury on the discharge of its functions and the extent to which it has met its objectives. The Treasury may conduct independent reviews of the FCA based on various criteria. The relative responsibilities of the Bank of England and the Treasury in a financial crisis are subject to the above-mentioned memorandum of understanding.

A single complaints commissioner is designated to handle complaints against the FCA, banking, and the PRA. Regulators themselves conduct investigations into complaints, and if they are not resolved, they may be referred to the complaints commissioner. The complaints commissioner is required to be independent. Complaints against regulators encompass mistakes, undue delays, professional behavior, bias, etc.

Regulators and their practices are subject to compliance with competition legislation by the Office of Fair Trading and Competition Authority, Competition Commission. Regulators themselves are subject to judicial review in accordance with ordinary legal principles.

Several statutory panels exist, including the FCA and PRA Practitioner Panels, the FCA Market Practitioners Panel, and the FCA Consumer Panel. These panels must be consulted regarding certain general policies and practices, and regulations must take their representations into account.

The membership of these panels is determined by the regulator and is designed to advise on the interests and concerns of regulated businesses and, in the case of the Consumer Panel, consumers. The FCA is required to consider the opinions of the Smaller Business Practitioner Panel, which represents smaller regulated firms.

The Tax and Chancery Chamber of the Upper Tribunal assumed the roles of the Financial Services and Markets Tribunal. It is an independent body that hears cases related to enforcement and authorization. The Upper Tribunal is the superior court with UK-wide jurisdiction in tax cases. Decisions of the financial services regulators may be referred to it. It also has jurisdiction in England and Wales regarding decisions of the pension regulator.

This process is distinct from an appeal on a point of law to the courts. The Upper Tribunal may provide for the rehearing of enforcement and authorization cases when the individual or firm and the regulator cannot agree on an outcome.

The Financial Ombudsman Service resolves disputes between customers and financial service providers, with oversight by the Financial Conduct Authority. Under the Consumer Credit Act, the Financial Ombudsman Service may establish rules to resolve disputes involving persons licensed under the Office of Fair Trading for consumer credit activities.

The Financial Conduct Authority assumed regulation of consumer credit from the Office of Fair Trading in 2014. It maintains a consumer credit register and previously licensed persons authorized under the Consumer Credit Act. Firms engaged in regulated consumer credit activities are subject to rules established by the FCA in its handbook.

Certain Consumer Credit Act requirements are now incorporated within the Financial Conduct Authority Handbook.