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The Financial Conduct Authority (FCA)

“The emerging framework for the Financial Conduct Authority has much to commend it.  We welcome the recognition that investors are effectively consumers in capital markets. The proposed objectives are moving in the right direction. And we welcome the proposals on accountability.

“We shall consider with interest the provisions on product bans and the withdrawal of financial promotions with interest, given the £420 million of compensation required from investment intermediaries in the last two years. In that regard, we will be looking carefully at the future of the Compensation Scheme.  Recent events have highlighted significant structural problems with the existing rules. The statutory framework must allow for a compensation structure that is fair and fit for purpose.”  

Richard Saunders, Chief Executive of the IMA

What is happening with the UK regulatory structure and how will this affect asset management?

Asset managers are to be regulated by the new FCA

The Chancellor of the Exchequer, George Osborne, announced in his speech at the Mansion House on 16 June 2010 that the Government planned to reform the regulatory system, including creating an independent Financial Policy Committee at the Bank of England, a new prudential regulator, and a new consumer protection and markets authority – now re-named the Financial Conduct Authority.

On 26 July 2010 the Financial Secretary to the Treasury, Mark Hoban MP, launched the Government’s consultation on the implementation of reforms to financial regulation.  On 17 February 2011 the Government published a further consultation A new approach to financial regulation: building a stronger system. This focuses on:

  • creating an independent Financial Policy Committee (FPC) in the Bank of England;
  • establishing a new Prudential Regulation Authority (PRA) as a subsidiary of the Bank; and
  • creating an independent conduct of business regulator, the Financial Conduct Authority (FCA). 

On 16 June 2011 the Government published a White Paper and draft Bill.  The draft Bill has undergone pre-legislative scrutiny and the report can be found here.

Under the proposed structure banks and insurance companies will be prudentially regulated by the new PRA and all firms will be regulated on conduct of business by the new FCA, including investment managers (for whom the FCA will be the prudential regulator as well). 

The UK Listing Authority function will remain under the FCA; exchanges and trading platforms will be supervised by the FCA, while clearing and settlement systems will be supervised by the Bank of England, alongside its existing responsibilities for payment systems.

What are the main issues for asset managers?

The regulatory structure will be fragmented

The proposed approach re-allocates responsibilities between statutory bodies.  Whilst there is a rationale for each piece of the proposed re-allocation, viewed as a whole the IMA has some concerns.

If the regulatory landscape is to be fragmented in this way, there must be close and continuous co operation between regulators. The objectives of the individual regulators need to be clear and to mesh together.  Failures happen when there are gaps in regulatory oversight, when regulators fail to co-operate or when they fail properly to fulfil their obligations.  The proposals provide a framework for relationships to work.

“Horizontal” regulation of product selling is welcome, but differences need to be reduced

The FCA will regulate all conduct of business, including disclosures at the point of sale.  This is welcome, because it will encourage similar rules to be applied to all product types.  The structure is preferable to that at EU level, where the new regulatory authorities will have separate jurisdiction over the selling of banking, insurance and investment products, which risks applying different standards to different products which compete for the same investor customer base.

Nonetheless, even in the UK, regulation of what is in the products themselves will differ: 

  • Authorised funds are subject to detailed and comprehensive rules to protect retail consumers, which will come under the FCA.  
  • Listed, closed-ended investment companies - investment trusts, REITs and VCTs - are subject to special listing rules designed to protect the general interests of investors, which it is proposed will sit with the Financial Reporting Council.  
  • The regulation of insurance products is within the prudential rules for life companies, which will sit with the PRA.  
  • Securities – which include many “structured products” will be subject to the rules of the country in which they are created, which is frequently not the UK and so outside the scope of both the PRA and FCA.
  • Bank deposits are not subject to detailed disclosure rules, although they may be designed to mimic a stock market or other investment return.

IMA therefore supports the EU “PRIPs” initiative, which aims to address this concern.  And we shall look to the FCA to carry forward those proposals for all types of retail investment products.

Wholesale market regulation should take account of the buy-side as well as the sell-side

We welcome the recognition that buy-side firms are consumers in the wholesale markets. 

The role of innovation needs a place

There is a danger that in seeking to improve the stability of the system, innovation might become stifled.  It is important that the FCA, in its regulation of the retail market place, recognises the importance of innovation to meet changing consumer needs and the wider European dimension for funds. 

The Compensation Scheme is in need of reform

The industry-funded Financial Services Compensation Scheme is an important protection for consumers.  But the FSA has admitted that aspects of it need review, including how the cost of compensation is allocated to different sectors.  The Scheme’s rules will be set in future by the PRA and FCA jointly, and it will be important to ensure that the new statutory framework will allow the necessary reforms to take place.

What happens next?

The draft Bill has undergone a scrutiny process which resulted in this report.  The revised Bill will go through the various legislative stages. The new regulatory structure is expected to be in place by the end of 2012.

Further reading

IMA responses

IMA comments on the new UK regulatory structure – IMA press release - 26 July 2010
IMA written evidence to Treasury Select Committee inquiry (September 2010)
Changing of the guard - IMA blog - 20 October 2010
Audio recording of IMA evidence to Treasury Select Committee inquiry (October 2010)
Corrected transcript of IMA oral evidence (October 2010)
IMA response to Treasury consultation “A new approach to financial regulation” (14 April 2011)
IMA response to FSA consultation on The Financial Conduct Authority:  Approach to Regulation (1 September 2011)
IMA response to HMT paper:  A new approach to financial regulation – the blueprint for reform (8 September)
IMA submission to Joint Committee call for evidence on the draft Financial Services Bill (September 2011)
IMA oral evidence to Joint Committee on the draft Financial Services Bill (October 2011)
IMA written evidence Treasury Select Committee inquiry into the Financial Conduct Authority (October 2011)
IMA expresses reservations about draft Financial Services Bill report (December 2011)


Other papers

Chancellor’s speech at the Mansion House  - 16 June 2010
Financial Secretary to the Treasury’s oral statement to Parliament outlining further detail of the proposals –17 June 2010     
Treasury press release on the consultation of financial regulation reforms – 26 July 2010    
Treasury consultation paper, 'A new approach to financial regulation: judgement, focus and stability' – 26 July 2010 
Treasury consultation paper, “A new approach to financial regulation: building a stronger system” - 17 February 2011
Treasury consultation paper - A new approach to financial regulation: the blueprint for reform – June 2011
FSA paper on the FCA approach to regulation – June 2011
Report of Joint Committee on draft Financial Services Bill - December 2011
Financial Services Bill -February 2012


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