Regulatory reform and the consumer credit regime
Regulatory reform is coming. The financial services industry is gearing up for a new style of regulation which will come into force on 1 April 2013.
Consumer credit is scheduled to follow suit in 2014.
We continue to follow and update you on the changes and how they will affect you.
Regulatory reform - An overview
Throughout the financial crisis, the UK regulatory regime took much of the blame for the problems faced by the financial sector and the role of the Financial Services Authority (FSA) has come under severe criticism.
In June 2010 the Chancellor announced changes to the financial services regulatory regime including a separation of duties between prudential and conduct regulation.
This means that two new regulatory authorities will be established to take the place of the FSA:
- The Prudential Regulatory Authority (PRA) (which will be part of the Bank of England) will have a general objective to promote the safety and soundness of firms, and within this it will focus primarily on the harm that firms can cause to the stability of the UK financial system. The PRA will be responsible for the prudential regulation of deposit-takers, insurers and major investment firms.
- The Financial Conduct Authority (FCA) will be the new regulator responsible for ensuring that firms put the well-being of their customers at the heart of how they run their business, promoting effective competition and ensuring that markets operate with integrity. The FCA will regulate conduct in retail and wholesale markets, supervising the trading infrastructure that supports those markets and will be responsible for the prudential regulation of firms not prudentially regulated by the PRA.
In addition to the FCA and PRA, a Financial Policy Committee (FPC) will be created which, as part of the Bank of England, will have a macro-prudential role focussing on the overall stability of the UK’s financial system. The FCA itself will be accountable to HM Treasury and Parliament and will have an on-going co-operative and co-ordinated relationship with the PRA.
Firms regulated by the FCA and PRA will need to ensure that they comply with both regulators independently. Each regulator will be in a position to independently or jointly investigate and discipline regulated firms.
In April last year the FSA restructured internally to reflect the separation of the roles of the regulation of prudential and conduct of business to reduce the impact on firms when the changes come into force on the 1 April 2013.
The government also considered that the current split between the Office of Fair Trading (OFT), dealing with Consumer Credit, and the FSA caused a fundamental weakness in financial services regulation. There was a significant disparity in the way that the OFT and the FSA regulated their firms.
Changes to the regulatory system would provide an opportunity to address the existing problems caused by similar products being regulated under different regimes by ensuring that a single regime operated across both Consumer Credit and the rest of the financial services industry.
The Financial Services Act 2012 includes provisions for the transfer of Consumer Credit regulation to the FSMA style regulatory regime. A consultation paper to identify exactly how the changes will take place is awaited. However, for Consumer Credit firms, currently regulated by the OFT, it will inevitably mean that they will be required to be authorised under a system similar to that presently operated by the FSA.
This will be a significant change for Consumer Credit licence holders used to the considerably less interventionist approach of the OFT.
The current timetable anticipates that in 2014 all Consumer Credit licence holders will be "grandfathered" to the FCA. In the following two years every licence holder will be required to go through a full authorisation process.
The general expectation is that this process will be rigorous, annual costs are likely to be significantly higher than the five year licence fee charged by the OFT and firms will be subject to a greater degree of supervision than they current experience.