At-a-glance guide: The new financial regulation framework

Yesterday (17 February), the Treasury published the second of two consultation papers on how its new framework for financial regulation, designed to replace the FSA, will work. The new paper gives more details than an initial consultation paper, which was published last year.

The FSA will be replaced by two bodies: the Financial Conduct Authority and the Prudential Regulation Authority.

The Financial Conduct Authority (FCA) will be responsible for the following:

• regulating financial conduct of all financial service firms, including insurers

• prudential regulation of firms that do not fall under the umbrella of Prudential Regulation Authority, including all insurance brokers

• all retail, wholesale and market conduct

• regulatory action to counter financial crime

• new powers to force firms to withdraw misleading advertising

• subjecting all firms to periodic review of governance, culture and controls

• regulation of Lloyd’s of London conduct

• regulating Lloyd’s members, agents and brokers

The paper also outlines a revised approach to the FCA’s consumer champion role, saying it will be impartial between consumers and firms. The degree of protection that customers enjoy will depend on their capability and personal circumstances, for example retail customers will be given a different level of protection to a professional market participant.

The degree of regulation will also recognise the potentially negative impact of excessive regulation on market efficiency and consumer choice. Authorised persons in firms’ senior management will continue to be responsible for ensuring compliance with the regulatory framework.

The Prudential Regulation Authority (PRA) will be responsible for:

• firms that deal with significant risks on their balance sheets in line with the PRA's strategic objective to promote the soundness of firms and the wider stability of the financial system.

• authorisation and supervision of all insurers

• lead regulation of Lloyd’s of London

The paper also says that the PRA will recognise that insurers’ business models are different from those of the banks, because the risk of failure is likely to be of less systemic importance to the wider economy. Insurance firms may be subject to less intensive supervision than is the case for banks.

The Financial Services Compensation Scheme will be overseen by both the PRA and the FCA.

The current timetable for the new regime is at the end of 2012.