April 2012

LEGAL EASE: Twin peaks at Canary Wharf

Canary-WharfThe Financial Services Authority (FSA) moved to its “twin peaks”model from the beginning of this month as it further readied itself to split into two new regulatory bodies. From early 2013, the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) will supersede the current UK regulator,which is based in London’s Canary Wharf.Under the new model, the PRA will be a subsidiary of the Bank of England and will carry out prudential supervision for banks, building societies, insurers and major investment firms. It is estimated by the FSA that 2,200 firms will be covered by the PRA, and about 1,100 staff will be transferred to the Bank. However, it is only a “small number” of investment firms that will fall under PRA monitoring, the FSA said in its recently published business plan. It did not name the firms. Meanwhile, the other regulatory body, the FCA, will become the renamed FSA and it will focus on consumer protection and market regulation. Period of change
It is a period of change in more ways than one for the FSA. The chairmanship of Lord Adair Turner is coming to an end and its chief executive, Hector Sants, recently announced his resignation. The financial crisis thrust Lord Turner into the spotlight following his Turner Review. Turner’s report heralded a more aggressive approach to FSA activities after criticism that regulation in the days of cheap loans and easy credit before the crisis had been too passive. This proactive stance is reflected in increased enforcement costs and penalties issued by the FSA. According to Lord Turner in a foreword to the recently published FSA Business Plan 2012/2013,much progress has been made since 2008 – the year that Lehman Brothers collapsed – in building the resilience of UK banks and other financial firms. In the same business plan, Sants points out that the stability of the banking sector is how most commentators gauge the success of the FSA, but the regulator has far wider responsibilities and only a minority of the staff are engaged in banking stability. For the coming year, the FSA will mainly focus on five areas: delivering the regulatory reform programme; influencing the international policy agenda; delivering financial stability;  delivering market confidence; and protecting consumers. Of these, the delivery of market confidence is perhaps one of the most visible activities. The increased penalties alreadynoted, some of which relate to market abuses, come with well publicised fines. The FSA pledges to develop its market surveillance systems in the coming twelve months to deliver an “intensive supervisory approach to the markets”.Measuring suspicious trades in equity markets is one metric the FSA uses in its effort to make markets fair and clean, and maintain confidence. Insider dealing
Related to this is the ongoing investigation into insider dealing, which has seen some arrests and searches of premises. And beyond the five main areas of focus for the coming year, the FSA business plan also highlights work on financial crime. This includes tough action against firms that must help with prevention. Last month, the FSA fined Coutts & Company £8.75 million for anti-money laundering failures. Becoming a more aggressive regulator is costly. Its budget for this year increased 15.6% to £578.4 million, mainly sourced from larger firms. The FSA says it recognises that given the economic circumstances the industry faces, the rate of increase is not sustainable in  the longer term. Therefore, the new authorities will be very focused on controlling costs. But there is something else the FSA has to consider as it hands over to the new regime. As Sants acknowledges, the FSA must ensure that the accumulated knowledge and lessons learned since the financial crisis are passed on. ©2012 funds europe

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