The new Financial Services Act will dismantle the existing tripartite regulatory regime, including current regulator the Financial Services Authority (FSA). It will instead hand overall responsibility for protecting and enhancing financial stability to the Bank of England and create a strengthened regulatory regime.
Among other changes which will be introduced by the new Act and by secondary legislation, to be published by the Government in the New Year, will be bringing activities related to the London Interbank Offered Rate (LIBOR) into the scope of statutory regulation for the first time. This will also criminalise the making of misleading statements in relation to benchmarks such as LIBOR, and amend the language of existing offences. LIBOR, a benchmark rate based on the daily interest rates at which banks can lend unsecured funds to each other, is currently being reviewed following allegations that it was manipulated by major banks.
"The Financial Services Act replaces a regulatory structure which palpably failed when tested by crisis," Greg Clark, Financial Secretary to the Treasury, said. "It sets out a comprehensive regulatory framework designed to enhance financial stability in the future and protect consumers. It takes important steps to focus the regulators on rebuilding competition in a banking sector that has become too concentrated."
"It is important that the reputation of the UK as a global financial centre is underpinned by a regulatory environment in which the world's investors, as well as British taxpayers, can have confidence. These reforms – as well as those in the forthcoming Banking Reform Bill – can help rebuild confidence and trust," he said.
The passing of the new Act comes at the end of a two and a half year process involving extensive consultation and numerous amendments. The Government's plans for a new regulatory system were first announced by the Chancellor of the Exchequer in June 2010, and the draft Bill was published in January this year.
The FSA will be dismantled from 1 April 2013 and most of its day-to-day regulation and supervisory powers in relation to banks, building societies and insurers will be transferred to a new Prudential Regulation Authority (PRA). The PRA will be established as a subsidiary of the Bank of England. A new Financial Policy Committee (FPC), also within the Bank, will address wider 'macro-prudential' issues that may threaten economic and financial stability.
A new Financial Conduct Authority (FCA) will take over the FSA's conduct and compliance functions, as well as the prudential supervision of those firms not supervised by the PRA. Its objective is to ensure that the relevant markets "function well" while seeking an appropriate degree of protection for consumers and protecting and enhancing the integrity of the UK's financial system. It will also have a duty to carry out its general functions "in a way which promotes effective competition", as far as is compatible with its consumer protection and integrity objectives.
The Act will also give the FCA a new product intervention power, enabling the regulator to act quickly to ban or restrict financial products without consultation. The FCA will also be given the power to take over responsibility for consumer credit regulation from the Office of Fair Trading (OFT), which it is currently due to do from April 2014.
The Government has said that the new authorities will be charged with looking beyond "tick-box compliance". The new structure will "foster a regulatory culture of judgement, expertise and proactive supervision", it said.