Changing the guard of regulation

April marks the end of the FSA’s 16-year regulatory rule and this ‘changing of the guard’ sees three new watchdogs rule over the financial realm.

The FSA, the brainchild of former Chancellor of the Exchequer Gordon Brown, was formed in 1997 after fraud cases at Barings Plc and Bank of Credit & Commerce International dented confidence in the finance industry.

FCA

In its place, the burden falls upon the Financial Conduct Authority (FCA), led by Martin Wheatley, which, unlike the FSA, will not sit under the umbrella of the Bank of England and will instead act as an independent judicator to the industry.

The FCA will report on the behaviour of finance companies and, more importantly, protect the interests of consumers against unethical practice.

The FSA was often labelled the watchdog that didn’t bark, primarily owing to what many perceive as a lack of enforceable regulation, particularly in light of the Libor scandal which some believe the regulator was aware of but failed to take action.

The FCA also has the power to ban suspect financial products for up to 12 months whilst it assesses their suitability, a move which has raised concerns over financial innovation being shackled.

Martin Wheatley, Chief Executive of the FCA, did however explain that this power will not be used frequently.

He said: “We know that some in the industry are concerned about us using this power too hastily; I want to be clear that we know proportionate judgement is needed, and that is what we will exercise.

”The new regulator, which, combined with the other arms of the new financial watchdog, will cost the taxpayer 15 per cent more than the FSA, with costs being incurred by the increase of frontline staff, IT and central support.

PRA

1,700 banks, building societies, credit unions, insurers and investment firms are now under the supervision of the Prudential Regulation Authority (PRA), which operates as part of the Bank of England.

The PRA, led by Andrew Bailey, is now responsible for the “safety and soundness” of the companies that it regulates and early indications appear to show that the PRA is looking to create a level playing field by promoting challenger banks as opposed to mainstream lenders.

The FSA received wide criticism for its failure to control the banks, with many claiming that the body should also be held to account for failing to identify the initial signs of economic downturn.

Lawmakers condemned the regulator for failing to prevent the collapse of Northern Rock, Royal Bank of Scotland and Lloyds Banking Group during the 2008 credit crisis.

It was argued that the combination of Northern Rock’s ‘Together’ mortgage, HBOS’s extraordinarily high UK mortgage market share and the speed of Abbey National’s fast track mortgages should have at least prompted a reaction from the FSA.

FPC

Lastly, the Financial Policy Committee (FPC), which will also act under the umbrella of the Bank of England, is tasked with preventing any further economic crisis by monitoring the financial market and the activities of the other regulators.

The FPC, led by the current governor of the Bank of England, Sir Mervyn King, will support the Government’s economic policies and has the power to hold the banks to account for the sizing of capital buffers.

Speaking at the World Economic Forum in January, Chancellor George Osborne said: "The Financial Services Bill will overhaul the failed system of financial regulation which allowed such dangerous levels of leverage to emerge.

"We are putting in place clear lines of accountability, and restoring that crucial element of judgment."