The Financial Services Act 2012 (the "Act") received Royal Assent on 19 December 2012. The Act, which will come into force on 1 April 2013, will deliver the long-awaited reform of financial regulation in the UK, replacing the old tripartite system. Among other things, the Act:
- gives the Bank of England responsibility for protecting and enhancing financial stability, bringing together macro and micro prudential regulation;
- introduces the Financial Policy Committee; and
- abolishes the FSA and replaces it with the "twin peaks" structure of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA).
Secondary legislation under the Act, including regulations setting out how regulated activities will be divided between the new authorities has now been published and the new PRA and FCA Handbooks now appear on the FSA website.
Insurers fall into the "dual-regulated" category of firms and as such will have to adapt to having two separate regulatory bodies. As such, the industry will be keen to get to grips with how this structure will operate in practice, notwithstanding that the FSA has for much of the last 12 months adopted a 'twin peaks' shadow internal structure as a transitional step.
It is a commonly held view that the success of the new regulatory regime will depend to some extent on the effective coordination between the different regulatory bodies and avoiding so far as possible unnecessary overlap. The former head of the FSA referred in a speech last year to the new structure as "independent but coordinated regulation". Perhaps understandably, the industry has concerns about how effective the new structure will be – for instance, the ARROW risk mitigation programme will be replaced by two separate risk mitigation programmes. Further, the memorandum of understanding between the PRA and the FCA first published in January 2012 remains in draft form. Inevitably, effective coordination can only be achieved over time but with an ever increasing regulatory burden, authorised firms will be keen to avoid unnecessary duplication in their dealings with their regulator(s).
A further point to note is the new powers of direction that the regulator will have over unregulated parent undertakings. The Bank of England and the FSA have published a consultation paper containing a draft policy statement on the PRA's use of such powers, including a non-exhaustive list of possible scenarios in which the PRA may consider exercising such powers. The rationale behind these new powers is that the parent company of an authorised firm will often decide overall group strategy and organisation, group risk management policies, group recovery plans and intra-group flows of capital and liquidity. This is all part of the "consolidated" and holistic approach to supervision.
The key point is that the PRA will have the power to intervene in a wide range of potential scenarios. Further, the non-exhaustive list of possible directions which the PRA may consider making include restrictions on dividend payments, a requirement to move funds, a requirement to restructure and to raise more capital. Interestingly, such a "qualifying parent undertaking" includes a UK incorporated parent undertaking or one with a place of business in the UK, which casts the net potentially wider. However, it is unclear how effective such a power could be in respect of a non-UK entity. In such event the regulator might turn its attentions to an intermediate UK-domiciled holding company.