The Financial Services Act 2012 has come into force from 1st April, 2013 in the U.K.
August 28, 2013 : The Financial Services Act 2012 is aimed at creating a new regulatory framework for the supervision and management of UK’s banking and financial industry. The enforcement of the act will also see the launch of the new Prudential Regulatory Authority, which will be a part of the new regulatory system. The regulation will keep U.K. ahead in the global race and ensure London as an epicenter of the world’s leading financial centers. Mr. George Osborne said the changes are the start of resetting the system of financial regulation in Britain. Speaking alongside Mervyn King, the outgoing governor of Bank of England, the chancellor said “The changes coming into effect are the start of the resetting of the financial regulation in our country”.
This new legislation is aimed at making significant changes to the Financial Services and Markets Act 2000, The Bank of England Act 1998 & the Banking Act of 2009. Some of the newer provisions under the new legislation include repealing of Section 397 of FSMA which leads to misleading statements, three separate offences relating to financial services namely offences of misleading statements, misleading impressions and statements lastly the misleading impressions leading to benchmarks (for example:LIBOR) and setting up new provisions relating to regulated activities connected with setting benchmarks.
The legislation also gives Bank of England macro-prudential responsibility for oversight of the financial system, which includes day to day supervision of financial services firms managing significant balance sheet risk. Macro prudential authority means the approach to financial regulation aimed mainly to mitigate the risk of the financial system as a whole. The term macro prudential was first used in 1970’s in unpublished documents of the Cooke committee and the Bank of England.
Comparison of Macro prudential and micro prudential perspectives.
| The objective of Macro prudential authority is to limit distress for a financial system in distress (correcting risk factors arising in a financial system as a systematic phenomenon) | Micro prudential authority seeks to limit distress of individual financial institutions |
| Avoid output costs | Mainly to oversee consumer protection |
| The characterization of risk is due to collective behaviour (endogenous) | Characterization of risk is due to individual behaviour (exogeneous) |
Under the new regulation the Bank of England will have responsibility for protecting and enhancing financial stability. Under the Act, three new bodies will be formed:
- The Financial Policy Committee (FPC): The FPC will be responsible for macro prudential regulation and entrusted with the responsibility of monitoring the stability of UK’s financial system as a whole and supporting the economic policies of the government and identifying systemic risks.
- The Prudential Regulatory Authority (PRA): The PRA will be a micro prudential regulatory authority responsible for ensuring effective prudential regulation of deposit takers, insurers and investment firms. The statutory objective of PRA will be to promote the safety and soundness of firms.
- The Financial Conduct Authority (FCA): The FSA will be abolished and FCA will take its place, the new authority will be a business conduct regulator with the strategic objective of ensuring the relevant markets are functioning well. The creation of FCA is seen as an opportunity to reset conduct standards of the financial services industry in U.K. which is under the spotlight after the financial crisis in 2008. The new legislation gives powers to FCA to abolish financial products, curtail misleading financial promotions and take disciplinary actions against erring financial firms.