The break-up of the Financial Services Authority in the UK*

Within days of coming into power in 1997, the new Labour Government announced its intention to engage in fundamental reform of the UK’s institutional arrangements for the supervision of financial market activity that would strip the Bank of England (Bank) of its supervisory responsibilities. This led to the creation of the Financial Services Authority (FSA) as the UK’s integrated financial regulator. Within days of the May 2010 election, the new Conservative–Liberal Democrat Coalition Government announced its intention to engage in fundamental reform of the institutional arrangements for the supervision of UK financial market activity: the FSA is to be abolished, the Bank is to be put back in charge of supervision at the apex of a structure involving an objectives-oriented approach in which one authority, established as a subsidiary of the Bank, will be responsible for micro-prudential supervision and another will oversee conduct, consumer protection and markets issues. ¹ The prudential supervisor, the Prudential Regulation Authority (PRA), will conduct the prudential regulation of deposit takers, insurers and some investment firms. The other authority, initially dubbed the Consumer Protection and Markets Authority (CPMA) but, after initial consultation rounds, re-named the Financial Conduct Authority (FCA), will be responsible for consumer protection in financial services and the regulation of conduct of business, including the conduct of firms supervised by the PRA, and market regulation, including the listing of securities. The FCA will also assume the responsibility for consumer credit regulation that is currently exercised by the Office of Fair Trading. A new permanent Financial Policy Committee in the Bank will have primary responsibility for macro-prudential supervision of the system in order to maintain overall financial stability. While it will be for the PRA to ‘pull the trigger’ that puts a failing bank into special resolution, responsibility for designing and carrying out that resolution will remain with the Bank itself. ² The Bank will also assume responsibility for the oversight of settlement systems and central counterparty clearing houses to sit alongside its existing responsibilities for payment system oversight. The new institutional structure is expected to be formalized by 2012 but this will be preceded during 2011 by a functional separation of the FSA into two distinct parts, ³ and the establishment of an interim Financial Policy Committee. ⁴ Likely transition costs for HM Treasury, the Bank and the supervisory authorities were initially estimated to be in the region of £50 million spread over three years but, after initial consultations, the estimated figure has been increased to between £90 and £175 million. ⁵