Financial Services 2013—the year in review

The Financial Services sector underwent a number of changes in 2013. Michael Wainwright, partner at Eversheds, looks at some of these changes and what impact they have had in practice.

2013 saw the UK’s financial services regulator, the Financial Services Authority (FSA), split into two. How do you think the industry has reacted to the change so far?

For the great majority of firms, the division of the FSA into Prudential Regulation Authority (PRA) and Financial Conduct Authority (FCA) has felt like a non-event. These firms are regulated for all purposes by the FCA, so that the PRA has no direct relevance to them. The regulatory relationship involves the same people, at the same address, working from the same rulebook as before. There is a minor change of name, some expensive but ultimately inconsequential rebranding, and new talk about proactive regulation which was already in the pipeline before the change in regulators.

Firms that are regulated by both PRA and FCA are beginning to experience the burden of serving two masters. Reporting, regulatory approvals, review visits and new rules now come from two directions. This soaks up considerably more resources and management time.

And the regulators—have we seen much interaction between the FCA and the PRA or anything falling through the cracks?

The PRA has a statutory right of veto over FCA action. We do not expect to see this exercised in practice, but it is a clear symbol of the junior status of the FCA in the regulatory hierarchy. On the other hand, the FCA has the lion’s share of the resources, and its mission of preventing misconduct is one that is dear to the present government. The impression is that over the first eight months, each regulator has concentrated on defining and promoting its own role, and there has been little emphasis on either side on co-ordinated action.

The implementation of CRD IV for investment firms has been an interesting test case. The Basel III rules were designed for banks, but European regulators have applied them to investment firms generally, against the will of the UK regulators and government. The PRA took the lead in engaging with the new rules, but did so at a high level, disdainful of explaining implications and expectations in detail. The FCA was left struggling to keep up. Its consultations were piecemeal, late and avoided briefing firms on the central measure, the capital requirements regulation, on the excuse that it was not the FCA’s responsibility and they had no choice in the matter. The consequence was that investment firms