Financial Conduct Authority and Prudential Regulation Authority
Section 6 and Schedule 3: The new Regulators
91.Section 6 replaces the provisions in Part 1 of FSMA relating to the FSA, and Schedule 1 to FSMA, with provisions relating to the FCA and the PRA. Schedule 3 inserts new Schedule 1ZA and new Schedule 1ZB (which make provision in relation to the FCA and the PRA respectively).
The FCA
92.New section 1A renames the FSA the “Financial Conduct Authority”. Subsection (4) requires the FCA to comply with the requirements set out in new Schedule 1ZA which makes provision in relation to the constitution of the FCA and other matters. Subsection (6) provides that references in the Act, or in any other enactment, to the FCA’s functions under FSMA includes its functions under the Act, the Insolvency Act 1986, the Banking Act 2009, and provisions of EU law specified by order by the Treasury for this purpose.
93.New section 1B sets out how the FCA must discharge its general functions, which are defined in subsection (6) as its functions of: making rules; preparing and issuing codes; giving general guidance; and determining the general policy and principles by reference to which it performs particular functions under the Act. In particular, the FCA must, so far as reasonably possible, act in a way which is compatible with its strategic objective (described in subsection (2)) and advances one or more of its operational objectives (described in new sections 1C, 1D and 1E). In addition, so far as is compatible with acting in a way which advances its consumer protection (new section 1C) or integrity (new section 1D) operational objectives, the FCA must discharge its general functions in a way which promotes effective competition in the interests of consumers (subsection (4)). The effect of this duty is that where the FCA decides to act in pursuance of an operational objective and has the choice between two options, one of which would have a negative impact on competition (option 1), the other which would have a positive impact on competition (option 2), the FCA must choose option 2 unless this would be incompatible with its objectives.
94.Subsection (5) provides that in discharging its general functions the FCA must also have regard to the regulatory principles which apply to the FCA and the PRA (as set out in new section 3B) and must have regard to the importance of taking action intended to minimise the extent to which it is possible for certain types of business to be used for a purpose connected with financial crime (as defined in new section 1H(3)). This duty is placed on the FCA (rather than the PRA) as the FCA is to have responsibility for regulating the conduct of business of authorised persons (and certain other entities) and is therefore best placed to take regulatory action to tackle financial crime.
95.New section 1C sets out the FCA’s “consumer protection” operational objective. Subsection (2) specifies the factors to which the FCA must have regard when it is considering what degree of protection for consumers may be appropriate in a particular instance. This list includes the “have regard” specified in subsection (2)(c) concerning the needs which consumers may have for the timely provision of information and advice that is accurate and fit for purpose. For example, should the FCA consider that consumers of a particular regulated financial service are not being provided with appropriate information at the right time (for example, before entering into an agreement for the provision of the service) then the FCA, in the interests of ensuring an appropriate degree of protection for those consumers, may make rules prescribing the information to be provided by firms. Similarly, the FCA could take steps in the course of discharging its general functions to specify the form in which information should be presented to certain kinds of consumers in order to ensure that it is fit for purpose, for example, in terms of being clear and fair (such as being drafted in plain English and identifying key facts) and generally being presented in a comprehensible format, or to specify that advice should cover certain matters in order to ensure that it is not misleading. The list also includes the “have regard” specified in subsection (2)(e) which specifies the general principle that those providing regulated financial services (as defined in new section 1H(2)) should be expected to provide consumers with a level of care that is appropriate having regard to the degree of risk involved in relation to the investment or other transaction and the capabilities of the consumers in question. Subsection (2)(f) requires the FCA to have regard to the differing expectations that consumers may have in relation to different kinds of investment or other transaction. Thus the FCA should have regard to the fact, for example, that consumers wishing to invest in a “social investment” product may expect a societal benefit from their investment, rather than a purely financial one
96.The requirement to “have regard” to certain matters in assessing whether an appropriate degree of protection has been provided does not prevent the FCA from having regard to other factors as may be appropriate in a particular instance.
97.“Consumers” is defined in new section 1G. This definition is an extended form of the definition used in sections 425A and 425B of FSMA. This is because the definition of “general functions” in the new section 1B extends to those functions under Part 6 of FSMA (official listing). Therefore it is appropriate, for example, for the definition to extend to listed issuers in their capacity of “consumers” of the regulated financial services provided by sponsors and primary information providers (defined in new section 1H(8)). This definition does not mean that the FCA is required to take a universal approach to determining what constitutes an appropriate degree of protection for consumers. Rather, the FCA can rely on this objective to address issues relating to the interests of different types of consumer in a wide range of markets for regulated financial services. For example, the FCA could determine that it is appropriate to make rules requiring authorised persons to disclose certain types of information before selling a financial product to a “retail” consumer, but may make no similar provision for cases in which authorised persons are dealing with certain types of “wholesale” customer on the basis that the latter category of customer can be reasonably expected to have a better awareness of the risks and features of investing in the product in question.
98.None of the FCA’s objectives impose on the FCA a statutory duty to take action, for example, to secure an appropriate degree of protection for all persons who fall within the definition of “consumer” nor should they be interpreted as establishing a standard of conduct to be expected of regulated firms. Instead, the objectives provide a mandate for the FCA to take action. The FCA could take action, for example, under its consumer protection objective for the purposes of protecting only one category of person who falls within the definition of “consumer”. The FCA need not ensure that action taken for the purposes of advancing this operational objective secures an appropriate degree of protection for all persons who fall within that definition. In addition, the FCA may take action in pursuance of this operational objective which has the effect of securing an appropriate degree of protection for one or more categories of person within the definition of consumer and which also has the effect of protecting persons who fall outside the definition.
99.New section 1D sets out the FCA’s “integrity” objective. The term “integrity of the UK financial system” has a non-exhaustive definition (subsection (2)). For example, the term includes, among other things, the soundness, stability and resilience of the financial system. Examples of action which the FCA may take in pursuance of this operational objective are: (i) the FCA may choose to exercise its powers make rules banning the short-selling of a financial instrument for the purposes of addressing a threat to the stability of the UK financial system; (ii) the FCA may choose to make rules to address risks of money laundering or the use of the financial system to fund terrorist activity; and (iii) the FCA may make disclosure rules under Part 6 of FSMA imposing requirements on listed issuers of financial instruments as to the information which must be disclosed to the market.
100.New section 1E sets out the FCA’s “competition” objective. The FCA may take action in pursuance of this operational objective to promote effective competition in the interests of consumers in the markets for services falling within the definition of “regulated financial services” (new section 1H(2)) and services provided by persons specified as recognised investment exchanges under Part 18 of FSMA. Subsection (2) lists a number of matters to which the FCA may have regard in considering the effectiveness of competition in a particular market. This is a non-exhaustive list of factors which may be relevant to the assessment of the effectiveness of competition but highlights a number of factors which are regarded as particularly indicative. These include: the ease with which consumers may access regulated financial services, including consumers in areas affected by social or economic deprivation (subsection (2)(b)); the ease with which customers can change the person from whom they obtain such services (subsection (2)(c)); and the ease with which new entrants can enter the market (subsection (2)(d)).
101.New section 1F defines the term “relevant markets” for the purposes of new section 1B(2). New section 1G defines the term “consumer” for the purposes of new sections 1B to 1E and new section 1H defines certain other terms for the purposes of new sections 1B to 1G. New section 1I defines the term “the UK financial system” for the purposes of FSMA.
102.New section 1J confers on the Treasury a power to make an order amending certain definitions (for example the definition of “consumer” and “regulated financial services” used for the purposes of new section 1E(1)(a) and (b), new section 1G and new section 1H(2) and (5) to (8)). This power could be used, for example, to amend the definition of “consumer” by adding a new category of person to that definition in order to ensure that the FCA could rely on its “consumer protection” operational objective for the purposes of discharging its general functions (for example the power to make rules) to protect consumers of the new regulated product or service. An order under this section is subject to the affirmative procedure (see the amendments to section 429 of FSMA made by section 49 of the Act).
103.New section 1K requires the FCA to include in general guidance issued under new section 139A (inserted by section 24) guidance on how it intends to advance its operational objectives in discharging its general functions in relation to different categories of authorised persons or regulated activity. For example, the FCA must give guidance as to how it proposes to regulate authorised persons who accept deposits differently from authorised persons who effect or carry on contracts of insurance.
104.Subsection (1) of new section 1L provides that the FCA must maintain arrangements for supervising authorised persons. The concept of “supervision” encompasses matters such as monitoring the activities of authorised persons in light of the FCA’s objectives, forming a view on the person’s long term strategy for doing business, providing advice and, where appropriate, warnings, monitoring compliance with regulatory requirements and taking disciplinary action where appropriate.
105.Subsection (2) of new section 1L requires the FCA to maintain arrangements designed to enable it to determine whether people who are not authorised persons are complying with regulatory requirements and, where appropriate, for enforcing compliance. For example, the FCA must maintain arrangements to monitor whether people are carrying on regulated activities in breach of the general prohibition in section 19 of FSMA and, where appropriate, take action against such persons.
106.New section 1M imposes on the FCA a duty to make and maintain effective arrangements for consulting practitioners and consumers on the extent to which its general policies and practices are consistent with its general duties specified in new section 1B such as the extent to which it has promoted competition in the interests of consumers in accordance with its duty under new section 1B(4).
107.New section 1N makes provision for the FCA Practitioner Panel and new section 1O places on a statutory footing the Smaller Business Practitioner Panel. New section 1P also establishes a Markets Practitioner Panel to represent the interests of persons likely to be affected by the exercise by the FCA of its functions relating to markets. New section 1Q makes provision for the Consumer Panel. New section 1R imposes on the FCA a duty to consider representations made in accordance with arrangements established under new section 1M.
108.New section 1S enables the Treasury to appoint an independent person to conduct a review of the economy, efficiency and effectiveness with which the FCA has used its resources in discharging its functions. New section 1T specifies that a person conducting a review under new section 1S has certain rights to access documents reasonably required for the purposes of the review, and to require a person holding, or accountable for, any such document to provide such information and explanations as are reasonably necessary for the review.
109.Part 1 of new Schedule 1ZA (The Financial Conduct Authority) sets out requirements for the FCA’s constitution and imposes certain obligations on the FCA. Part 2 deals with the status of the FCA. Part 3 makes provision in relation to penalties and fees and Part 4 gives the FCA and those who work for it limited immunity from liability in damages and makes other miscellaneous provisions such as specifying that any amount required by rules to be paid to the FCA may be recovered as a debt due to the FCA.
110.Paragraphs 2 to 6 of new Schedule 1ZA make provision in relation to the constitution of the FCA.
111.The FCA must have a governing body consisting of:
a chair and a chief executive (both appointed by the Treasury),
the Bank’s Deputy Governor for prudential regulation,
two further members appointed jointly by the Treasury and the Secretary of State, and
at least one further member appointed by the Treasury.
112.The majority of the members of the governing body of the FCA are to be non-executive members, including the chair (paragraph 2(3) and (4)). The appointment process and terms of service for the appointed members (which are determined by the Treasury) are designed to ensure the independence of the appointed members (paragraph 3(3) and (4)). In addition, the Bank’s Deputy Governor for prudential regulation is not to take part in any discussion by, or decision of, the FCA which relates to the exercise of the FCA’s functions in relation to a particular person, or a decision not to exercise those functions (paragraph 6). (The terms of service of the Bank’s Deputy Governor in his or her capacity as a member of the governing body of the FCA will be determined by the FCA).
113.Paragraph 5 provides for the acts of the FCA to be valid irrespective of a vacancy in the office of the chair of the FCA, the chief executive of the FCA or the Bank’s Deputy Governor for prudential regulation or a defect in the appointment of a person to any of those offices or of any other person as an appointed member (as defined in paragraph 2(6)). This is to prevent the FCA’s rules, and any action it takes in pursuit of its functions, being rendered invalid purely as a result of such a vacancy or defect in appointment.
114.Paragraph 8 allows the FCA’s functions, with the exception of its legislative functions, to be delegated. However, the governing body must discharge the legislative functions set out in sub-paragraph (3); these are: rule-making; issuing codes under sections 64 and 119 of FSMA; issuing statements of policy on, for example, financial penalties and other disciplinary measures; and giving directions relating to exemptions from the general prohibition. The governing body may delegate the function of issuing general guidance to a committee or sub-committee but not to an individual officer or member of staff (sub-paragraph (4)).
115.Paragraph 9 requires the FCA to maintain satisfactory arrangements for recording decisions made in exercise of its functions and the safe-keeping of those records.
116.Paragraph 10 requires the FCA to publish a record of each meeting of its governing body. The record must specify any decisions taken at the meeting (including decisions to take no action) and set out a summary of the deliberations in relation to each decision. The record is to be published within 6 weeks of the meeting unless no meeting has been held in that period whereupon the record is to be published within 2 weeks of the next meeting. This arrangement reflects the fact that the FCA’s governing body (which is expected to approve the record of each meeting prior to publication) is expected to meet once a month except in the summer when it is likely that there will be one month where no meeting is held. The record is not expected to contain confidential firm-specific information.
117.Paragraph 11 requires the FCA to report at least once a year to the Treasury on the discharge of its functions, and on the extent to which it has acted compatibly with its strategic objective and advanced its operational objectives. The FCA is also required to report on how far it has complied with its “competition” duty referred to in new section 1B(4); its consideration of its regulatory principles and the importance of taking action intended to minimise the extent to which it is possible for a business carried on by an authorised person or a recognised investment exchange, or in contravention of the general prohibition, to be used for a purpose connected with financial crime; and on such other matters as directed by the Treasury. The report must be accompanied by a statement setting out the remuneration of the members of the governing body, and any other information or reports the Treasury may direct. It must also include an account of the how the FCA has complied with the general duty to coordinate (section 3D), the use of the PRA powers of direction over the FCA (sections 3I and 3J), and how the FCA has cooperated with regulatory bodies outside the UK. The Treasury is to lay the report before Parliament. Paragraphs 12 and 13 require the FCA to hold a public meeting to discuss its annual report, and to publish a report of the meeting.
118.Paragraph 14 provides that the Treasury may require the FCA to comply with any provisions of the Companies Act 2006 dealing with accounts and audit which would otherwise not apply to it. A Treasury direction may modify provisions of the Companies Act 2006 dealing with accounts and audit in their application to the FCA.
119.Paragraph 15 provides for the FCA’s annual accounts to be audited by the Comptroller and Auditor General; the National Audit Office carries out audit functions of the Comptroller and Auditor General. The Treasury must lay before Parliament the certified accounts of the FCA and the report of the Comptroller and Auditor General on them.
120.Paragraph 16 specifies that, in relation to any of its functions, the FCA is not to be regarded as acting on behalf of the Crown and its members, officers and staff are not be regarded as Crown servants.
121.The FSA is a company limited by guarantee; prior to the Act coming into force, it was exempt by virtue of paragraph 14 of Schedule 1 to FSMA from the need to use “limited” as part of its name. Paragraphs 17 and 18 continue that exemption for the FCA.
122.Paragraph 19 provides that in determining its policy with regard to the level of penalties to impose under powers in the Act, the FCA may take no account of its expenses or anticipated expenses; there is to be no link or incentive to fund the FCA by levying penalties on the persons it regulates.
123.Paragraph 20 provides that the FCA, in respect of each of its financial years, must pay to the Treasury its penalty receipts after deducting and retaining its enforcement costs. Sub-paragraph (2) defines “penalty receipts” for this purpose as any amounts received by the FCA by way of penalties imposed under FSMA. Sub-paragraph (3) defines “enforcement costs” for these purposes as the expenses incurred by the FCA in connection with the exercise or consideration of the exercise of its enforcement powers (as defined by sub-paragraph (4)) in particular cases or the recovery of penalties. The effect of this provision is that the FCA may retain from penalty receipts funds to cover its enforcement costs. Sub-paragraph (6) provides that the Treasury may give a direction to the FCA as to how it is to comply with its duty under sub-paragraph (1); a direction may in particular specify what expenditure is or is not to be treated as an enforcement cost (for example, the costs of employing staff or engaging third parties to provide services to the FCA in connection with particular cases). Sub-paragraph (9) provides that the Treasury must pay into the Consolidated Fund any sums received under this paragraph.
124.Paragraph 21 requires the FCA to operate a scheme to ensure that penalty receipts which the FCA is, under paragraph 20, entitled to retain are applied for the benefit of regulated persons (as defined by sub-paragraph (2)). The scheme must ensure that those who have become liable to pay a penalty to the FCA in any financial year do not receive a benefit under the scheme in the following year.
125.Paragraph 22 requires the FCA to consult on these arrangements.
126.Paragraph 23 provides for a rule-making power for the FCA to raise fees to meet the costs it incurs in the discharge of its qualifying functions. Qualifying functions means its functions under FSMA, the Act, the Banking Act 2009, the Insolvency Act 1986, and certain EU legislation. It may use the fees to meet its expenses, to repay borrowing incurred and to meet expenses incurred in connection with the commencement of the Act, and to maintain adequate reserves. Sub-paragraph (7) requires that the FCA may not take into account any penalties which it has received, or expects to receive, in setting the fees under FSMA.
127.Paragraph 24 provides that fees may not be charged when a person gives notice of their intention to exercise EEA passporting rights under Schedule 3 to FSMA or where any person whose application for approval under section 59 has been granted.
128.Paragraph 25 provides immunity for the FCA and its members, officers and staff from liability in damages except where the act or omission is shown to have been in bad faith or where damages are sought under the Human Rights Act 1998. This immunity applies where the FCA or its staff are exercising investigative powers by virtue of an appointment by the PRA or the Bank under sections 166 to 169 of FSMA.
129.Paragraph 26 treats the actions of an accredited financial investigator (within the meaning of the Proceeds of Crime Act 2002) who is an employee of the FCA or undertaking an investigation for the FCA as being done in the exercise or discharge of a function of the FCA.
130.Paragraph 27 provides that any amount (other than a fee) which is required by rules to be paid to the FCA may be recovered as a debt due to the FCA.
The PRA
131.The PRA is a limited company formed under the Companies Act 2006. New section 2A renames that company as the Prudential Regulation Authority, and provides for it to have the functions conferred on it under FSMA; references to its functions, for example in the application of its general objective (see new section 2B), include the PRA’s functions under the Insolvency Act 1986, the Banking Act 2009, provisions of EU law specified by order by the Treasury for this purpose and this Act; references to functions of the PRA do not include its functions under the legislation relating to mutual societies except to the extent that an order under section 50 so provides (see new section 2J(2)).
132.New section 2B requires the PRA to discharge its general functions in a way which advances its general objective, which is the promotion of the safety and soundness of PRA-authorised persons. The primary means by which the PRA is to advance that objective are by seeking to ensure that the way in which the business of PRA-authorised persons is carried on avoids any adverse effect on the UK financial system (subsection (3)(a)), and by seeking to ensure that, if a PRA-authorised person fails, that failure occurs in as orderly a manner as possible (subsection (3)(b)). New section 2J(3) provides further details about the meaning of “failure”. It includes: insolvency; being taken for the purposes of the financial services compensation scheme as being, or being likely to be, unable to meet claims against it; and having a stabilisation option under Part 1 of the Banking Act 2009 implemented (for example transfer to a private sector purchaser (section 11 of that Act), transfer to a bridge bank (section 12 of that Act), or transfer to temporary public ownership (section 13 of that Act)). New section 2G emphasises that the PRA’s objectives do not oblige it to ensure that no PRA-authorised person fails.
133.New section 2C provides for the PRA to have an additional objective which will apply if an order made under section 22A FSMA provides for certain activities relating to insurance to be PRA-regulated activities. Where the PRA is discharging its general functions in relation to PRA-authorised persons who are insurers or reinsurers, it must seek to advance its insurance objective; the insurance objective is contributing to the securing of an appropriate degree of protection for policy holders (new section 2C). The insurance objective and the general objective have the same legal status. When the PRA is discharging its functions in relation to such PRA-authorised persons, it must act compatibly with both the general objective and the insurance objective and act in a way which the PRA considers most appropriate for advancing both objectives.
134.New section 2D provides that further objectives may be specified in relation to activities that become PRA-regulated activities by order under section 22A of FSMA (see commentary on section 9 below).
135.New section 2E requires the PRA to determine its strategy in relation to its objectives and from time to time (and at least every 12 months) review that strategy. The PRA must consult the court of directors of the Bank on a draft of the strategy and any revisions to it. The strategy and any revised strategy must be published.
136.New section 2F makes provision for how references in FSMA to the PRA’s objectives should be interpreted. For example, a reference in FSMA to the PRA’s objectives in the context of a function which is exercisable in relation to insurance (such as the rule-making power in new section 137E) is to be taken as a reference to the general objective and the insurance objective.
137.New section 2I requires the PRA to give guidance on how it intends to advance its objectives in relation to different categories of PRA-authorised persons or PRA-regulated activity. For example, the PRA must give guidance as to how it proposes to regulate PRA-authorised persons who accept deposits differently from PRA-authorised persons who effect or carry on contracts of insurance.
138.Definitions relevant to the PRA’s general duties are set out in new section 2J, including a list of the PRA’s “general functions”.
139.New section 2K provides that the PRA must maintain arrangements for supervising PRA-authorised persons. The concept of “supervision” encompasses matters such as monitoring the safety and soundness of PRA-authorised persons, forming a view on the person’s long term strategy for doing business, providing advice and, where appropriate, warnings, monitoring compliance with regulatory requirements and taking disciplinary action where appropriate.
140.New section 2L requires the PRA to make and maintain effective arrangements for consulting those who are PRA-authorised persons or who appear to the PRA to represent the interests of such persons (for example, relevant industry associations), and to consider representations made under those arrangements.
141.New section 2M provides that the arrangements maintained under section 2L must include the establishment and maintenance of a panel of persons, to be known as the PRA Practitioner Panel, to represent the interests of practitioners. The PRA must appoint the chair of the Panel. The approval of the Treasury is required for the appointment and removal of the chair.
142.New sections 2O and 2P make provision for the Treasury to arrange for an independent review of the economy, efficiency and effectiveness with which the PRA has used its resources, and access to documents and information for the purposes of such a review.
143.Part 1 of new Schedule 1ZB (The Prudential Regulation Authority) sets out requirements for the PRA’s constitution and imposes certain obligations on the PRA. Part 2 deals with the status of the PRA. Part 3 makes provision in relation to penalties and fees and Part 4 gives the PRA and those who work for it limited immunity from liability in damages and makes other miscellaneous provision.
144.Paragraphs 2 to 14 of new Schedule 1ZB make provision in relation to the constitution of the PRA.
145.The PRA must have a governing body consisting of:
the Governor of the Bank, who is to be the chair of the PRA,
the Bank’s Deputy Governor for prudential regulation, who is to be the chief executive of the PRA,
the Bank’s Deputy Governor for financial stability,
the chief executive of the FCA, and
appointed members.
146.The appointed members are appointed by the court of directors of the Bank with the approval of the Treasury. The appointment process and terms of appointment are designed to ensure the independence of the appointed members (paragraph 11). The majority of the governing body of the PRA are to be non-executive members (paragraph 8). For the purposes of determining the balance of the board, and for corporate governance purposes, the Governor of the Bank and the Deputy Governors, and any board members who are PRA staff (whether employees of the PRA or secondees from the Bank), are not to be treated as non-executive members (paragraph 9); this is to ensure a proper number of independent board members, and it is those members who will undertake the corporate governance roles reserved to non-executives. In addition, the chief executive of the FCA is not to take part in any firm-specific decisions made by the PRA (paragraph 5).
147.Paragraph 4 provides for the acts of the PRA still to be valid irrespective of a vacancy in the office of the ex-officio members of its governing body (those listed at (a) to (d) above) or any defect in an appointment of an ex-officio member or an appointed member. This is to prevent the PRA’s rules, and any action it takes in pursuit of its functions, being rendered invalid purely as a result of such a vacancy or defect.
148.Paragraph 16 allows the PRA’s functions, with the exception of its legislative functions and its functions in relation to the strategy under section 2E, to be delegated. The legislative functions set out in paragraph 16(3) include: rule-making; issuing codes and statements of principle under section 64 of FSMA; issuing statements of policy under section 69 of FSMA relating to the imposition of penalties, suspensions and restrictions on approved persons; issuing statements of policy under section 210 of FSMA relating to the imposition of penalties, suspensions and restrictions on authorised persons; giving directions under section 316 of FSMA that the general prohibition or certain FSMA provisions are to apply to members of Lloyds; giving directions under section 318 of FSMA to the Council of Lloyds; and issuing guidance under section 2I of FSMA.
149.Paragraph 17 requires the PRA to maintain satisfactory arrangements for recording decisions made in exercise of its functions and the safe-keeping of those records.
150.Paragraph 18 requires the PRA for each of its financial years to adopt an annual budget. The budget must be approved by the Bank. The PRA may, with the approval of the Bank, vary its budget. The budget, and any variations to it, must be published.
151.Paragraph 19 requires the PRA to report at least once a year to the Treasury on the discharge of its functions; on the extent to which its statutory objectives have been met; its consideration of its regulatory principles and the need to minimise any adverse effect on competition in the relevant markets that may result from the manner in which the PRA discharges its functions; and on such other matters as directed by the Treasury. The report must be accompanied by a statement setting out the remuneration of the members of the governing body, and any other information or reports the Treasury may direct. It must also include an account of the how the PRA has complied with the general duty to coordinate (section 3D), the use of the PRA powers of direction over the FCA (sections 3I and 3J), and how it has cooperated with regulatory bodies outside the UK. The Treasury is to lay the report before Parliament. Paragraphs 20 and 21 require the PRA to consult publicly on its annual report; the PRA must publish a report on its consultation, including an account of representations received.
152.Paragraph 22 provides that the Treasury may require the PRA to comply with any provisions of the Companies Act 2006 dealing with accounts and audit which would otherwise not apply to it. A Treasury direction may modify provisions of the Companies Act 2006 dealing with accounts and audit in their application to the PRA.
153.Paragraph 23 provides for the PRA’s annual accounts to be audited by the Comptroller and Auditor General; the National Audit Office carries out audit functions of the Comptroller and Auditor General. The Treasury must lay before Parliament the certified accounts of the PRA and the report of the Comptroller and Auditor General on them.
154.Paragraph 24 specifies that, in relation to any of its functions, the PRA is not to be regarded as acting on behalf of the Crown and its members, officers and staff are not be regarded as Crown servants.
155.The PRA is a company limited by shares; as it is not able to benefit from the exemptions available in section 60 of the Companies Act 2006 from the requirement to include “limited” in its name, paragraph 25 exempts the PRA from having to do so. Paragraph 26 provides for the Secretary of State to remove that exemption after consulting the Treasury, if it is inappropriate for it to continue. Similar provision was made in respect of the FSA by paragraphs 14 and 15 of paragraph 1 of Schedule 1 to FSMA.
156.Paragraph 27 provides that in determining its policy with regard to the level of penalties to impose under powers in the Act, the PRA may take no account of its expenses or anticipated expenses; there is to be no link or incentive to fund the PRA by levying penalties on the persons it regulates.
157.Paragraph 28 provides that the PRA, in respect of each of its financial years, pay to the Treasury its penalty receipts after deducting and retaining its enforcement costs. Sub-paragraph (2) defines “penalty receipts” for this purpose as any amounts received by the PRA by way of penalties imposed under FSMA. Sub-paragraph (3) defines “enforcement costs” for these purposes as the expenses incurred by the PRA in connection with the exercise of consideration of the exercise of its enforcement powers (as defined by sub-paragraph (4)) in particular cases or the recovery of penalties. The effect of this provision is that the PRA may retain from penalty receipts funds to cover its enforcement case costs. The general costs of the FCA’s enforcement capability which are not attributable to case work (e.g. the cost of senior management or enforcement policy work) would not be treated as an “enforcement cost”. Sub-paragraph (6) provides that the Treasury may give a direction to the PRA as to how it is to comply with its duty under sub-paragraph (1). Sub-paragraph (9) provides that the Treasury must pay into the Consolidated Fund any sums received under this paragraph.
158.Paragraph 29 requires the PRA to operate a scheme to ensure that penalty receipts which the PRA is, under paragraph 28, entitled to retain are applied for the benefit of PRA-authorised persons. The scheme must ensure that those who have become liable to pay a penalty to the PRA in any financial year do not receive a benefit under the scheme in the following year.
159.Paragraph 30 requires the PRA to consult on these arrangements.
160.Paragraph 31 provides for a rule-making power for the PRA to raise fees for what it does in the discharge of its qualifying functions. Qualifying functions means its functions under FSMA, the Act, the Banking Act 2009, the Insolvency Act 1986 and certain EU provisions which have been specified for the purpose by the Treasury. It may use the fees to meet its expenses, to repay borrowing incurred in connection with the commencement of the Act, and to maintain adequate reserves. Sub-paragraph (6) provides that the PRA may not take into account any penalties which it has received, or expects to receive, in setting the fees under FSMA. This will ensure that penalty setting policy is kept distinct from PRA budget setting.
161.Paragraph 32 provides that fees may not be charged when a person gives notice of their intention to exercise EEA passporting rights under Schedule 3 to FSMA, or to persons approved under Part 5 of FSMA.
162.Paragraph 33 provides immunity for the PRA and its members, officers and staff from liability in damages except where they act in bad faith or where damages are sought under the Human Rights Act 1998. This immunity applies where the PRA or its staff are exercising investigative powers by virtue of an appointment by the FCA or the Bank under sections 97, 166 to 169 or 284 of FSMA.
163.Paragraph 34 treats the actions of an accredited financial investigator who is an employee of the PRA or undertaking an investigation for the PRA as being done in the exercise or discharge of a function of the PRA. Financial investigators are accredited by the National Policing Improvement Agency.
Further provisions relating to the FCA and the PRA
164.New sections 3A to 3S contain further provisions relating to the FCA and the PRA.
165.New section 3B lists the regulatory principles to which the regulators must have regard when discharging their general functions, for example the principle of the desirability of sustainable growth in the economy of the United Kingdom in the medium or long term (subsection (1)(c)). These principles do not place burdens or requirements on consumers or firms. They are matters which the regulators must take into account when exercising their general functions. For example, the principle that consumers should take responsibility for their decisions, and the principle that firms’ senior management have responsibilities in relation to compliance with the regulatory requirements (including those relating to consumers), makes clear that the FCA and PRA should not aim for a zero-failure regime, which would effectively obviate consumers of their responsibility to look after their own interests and of firms to manage their own business.
166.The Treasury may amend the definition of “consumer” in this context, by order; the order must be approved in draft by each House of Parliament (see the amendments to section 429 of FSMA made by section 49 of the Act).
167.New section 3C requires the regulators to have regard to generally accepted principles of good corporate governance where relevant; for example the UK Corporate Governance Code issued by the Financial Reporting Council and, where appropriate, the corporate governance code for central government departments.
168.New section 3D requires the regulators to coordinate the exercise of the functions conferred on them by or under FSMA for three purposes: to ensure that they consult each other before exercising a function under FSMA in a way which may have a material adverse impact on advancement by the other regulator of its objectives; to ensure that they obtain advice and information from each other in connection with the exercise of their functions under FSMA in relation to matters of common regulatory interest (see subsection (3)), where the other regulator has relevant information or expertise; and to ensure that, in relation to matters of common regulatory interest, they have regard to the need to use resources efficiently and economically and to the proportionality principle set out in section 3B(1)(b). The duty to coordinate may, for example, require the regulators to coordinate requests for information from authorised persons. The duty to coordinate does not, however, override the requirement that each regulator discharge its general functions in a way which advances its objectives, and it does not apply where the burden on the regulators of coordinating the exercise of their functions would outweigh the benefits (subsection (2)).
169.Under new section 3E, the regulators must prepare a memorandum setting out their roles in relation to matters of common regulatory interest and how they will comply with the duty to coordinate the exercise of their functions. The memorandum may contain specific provision about the matters set out in subsection (2). Subsection (3) sets out additional matters on which the memorandum must contain provision. The memorandum is to be reviewed annually; the regulators must publish the current memorandum and send a copy to the Treasury, which must lay it before Parliament. Subsection (8) indicates that the memorandum need not relate to matters publication of which would be against the public interest or which are technical or operational matters which do not affect the public.
170.New section 3F provides that the FCA and PRA must prepare and maintain a memorandum which sets out the role of each regulator in relation to the regulation of with-profits insurers (as defined by subsection (5)) and how the regulators intend to comply with their duty to coordinate such functions. The memorandum may be combined with the memorandum required under section 3E. The section only applies if the activity of effecting or carrying out of contracts of insurance is a PRA-regulated activity. Subsection (6) enables the Treasury, by order, to amend the definition of “with-profits policy” that applies for the purposes of this section.
171.New section 3G enables the Treasury by order to specify matters which are primarily or solely the responsibility of one or other regulator. New section 3H provides that such an order must be laid before Parliament in draft and approved by each House of Parliament before being made; where the order contains a statement by the Treasury as to its urgency, the order may be laid before Parliament after being made but ceases to have effect unless approved by each House of Parliament within 28 sitting days (see subsections (4) and (5)).
172.New section 3I makes provision for the PRA, where the FCA proposes to exercise a regulatory power in relation to PRA-authorised persons or a particular PRA-authorised person, or to exercise an insolvency power in relation to a PRA-authorised person or certain other persons, to direct the FCA not to exercise the power or not to exercise it in a particular manner. The PRA may only give a direction if exercise by the FCA of the power might threaten the stability of the UK financial system or result in the failure of a PRA-authorised person in a manner that would adversely affect the UK financial system and the PRA considers that giving a direction is necessary in order to avoid that consequence. For example, the FCA could propose to cancel a firm’s deposit taking permission under Part 4A of FSMA. If the PRA determined that this could lead to the sudden and disorderly failure of the firm, the PRA could, if it deemed it necessary, give a direction under new section 3I to prevent the FCA from cancelling the firm’s permission. The FCA is not required to comply with a direction to the extent that compliance would be incompatible with an EU or international law obligation of the United Kingdom (new section 3I(8)). Certain functions of the FCA are excluded from this power (those relating to the giving of consent to the giving of permission under new section 55F or variation of permission under new section 55I).
173.New section 3J makes provision for the PRA, where the FCA proposes to exercise a regulatory power (as defined in subsection (3)) in relation to the provision of discretionary benefits by with-profits insurers, to direct the FCA not to exercise the power or not to exercise it in a particular manner, where the PRA considers that giving the direction is desirable in order to advance the PRA’s general objective or insurance objective. The FCA is not required to comply with a direction to the extent that compliance would be incompatible with an EU or international law obligation of the United Kingdom (new section 3J(8)). Certain functions of the FCA are excluded from this power (those relating to the giving of consent to the giving of permission under new section 55F or variation of permission under new section 55I and its functions in relation to insolvency under Part 24 of FSMA).
174.New sections 3K and 3L make further provision in relation to directions under sections 3I or 3J. The PRA must consult the FCA before giving such a direction; and the direction must be published and, in the case of a direction under section 3I, laid before Parliament unless the PRA after consulting the Treasury decides it would be against the public interest to do so; the PRA must keep any such determination under review and publish the direction if and when it is no longer against the public interest to do so (new section 3L(8)).
175.New sections 3M to 3P provide that one regulator may give the other a direction in relation to the consolidated supervision of some or all of the members of a group for the purposes of relevant EU directives. The direction may require the regulator to exercise, or not to exercise, its functions in a particular way. The direction may not require the regulator to do something that it does not have the power to do. The regulator need not comply with a direction it has received if compliance with the direction would not be compatible with the EU obligations or other international obligations of the United Kingdom. Certain functions of the regulators (including rule making) are excluded.
176.The regulators are obliged to cooperate with the Bank in pursuit of its financial stability objective and the Bank’s compliance with its duties under sections 54 and 55 of the Act (duty to notify the Treasury of possible need for public funds). The duty to cooperate includes the sharing of information (new section 3Q). This might include, for example, the PRA collecting information from PRA-authorised persons and passing it to the FPC for the purposes of its financial stability functions or the FCA informing the Bank that there may be a need to provide public funds in connection with an authorised person regulated only by the FCA.
177.New section 3R enables the regulators to make arrangements to provide services to each other, to the Bank (or services from the Bank to the regulators), to the consumer financial education body, the scheme manager of the financial services compensation scheme or the scheme operator of the financial ombudsman service on such terms as may be agreed. This would allow, for example, the Bank to provide human resources (staff) to the PRA and allow the FCA to collect fees payable to the PRA on the PRA’s behalf. Subsection (5) enables the FCA to enter into arrangements with local weights and measures authorities in England, Wales and Scotland or, in Northern Ireland, the Department of Enterprise, Trade and Investment for the provision of services in relation certain types of regulated activity (for example, consumer credit). This would allow the FCA to enter into a contract with a local weights and measures authority or that Department so that the authority visits firms and carries out compliance checks on behalf of the FCA. The regulators will also be able, pursuant to powers under their own constitution, to make arrangements with private sector entities for the private sector entity to provide services to the regulator, for example legal advice or the analysis of data.
178.New section 3S provides for the consumer financial education body to continue to have the consumer financial education function. The consumer financial education function is to enhance (a) the understanding and knowledge of members of the public of financial matters (including the UK financial system), and (b) the ability of members of the public to manage their own financial affairs. Subsection (4) is a non exhaustive list of activities that fall within the consumer financial education function. These largely restate the activities currently set out in section 6A of FSMA. Paragraph (b) of subsection (4) differs from the wording in section 6A of FSMA to make it clear that the consumer financial education body is to promote awareness in relation to the whole life of a product not just its initial supply; and paragraphs (f) and (g) are new. These paragraphs make it clear that the consumer financial education function includes assisting members of the public with the management of debt and working with other organisations which provide debt services.
