Renaissance Utterances: The Colour of Money; The New Financial Services Regulations

Two of the best things about being in law librarianship for decades are 1. seeing the changes in colours of institutions’ rule books; 2. the learning and relearning of industry acronyms. London Stock Exchange Listing Rules went from being the ‘yellow’ book to ‘that weird aubergine colour’ and the SFA, SIB, FIMBRA, PIA rule books all had their own coloured binders which had to be painstakingly updated by hand. I vaguely remember one of them being green, though the Bank of England reports tended to be a very elegant expensive looking white and gold. However when the FSA overturned these organisations in 2000-01 all their rules were subsumed into the multiple FSA Handbooks (white, purple and pale turquoise green), horrible new binders which would take your thumb off if you let them.

An FSA Handbook yesterday

That is an introductory paragraph which probably says more about my curious obsession with the livery of financial services rulebooks rather than my technical knowledge of them. Since 2001, like the financial industry, the publishing of those rules has undergone great change and the colours have fallen by the wayside with handbooks going online mostly to the relief of librarians and their updating fingers. Yet again in 2013, as a group of us were to find out, there have been further changes to financial regulation and inevitably a whole alphabet soup of acronyms to learn.

Katie McCaw of Baker & MacKenzie took us on an entertaining journey into the financial services regime. Yes really. She outlined the cause of the 2007 financial crash, linking it to the the light touch, tripartite regime which had been established by the white/purple/pale turquoise green books. As an aside, I still boggle at the thought of a light touch regulation, knowing the size of these volumes. However despite the efforts of the FSA, Bank of England and the Treasury, when the crash came, no know knew who was in charge. This lead to a comprehensive review and investigation and the publishing of the first draft Financial Services Bill in mid 2011.

Lawyers/financial professionals cannot with any truth say that this legislation is sudden. It has been in the system of consultation, discussion for many years.

New Legislation

So what has been the result of this new legislation (and what colours are the books) since the in force date of 1 April 2013? Contrary to logic, they have not repealed the Financial Services and Markets Act 2000, or the Bank of England Act 1998. Instead this new Financial Services Act 2012 (beige) merely allows for thousands of amendments to the existing legislation (mostly name changes), whilst setting up a new regulatory architecture – a framework.

What Katie emphasised was the sheer complexity and interlinkedness of the banking system. It's not just UK banks but matters are exponentially complicated by the European and global nature of financial institutions, no one is 'stand alone' any more. This is why amendments to the Banking Act 2009 set up a Special Resolution Regimes (SRR) to Systemically Important Financial Institutions (SIFI). Essentially if a large global bank seems to be failing, 'disaster recovery' plans are already in place and can be implemented without delay.

Solomon's Pillars

The proposed regulatory structure will consist of 2 pillars; first there is the framework, and the second is the banking reform bill as recommended by the Vickers Report which is currently going through Parliament. This second bit is the vital separation of commercial and retail banking. This means that the tax payer will not have to prop up banks' wholesale operations should it all melt into nothingness again.

Framework

So what is the framework? Who are these three new authorities? The ultimate body responsible is the statutory appointed Bank of England Financial Policy Committee, chaired by the the Governor, Mark Carney as of July 2013. Two organisations report back - the Prudential Regulation Authority and the Financial Conduct Authority and they fulfil different, yet linked roles;

FPC – Macro regulation of firms; Provides rules and regulatory guidance to ensure safety, soundness, solvency and contingency; implements EU capital adequacy. It has no direct regulatory responsibility over any firms. Has powers to step in
PRA – Micro regulation of firms; administers the EEA passporting regime; Promotes the safety and soundness of regulated firms such as large banks, insurers, Lloyds or other SIFIs. There are no institutions that are just regulated by the PRA, they will also be regulated by the FCA, therefore these 1700 or so will be dual regulated
FCA – Ensures the 'relevant markets' function well. This new body is basically the existing FSA but by a different name. It's responsible for regulating all financial institutions – about 23000 of them – with extra powers for product intervention, investigation and bans.

Already the FCA is making waves and already pro-actively looking at products and methods that could potentially impact consumers, for instance, recent press reports on PPI misselling, interest only mortgages, swaps and payday loans. No longer are they waiting until something becomes critical, they are stepping in to minimise adverse effects. Katie is reserving judgement on whether this 'regulatory creep', interventionist approach is a 'good thing'. Most controversial is the fact that regulatory fines now go to the Treasury rather than reducing firms' overall annual levy. However the biggest change is the PRA's attitude to failure – firms will be allowed to fail in an orderly way; no bail out, no mess.

New Handbooks

Where does this leave the existing Rulebooks? She didn't tell us what colour they are going to be and I don't have hard copy sadly. But the prudential, supervisory FSA guidance will form the basis of the new PRA Handbook. Whilst the old Conduct of Business material will gradually evolve into the new FCA Handbook. Changes as of 1 April 2013 simply revolved around name changes and existing books will be developed in line with subordinate legislation (SIs and so forth). As a rule of thumb, if a query concerns prudential requirements, it will be found in the PRA Handbook, if day to day business question, it will be in the other one.

How to Irritate Banks

I'm not going into detailed regulatory changes here, though she gave us two example of what had been done already concerning LIBOR. Frankly I'm not qualified to comment but there are some really good articles from the financial law journals if you want to look further. But she suggested a way of really irritating the banks come 1 Oct 2013. All dual regulated bank communications on this date should include the wording (wait for it)

'Authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority'

She finished with a very open ended conclusion and everyone was still extremely alert and fascinated by what she'd said. Although some of her slides were reminiscent of Penrose Stairs, US/EU/UK regulations without beginning or end, it is important that everyone has an idea of what these financial institutions are doing. It affects everything; our economy, mortgages, pensions, cost of living, travelling abroad, and if this new framework is on a mission to prevent any more financial collapses and scandals by stepping in regularly, what will this do to market confidence and security? The last thing the economy requires is ongoing uncertainty and panic. Time will tell...

If you get an opportunity to hear Katie talking on this topic, go, and be fascinated and enlightened!