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Twin Peaks

May 23, 2013

AZ_Ajo_Mountains_Twin_Peaks

Photo by Michael Fiegle; some rights reserved. Used under a Creative Commons license.

Last month the U.K launched its new regulatory system for the financial services industry. Dubbed “twin peaks,” the new system created two new agencies, the Prudential Regulation Authority (“PRA”), housed within the Bank of England, and the Financial Conduct Authority (“FCA”), which supersedes the much maligned Financial Services Authority.

The PRA is responsible for the prudential regulation and supervision of banks, building societies, credit unions, insurers and major investment firms. Its two statutory objectives are to promote the safety and soundness of these firms and, specifically for insurers, to secure an appropriate degree of protection for policyholders. In promoting safety and soundness, the PRA focuses primarily on the harm that firms can cause to the stability of the U.K. financial system. It will also make forward-looking judgments on the risks posed by firms.

The FCA is responsible for the promotion of effective competition, the efficient functioning of relevant markets, and for the protection of all customers of financial services firms. The FCA also operates as the prudential regulator for those financial firms not supervised by the PRA, such as asset managers and independent financial advisers.

The PRA has a variety of formal powers available to it, including the power to require information from firms or to commission reports by a third party. The PRA may also vary the regulated activities in which a firm is permitted to engage and impose sanctions. The PRA has issued policy statement on its approach to enforcement; its approach to the supervision of financial market infrastructure; and its power of direction over qualifying parent undertakings.

​To address criticism levied at its predecessor the Financial Services Authority, the FCA announced it will take action before consultation when the FCA identifies a significant risk to consumers. Temporary product intervention rules will allow the FCA to take action such as restricting the use of certain product features, requiring that a product not be promoted to some or all types of customers, or requiring that a product not be sold.

The FCA has also published a new policy statement governing how investment managers may pay the sales platforms which carry the investment managers’ products. Under the new policy, investment managers will pay sales platforms a platform charge which is disclosed to retail investors. Cash rebates for non-advised platforms will be prohibited.

In one of its first, and highest-profile, enforcement actions (read the announcement here), the FCA fined J.P. Morgan International Bank £3,076,200 for system control failures in its wealth management unit. The failures existed for two years and were discovered during a FCA thematic review. Among other things, the FCA found incomplete client files, incomplete suitability reports, and incomplete suitability confirmations.

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