4.1.1 Getting to know the PRA and FCA
As you saw in the previous section and earlier in the course, the core regulatory bodies for UK financial services are the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) – with the consequence that the new framework is known as the ‘twin peaks’ regulation.
Deposit-taking firms (including banks and building societies), the investment banks and insurance firms are regulated by the PRA whilst other financial firms are regulated by the FCA. However, the FCA’s brief extends to market conduct and consumer protection matters which relate to the activities of all financial firms. As a consequence, PRA-regulated firms are also regulated and supervised by the FCA.
How do both go about their business? Many, but certainly not all, of their regulatory processes have been inherited from the former regulator, the Financial Services Authority (FSA), which the PRA and FCA formally replaced in April 2013.
Once a firm is permitted to conduct business in regulated activities, it is assigned to a supervisory team (or teams, if the firm is dual-regulated by both the PRA and the FCA). These teams will typically comprise specialists in the firm’s financial sector (banking, building society, insurance, etc.). This supervision will include checking that the firm adheres to the terms of its ‘permissions’ (the authorisations it has to conduct different types of financial services business) and will seek to ensure that the firm is managing its business and financial risks effectively.
Underpinning the FCA’s regulatory framework and the rules detailed in it are their eleven Principles for Business. These are set out below.
Table 1 The FCA’s eleven Principles for Business
|1||Integrity||A firm must conduct its business with integrity|
|2||Skill, care and diligence||A firm must conduct its business with due skill, care and diligence|
|3||Management and control||A firm must take reasonable care to organise and control its affairs responsibly and effectively, with adequate risk management systems|
|4||Financial prudence||A firm must retain adequate financial resources|
|5||Market conduct||A firm must observe proper standards of market conduct|
|6||Customers’ interests||A firm must pay due regard to the interests of its customers and treat them fairly|
|7||Communications with clients||A firm must pay due regard to the information needs of its clients, and communicate information to them in a way which is clear, fair and not misleading|
|8||Conflicts of interest||A firm must manage conflicts of interest fairly, both between itself and its customers and between a customer and another client|
|9||Customers: relationships of trust||A firm must take reasonable care to ensure the suitability of its advice and discretionary decisions for any customer who is entitled to rely upon its judgement.|
|10||Clients’ assets||A firm must arrange adequate protection for clients’ assets when it is responsible for them|
|11||Relationships with regulators||A firm must deal with its regulators in an open and co-operative way, and must disclose to the regulator(s) appropriately anything relating to the firm of which the regulator(s) would reasonably expect notice|
The PRA’s equivalent of the FCA’s ‘Principles for Business’ are known as its ‘Fundamental Rules’. These are essentially equivalent to FCA principles 1–4 and 11, plus the rule that firms must be able to prepare for an orderly resolution of their business (in effect the transfer of their business or their takeover by another firm), if the need arises due to failures by them. So, the key difference between the FCA’s ‘principles’ and the PRA’s ‘rules’ is that the latter do not include those of the FCA that relate to market conduct and consumer protection, since the FCA supervises these areas for all firms.