On 16 June 2011, HM Treasury published a White Paper on UK financial regulatory reform together with a draft Bill to amend Financial Services and Markets Act (FSMA) 2000.

The Government proposes to conduct regulation of financial services at macro- and micro-prudential levels.

The Financial Policy Committee (FPC) in the Bank of England will be responsible for macro-prudential supervision, with primary responsibility for maintaining financial stability. Micro-prudential supervision will be the responsibility of two regulatory authorities. The Prudential Regulation Authority (PRA), a subsidiary of Bank of England, will be in charge of prudential regulation of all deposit-taking institutions, insurers and banks. The Financial Conduct Authority (FCA) will regulate business conduct in retail and wholesale markets with a primary objective of protecting and enhancing confidence in the UK financial system.

Lloyd’s Regulatory Communications article Changes to UK financial regulation published in July 2011 provides further detail on the reform. For information on how the regulatory reform has evolved over time, please visit Government Affairs pages on Lloyds.com.

The consultation period on White Paper concluded on 8 September 2011 and Lloyd’s submitted a response.

Lloyd’s response to the HM Treasury White Paper

We welcomed the Government responding to Lloyd’s concerns on the development of the regulatory reform expressed in our previous submissions. We are pleased to note that a number of amendments to the initial proposals are in line with Lloyd’s views. These include:

  • recognition of the distinct nature of insurance business and introduction of a specific insurance objective for the PRA;
  • establishing a separate insurance division within the PRA, headed by an appropriate senior official;
  • appreciation that an insurance firm failure is much less likely to be of systemic importance than failures in the banking sector.

UK representation in Europe and internationally

The Government is committed to engage proactively with European and international policymakers. Nevertheless, Lloyd’s is concerned that the number of different bodies representing the UK internationally on financial regulatory affairs will make it difficult for the UK to present a united front. We emphasize the importance of co-ordinating positions on different regulatory issues between different entities.

We suggest that UK supervisory entities continue to co-operate with industry when developing their approaches to the EU and international policymaking.

Timetable for the UK regulatory reform implementation

It is desirable that the new regulatory architecture is established as soon as practically possible to avoid any legal uncertainty; however, it is equally important that new regulatory approaches are appropriately developed and new legislation is correctly drafted.

The financial services industry is undergoing major regulatory reform at European and international levels, which creates resource constraints for the industry and its regulators.

Regulation of Lloyd’s

We welcome the Government’s confirmation that the PRA will be a lead regulator of Lloyd’s as a whole and a prudential regulator for the Society of Lloyd’s and Lloyd’s managing agents.

The PRA response to insurance supervision says that ‘the PRA, FCA and the Society of Lloyd’s will enter into new co-operation arrangements’. We strongly believe that such arrangements should build on the existing co-operation agreement between the FSA and the Society of Lloyd’s, which ensures an effective working relationship.

Lloyd’s remains unclear on where the boundary between prudential and conduct regulation will lie and, as a result, of how much engagement the FCA will seek with the Society of Lloyd’s and Lloyd’s managing agents.

FCA approach to regulation

In June 2011, the FSA held a conference on the future of business conduct regulation and published a policy paper on the FCA Approach to Regulation.

Lloyd’s submitted a response to the consultation document outlining Lloyd’s structure and oversight of the conduct of business within the Lloyd’s market.

Next steps

A Parliamentary Joint Committee on the draft Financial Services Bill is scrutinising Government proposals. The Committee is due to report in December 2011 and it has already started receiving evidence from expert witnesses, members of public and the Government.

The Government intends to introduce the Bill into the Parliament before the end of this year, although this timeline looks challenging. In the meantime, the FSA has moved towards a new regulatory structure by replacing its current Risk and Supervision Business Units with a Prudential Business Unit and a Consumer and Markets Business Unit.

Additional information

Please visit Government Affairs pages on Lloyds.com to learn more about the UK regulatory reform.