Many in the industry are disappointed by the lack of detail in the latest consultation on the break-up of the FSA
The government has now published its plans for shaking up regulation of the financial services.
For brokers, the headline issue is probably the consultation paper’s comments on the future of the Financial Services Compensation Scheme (FSCS).
The paper moots the break up of the FSCS into a number of separate schemes. This would mean no more cross-subsidy of different classes of levy payers, which currently means for example that insurance companies are expected to bail out banks and vice versa.
The other option is to leave the scheme as a single entity, which would entail continuing the existing cross-subsidy arrangements.
The first option is likely to be favoured by brokers, given current concerns over the escalating cost of the FSCS. But what else does the paper, entitled A new approach to financial regulation, judgment, focus and stability, tell us about the future shape of financial regulation?
Greenest of the green
The paper confirms chancellor of the Exchequer George Osborne’s pledge to replace the FSA with two new bodies – the Consumer Protection and Markets Authority (CPMA) and the Prudential Regulation Authority (PRA), which will be part of the Bank of England.
But reaction to the paper’s publication has been lukewarm. Robert Peston, the BBC’s business editor quickly labelled it the “greenest of green papers”.
Solicitors Pinsent Mason partner Bruno Geiringer describes the absence of detail on insurance regulation in the consultation paper as “remarkable”.
This week’s consultation paper is only an interim document. Further consultation is promised in 2011, with draft legislation later in the year. Director of regulatory consulting at public affairs agency Lansons, Richard Hobbs, is pessimistic about the prospects of the legislation receiving Royal Assent before 2013.
Meet your new supervisor
For all, possibly barring the top three brokers, the paper indicates that the CPMA will be the sole regulator.
The CPMA will be responsible for the authorisation and supervision of all financial institutions not subject to the PRA’s prudential regulation.
It will also be responsible for governing the conduct of firms authorised by the PRA, meaning that it alone will have dealings with all financial services companies. As a result, the paper suggests that the CPMA should be responsible for collecting fees and levies.
The paper envisages that the CPMA will maintain the FSA’s recent and more interventionist and pre-emptive approach towards supervision.
Biba head of training and compliance Steve White is hopeful that the CPMA will adopt a more proportional approach to regulation than the FSA. “We have proven ourselves to be a low-risk sector,” he notes.
Fragmented
For insurers the picture is less clear. The prudential regulation of large insurers will come under the wing of the PRA.
It is unclear which insurers will be policed solely by the CPMA, believes financial services litigation partner at national commercial law firm Beachcroft, Dan Preddy.
“The jury is definitely still out on whether the end result of the proposed overhaul will be any less 'confused and fragmented' than the existing regime,” he says.
"The new regime is designed to address a perceived 'underlap' but brings with it the very clear risk of overlap and duplication, particularly between the PRA and CPMA.”
And these overlapping responsibilities will mean added costs, he predicts.
“The Treasury hasn't been able to measure the transitional or ongoing cost impact of the latter but 1,500 to 2,000 firms, including many small insurers, credit unions and building societies, will have to bear the additional costs of dealing with two regulators.”
