The dismantling of the FSA is part of a regulatory shake-up announced by Chancellor George Osborne which will give the Bank of England a strengthened role.
Under the plan, the FSA will be replaced by a new Prudential Regulatory Authority (PRA), a Consumer Protection and Markets Authority (CPMA) and a Financial Policy Committee. A separate Economic Crime Agency (ECA) will take over enforcement functions from the FSA and SFO.
The break-up of the tripartite system of financial regulation – ushered in by then Chancellor Gordon Brown in 1997 – will be in place by 2012.
However, in a webinar conference hosted by law firm Herbert Smith, lawyers said there remains much uncertainty about the precise role of the new bodies. They also warned the lack of clarity could lead to overlapping roles and in-fighting.
Speakers said there are many grey areas still to be resolved, in particular the split of functions between the PRA and CPMA.
The CPMA will be charged with ensuring good conduct of business in retail and financial services, whilst the PRA will have responsibility for prudential regulation of banks, insurers and investment banks.
Partner Patrick Buckingham, who specialises in financial services regulation, said defining the precise roles of the two bodies will prove troublesome.
“Trying to work out who will be responsible for what will be difficult,” he says. “We could have both institutions implementing similar rules. What about principles for business? Some aspects look like prudential and others conduct of business.”
He said although the soon-to-be established PRA will have responsibility for prudential regulation of key institutions, it might make more sense for the CPMA to take the lead role in the regulation of insurance intermediaries and mortgage firms.
“In an ideal world we will have complete transparency as to who does what. My worry is we have not got this – but we should strive for it.”
Stephen Flaherty, Herbert Smith dispute resolution of counsel, added it was unclear which body will have oversight for systems and control requirements.
“The nightmare scenario is one of institutional dysfunctionality,” says Buckingham.
“The new system needs total transparency as to who does what with no overlap or underlap. I expect intensive supervision to continue but if turf wars between the CPMA and PRA begin this could be horribly troublesome for firms and difficult to manage.”
Flaherty also questioned the ability of the Bank to take on new enforcement responsibilities – a role it has not had for some time.
The establishment of the ECA also generated concerns with Flaherty pointing to the danger of watering down current enforcement practice.
“The FSA has upped its game in the enforcement over the last few years and this now looks to be taken away from it and given to the ECA,” he says. “My concern is this might damage current enforcement activity.”
There were also fears the 2012 timetable to implement the changes is too rushed.
Participants then discussed the growing tide of European legislation, pointing to three new European agencies which will likely have “significant powers” by 2011.
They painted a picture of a new world of European supervision where national regulatory powers are eroded by a common European rule book.