New regulators on the block

Lucy Mair finds out about the new financial regulators that will take over from the FSA this April

Once a little-known regulatory institution, the Financial Services Authority (FSA) has come to the fore recently in the wake of the financial crisis and recent scandals involving Libor-rigging and the mis-selling of financial products to consumers.

But at the end of March the FSA will be replaced by two new regulatory authorities: the Prudential Regulation Authority (PRA), which will focus on whether banks, insurers and investment firms hold enough capital and are financially sound, and the Financial Conduct Authority (FCA), which will look at how firms go about their business, including how they interact with consumers and whether they obey market rules. These authorities will be complemented by the Financial Policy Committee, an umbrella organisation that will look at the systemic risks in the UK's financial services industry at a high level to prevent a repeat of the 2008 crisis.

What does the FSA do?

The FSA currently supervises the financial sector in the UK by making sure it's stable and working efficiently. It also works to ensure the public are treated fairly in their dealings with financial services firms. Since the financial crisis and the bailout of the Royal Bank of Scotland and Lloyds Banking Group in 2008, the FSA has become a more intrusive regulatory force and has taken a harder line against financial institutions involved in misconduct.

In June 2010, chancellor George Osborne announced the government's intention to replace the FSA as a single financial services regulator with two new successor bodies in order to make the UK's financial regulatory framework more robust. Since then, the FSA has continued its investigations into problems in the banking sector, while also restructuring its internal operations in preparation for this year's changes. Its operations have been split into two service areas: the Prudential Business Unit (PBU), which will become the PRA, and the Conduct Business Unit (CBU), which will become the FCA.

What do the changes mean?

The PRA and FCA will formally come into existence on 1 April 2013. By splitting the FSA's current responsibilities into two new organisations the two new bodies will be able to better focus on single objectives and reduce tensions over the allocation of resources.

The most significant change, however, is the transfer of responsibility for supervising the financial health of the UK's banking and insurance sectors to the PRA, which will become a subsidiary of the Bank of England (the Bank) rather than an independent body. When it takes on the supervisory role, the Bank will become one of the most powerful central banks in the world.

In late February, current managing director of the PBU within the FSA Andrew Bailey was appointed deputy governor of the Bank of England and chief executive of the Bank's new PRA. He said: "We have a big job ahead to ensure the UK has a stable financial system made up of banks, insurers and investment firms able to support activity in the economy and the needs of the public. There have been important and painful lessons from the financial crisis and we must ensure that the UK has a successful system of financial regulation now and for the future."

One of the PRA's first tasks will be to complete an assessment of the risks being taken by the big banks by going through their accounts in detail, as Bailey has insisted that the problems that led to the 2008 financial crisis have not yet been resolved. Meanwhile the FCA will continue to ensure banks fulfil their duties to compensate individuals and businesses for the mis-selling of payment protection insurance (PPI) and interest rate products.