LONDON - As most of Britain shuts down for the Easter holiday, workers at the Financial Services Authority will be busily putting the final touches to the largest overhaul of the country’s financial regulation in more than a decade.
Over the weekend, the last signs at the Financial Services Authority’s headquarters in the Canary Wharf financial district in London will be taken down. In their place will stand the logo of the Financial Conduct Authority, the new consumer protection agency that starts work next week.
And across town, many of the British regulator’s staff have spent much of the last three months moving to their new offices next to the Bank of England, the country’s central bank. The 1,300 employees will form part of the Prudential Regulatory Authority, a new watchdog that will oversee Britain’s largest banks.
The major regulatory changes signal the end of the Financial Services Authority.
Set up in the late 1990s to respond to the growing complexity of Britain’s financial industry, the regulator has been severely criticized for its failure to deal with the recent financial crisis. To make amends, the Financial Services Authority has tried to bolster its enforcement work, doling out multimillion-dollar fines related to the rate-rigging scandal and pursuing more insider trading prosecutions.
“The last 13 years have been a roller coaster ride,†said David Scott, a regulatory partner at the law firm Freshfields Bruckhaus Deringer in London.
As part of the overhaul, the Financial Services Authority’s banking supervision and consumer protection divisions will be split into separate regulators. By dividing the work between the Financial Conduct Authority and the Prudential Regulatory Authority, British officials are acknowledging that regulators became overstretched.
With around 4,000 regulators to police all of Britain’s financial industry, analysts say the Financial Services Authority routinely shifted its emphasis from guarding against major financial shocks to protecting consumers against potential fraud.
The dual role had significant drawbacks.
At the beginning of the financial crisis, British regulators admitted responsibility for failing to spot risky lending practices at the British bank Northern Rock, which had to be saved by local taxpayers. In 2011, the Financial Services Authority also took partial blame for the failure of Royal Bank of Scotland, which received a multibillion-dollar bailout in 2008. The firm’s failure resulted, in part, from a lack of regulatory oversight, according to a report from British authorities.
“Between prudential and conduct regulation, one tended to dominate the other,†said Andrew Bailey, the new chief executive of the Prudential Regulatory Authority. “To be effective, regulation needs to be focused.â€
In the face of growing criticism, British regulators have been trying to clean up their act.
Alongside greater scrutiny over how banks operate, attention also has centered on increased prosecutions and fines for illegal behavior, particularly as a number of recent scandals have tarnished London’s reputation as a financial hub.
Those include a $2.3 billion loss from illegal activity in London by a former UBS trader, Kweku M. Adoboli, and a $6 billion trading loss at a London-based unit of JPMorgan Chase.
In response, the Financial Services Authority has been seeking larger fines for wrongdoing. The total amount of financial penalties for the 12 months through March 27 rose more than fivefold, to £423 million, or $640 million, compared with the same period a year earlier.
The largest fines have related to the manipulation of the London interbank offered rate, or Libor. In December, the Financial Services Authority secured its largest-ever payout from the Swiss firm UBS as part of a global Libor settlement worth a total $1.5 billion. The Royal Bank of Scotland and Barclays also received the second- and third-largest ever financial penalties, respectively, from the British regulator in connected to the rate-rigging scandal.
And in one final settlement before the Financial Services Authority closed its doors, the British regulator fined the local insurer Prudent £30 million on Wednesday for failing to tell authorities about its plans to buy the rival Asian insurance company AIA Group.
The show of muscle has extended to criminal prosecutions. After criticism that it did not pursue enough white-collar crimes, the British authority has won 22 convictions for insider trading since 2009, with another six individuals awaiting trial.
In its most recent conviction, Richard Joseph, a self-employed trader, was sentenced to four years in prison this month after he made around $1 million from illegal tips that he received from contacts inside JPMorgan Chase and UBS, according to court documents.
“This verdict should send a clear message about the consequences to anyone else who might be tempted to do the same,†said Tracey McDermott, director of enforcement and financial crime at the Financial Services Authority.
