Regulatory Framework for UK Banking and Credit Institutions

This report provides a detailed analysis of the regulatory framework governing banking and credit institutions in the United Kingdom. It begins with an introduction to the importance of the banking sector in the UK economy and the impact of the financial crisis. The report then explores the roles of the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) in regulating UK banks, highlighting their responsibilities, objectives, and powers derived from the Financial Services and Markets Act 2000 (FSMA). It examines the PRA's focus on the safety and soundness of financial firms and the FCA's role in ensuring the proper functioning of financial services and protecting consumers. The report also discusses the influence of European regulations, such as CRR and CRD IV, on the UK banking sector, and the impact of the Financial Services (Banking Reform) Act 2013. The analysis covers key principles followed by the PRA, including judgment-based, forward-looking, and risk-focused approaches. Overall, the report offers a comprehensive overview of the UK banking law landscape.

Running head: BANKING LAW
BANKING LAW
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Introduction:
The banking and finance sector as held by Sulimierska and others, plays a very crucial
role in the economy of any country that contributes a major part of the gross domestic product1.
London is a banking centre of global importance; several globally renowned banking groups
either have headquarters or have very prominent existence in the city. Ten years after the
financial crisis that hit UK and other countries almost 10 years ago, causing recessions, many of
the scars created by it on the economy of UK is about to heal.
As said by Glynos and others, the banking sector of United Kingdom is controlled by the
Prudential Regulation Authority (PRA) for prudential purposes2. Prudential Regulation Authority
is a part of the Bank of England, the central bank of UK and the Financial Conduct Authority
(FCA) for the conduct purposes. The primary source of the framework of legislation controlling
the regulation of banking and financial services in the country is the Financial Services and
Markets Act 2000(FSMA) as put forward by Sulimierska, Malgorzata, and Alessandro Attilio
Antonio Miele3. While the present regulatory framework of UK gathers its existence from FSMA
and other similar legislations and rules, it is argued by de-Ramon and others that it also greatly
influenced by other European laws that put forward minimum criteria for the regulation of banks
and other banking services in the European Economic Area (EEA)4. The major part of the
framework is established by the European regulations, which have direct effect on the country,
1 Sulimierska, Malgorzata, and Alessandro Attilio Antonio Miele. "An investigation how quantitative easing
programme, Vickers’ ring-fencing regulation and the ‘Brexit’announcement impact on UK banking
sector." International Journal of Empirical Finance 5.3 (2017): 155-166.
2 Glynos, Jason, Robin Klimecki, and Hugh Willmott. "Logics in policy and practice: a critical nodal analysis of the
UK banking reform process." Critical Policy Studies 9.4 (2015): 393-415.
3 Sulimierska, Malgorzata, and Alessandro Attilio Antonio Miele. "An investigation how quantitative easing
programme, Vickers’ ring-fencing regulation and the ‘Brexit’announcement impact on UK banking
sector." International Journal of Empirical Finance 5.3 (2017): 155-166.
4 de-Ramon, Sebastian, William Francis, and Kristoffer Milonas. "An overview of the UK banking sector since the
Basel accord: insights from a new regulatory database." (2017).

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specifically Regulation (EU) 575/2013 on prudential need for credit institutions and investment
firms (Capital Requirements Regulation) (CRR) in addition to Directive 2013/ 36/ EU on the
capital requirements (Capital Requirements Directive IV) (CRD IV), that implements BASEL
III, which is the main source for capital, liquidity and leverage need in European Economic Area.
After the recession, the major development over the past year was the enactment of the
Financial Services (Banking Reform) Act 2013, better known as Banking Reform Act in
December 2013. This particular act puts forward the framework for the implementation of
several recommendations of the Independent Commission on Banking (ICB), which was created
by the government in year of 2010 to consider and allow recommendations to reform the UK
banking sector. The Banking reforms Act is basically an enabling act which empowers the HM
Treasury to make secondary legislation and powers to Prudential Regulation Authority, Financial
Conduct Authority and Bank of England to set out detailed scope and performance of new
reforms by making regulatory rules and regulations.
In this assignment, the regulatory framework for banking and credit institutions in UK
has been extensively discussed and elaborated.
Discussion:
The responsibility of regulation and supervision for UK banks is divided between the
Prudential Regulation Authority, which is a subsidiary of the Bank of England and the FCA
(Financial Conduct Authority) as discussed by Dalvinder Singh5. The FPC (Financial Policy
Committee) within the Bank of England though not directly involved for the regulation or
supervision of banks individually, has a mandatory responsibility to identify vulnerabilities,
5 Singh, Dalvinder. Banking regulation of UK and US financial markets. Routledge, 2016.

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imbalances and risks in the financial system of UK and to take proper steps to cope with those
risks to protect the wider economy.
As per John Kevin Ashton and others, both Prudential Regulation Authority and
Financial Conduct Authority derive their authority and power from the amended version of
Financial Services and Markets Act 2000 (FSMA) which sets out the aims for each of the
regulator and requires every regulator to use its powers in such a way that will lead to achieve
the required objectives6. The powers, liabilities and objectives of each such regulator have been
discussed in details below.
The Prudential Regulation Authority:
The prudential regulator of all the deposit taking institutions like banks and building
societies together with insurance companies and large investment companies is known as
Prudential Regulation Authority. The Prudential Regulation Authority regulated firms are also
controlled by Financial Conduct Authority in matters related to conduct of businesses. It
indicates that the firms are dual controlled, that is controlled and regulated by two bodies.
Under Financial Services and Markets Act 2000, it is a crime for any person to get
involved and engaged in ‘regulated activities’ by means of United Kingdom businesses unless
authorized or exempted from the authorization need. What exactly constitutes the regulated
activities is provided in the secondary legislation given under the Financial Services and Markets
Act 2000 as said by Julian Burling7. The firms that want to carry on deposit taking activities are
needed to get authorization to do such from the Prudential Regulation Authority. As argued by
6 Ashton, John Kevin, et al. "Has the Financial Regulatory Environment Improved in the UK? A Capture-Recapture
Approach to Estimate Detection and Deterrence." (2018).
7 Burling, Julian. "The Potential Effect of Brexit on Insurance Regulation in the UK." Insurance Regulation in the
European Union. Palgrave Macmillan, Cham, 2017. 79-106.

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Anita Anand, the application to the Prudential Regulation Authority for authorization must
include all the activities which the prospective bank wants to continue irrespective of the fact
that whether those are specified in Financial Services and Markets Act 2000 (Prudential
Regulation Authority- Regulated Activities) Order 20138. The Prudential Regulation Authority is
needed to totally get engaged in the authorization process of those classes of firms and may ask
questions or information from the applicant.
As per Paul Barnes, Prudential Regulation Authority has a statutory aim under the
Financial Services and Markets Act 2000 to promote the safety and soundness of the firms that it
regulates9. These firms may include banks. The Prudential Regulation Authority is needed to
move forward this aim mainly by seeking assurance that the business of the firms authorized by
Prudential Regulation Authority could be expected to have stability of the UK financial system
and also by seeking to minimize the negative effect that may be caused on the UK financial
system due to the failure of Prudential Regulation Authority authorized firm. The second part of
the objective shows that the Prudential Regulation Authority supervisory work is not expected to
act on a ‘zero failure’ basis. Thus main part of Prudential Regulation Authority’s approach to
supervision is based on the creation, maintenance and implementation of the proper recovery and
resolution arrangements.
The Prudential Regulation Authority has a general power under the provisions of
Financial Services and Markets Act 2000 to make regulations to be applied to the firms regulated
by it and to issue guidance with relation to, firstly carrying on by such firms of controlled
activities and secondly, other unregulated business activities carried on by such types of firms.
8 Anand, Anita. "The Enforcement of Financial Market Crimes in Canada and the United Kingdom." Corruption and
Fraud in Financial Markets: Malpractice, Misconduct and Manipulation (Wiley, 2019) (2018).
9 Barnes, Paul. Stock market efficiency, insider dealing and market abuse. Gower, 2016.

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The Prudential Regulation Authority can make rules as it considers required for the purpose of
advancing any of its aims. The Prudential Regulation Authority though has an active approach to
supervision, but it also focuses on the most important risks to its statutory aims. The Prudential
Regulation Authority depends and takes help from set of information and data in developing
supervision judgments and depends mainly on banks and others which it controls to submit such
data, information as mentioned by Oliver Burrows, Katie Low, and Fergus Cumming10.
As argued by Abdul Karim Aldohni from a governance perspective, the Prudential
Regulation Authority board is chaired by Bank of England’s governor whereas the Deputy
Governor of the Bank for Prudential Regulation is the chief executive of the Prudential
Regulation Authority11. The board also comprises of the Deputy Governor of the Bank for
Financial Stability, the chief executive of FCA and some other non executive directors. For
administrative matters and reviewing the Prudential Regulation Authority’s strategy, the
Prudential Regulation Authority and its Board both are accountable to the Bank of England.
As laid by Kern Alexander and Rosa María Lastra, in order to advance with the
objectives of Prudential Regulation Authority, three key principles are to be followed which are
judgment based, forward looking and focused on the risks12. As per Alison Lui, in judgment
based approach, supervisors reach judgments on the risks that a firm is facing, that it poses on
the main objectives13. As per Tilley, Sharadha V., Brian Byrne, and Joseph Coughlan, the
approach being forward looking, the supervisors not only just assess firms against existing risks
10 Burrows, Oliver, Katie Low, and Fergus Cumming. "Mapping the UK financial system." Bank of England
Quarterly Bulletin(2015): Q2.
11 Aldohni, Abdul Karim. "Is ethical finance the answer to the ills of the UK financial market? A post-crisis
analysis." Journal of Business Ethics 151.1 (2018): 265-278.
12 Alexander, Kern, and Rosa María Lastra. "Banking regulation and supervision: a UK perspective." Research
Handbook on Central Banking. Edward Elgar Publishing, 2018.
13 Lui, Alison. Financial stability and prudential regulation: a comparative approach to the UK, US, Canada,
Australia and Germany. Routledge, 2016.

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but also against those that may occur in future14. In this way the supervisors are always taking
precautions beforehand. Another principle that is needed to be followed is that the focus must be
always kept on those issues and those firms that can impose the greatest risk on the stability of
the UK financial system.
The Financial Conduct Authority:
As per Burling, the Financial Conduct Authority is mainly liable for control of the
business conduct in all the firms controlled by Financial Services and Markets Act 2000 as well
as the business conduct in relation to wholesale plus retail financial markets that aid these
markets15. Such Financial Services and Markets Act 2000 regulated firms include banks and
other firms authorized by Prudential Regulation Authority. The prudential supervision not
subjected to prudential control by Prudential Regulation Authority which could involve a part of
subsidiaries of bank is controlled by Financial Conduct Authority.
Under the Financial Services and Markets Act 2000, the Financial Conduct Authority
holds an aim to assure that the scope for financial services like the UK must do proper
functioning. As held by Philip Treleaven, this objective is supported by other operational
objectives that are as follows; firstly, securing a proper protection level for the consumers,
secondly, protecting and enhancing the UK financial system integrity, thirdly by encouraging
efficacy in the financial market, and finally advancing efficient competition in consumer interest
in the markets for controlled financial services given by the investment exchanges16.
14 Tilley, Sharadha V., Brian Byrne, and Joseph Coughlan. "An Empirical Analysis of the Impact of Fines on Bank
Reputation in the US and UK." Available at SSRN 2980352 (2017).
15 Burling, Julian. "The Potential Effect of Brexit on Insurance Regulation in the UK." Insurance Regulation in the
European Union. Palgrave Macmillan, Cham, 2017. 79-106.
16 Treleaven, Philip. "Financial regulation of FinTech." Journal of Financial Perspectives 3.3 (2015).

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While working on the objective of the consumer protection, the Financial Conduct
Authority must give importance to need of the customers of timely information and also suggest
whatever is appropriate and required for reason and principle that proper care to consumers must
be provided by the firms.
The Financial Conduct Authority has an intention to take proper approach in order to
satisfy the consumer protection and competition aims. Though was existent for a short interval of
time, the Financial Conduct Authority has launched many market surveys that include market
study on savings and has revealed that it expects that such market studies to be more proactive
element.
As given by K Lannoo, it is assumed that as time passes it will use an adequate protection
agenda for consumers and declared that Financial Conduct Authority will put a positive outcome
at the focus of the regulation process17. In regard to this agenda, Financial Conduct Authority has
powers under the Financial Services and Markets Act 2000 to introduce new rules that may
comprise of the capability to stop the sale or distribution of some commodities if Financial
Conduct Authority apprehends risk of consumer detriment to be caused by that financial product
that needs immediate intervening action. In addition to these, Financial Conduct Authority has
additional powers that include the power to publicly issue warning notice at the regulatory
investigation’s 1st phase before finding any guilt or offence and the power to make public the
ban of any controversial misleading financial promotions.
The Financial Conduct Authority has also power under Financial Services and Markets
Act 2000 to make rules that can be applied to all firms and to give guidance on all regulated as
well as other unregulated activities related to business continued by regulated firms. The
17 Lannoo, Karel. "EU financial market access after Brexit." Intereconomics 51.5 (2016): 255-260.

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Financial Conduct Authority can make rules which it considers required for forwarding with one
or more of the aims of operation. It mainly concentrates on rules in relation to business conduct
of firms of which the most significant is the interest of the customer.
From the governance point of view, the Financial Conduct Authority is governed by a
board of directors of which majority are non executive members appointed by the Her Majesty’s
(HM) treasury. A chief executive and a chairman direct the board; the HM treasury appointed
both of them.
The FPC:
The Financial Policy Committee or the FPC is a committee of the Bank of England. As
held by A Duncan and Charles Nolan, it has an aim of securing and developing the financial
stability plus flexibility of financial system of UK by controlling threats and implementing
proper actions required to refer any threats and imbalances in the country’s financial system18.
The FPC had the power of supervision of both the Prudential Regulation Authority and the
Financial Conduct Authority. But, the Financial Conduct Authority cannot control or give
directions to firms.
FPC has mainly two types of control over Prudential Regulation Authority and Financial
Conduct Authority. They are; firstly the broader power of recommending in respect of matters
related of financial stability supported by a statutory need for the Prudential Regulation
Authority and the Financial Conduct Authority to follow or explain and secondly, the narrow
power to perform its function to implement a macro prudential measure prescribed by the HM
Treasury by a statutory order. The Financial Conduct Authority is chaired by the Bank of
18 Duncan, Alfred, and Charles Nolan. "Reform of the UK Financial Policy Committee." (2017).

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England’s Governor and the other members are the Deputy Governors of the Bank of England
for Financial stability and Monetary Policy, the chief executive of the Prudential Regulation
Authority, the chief executive of the Financial Conduct Authority, four independent external
members and a representative of HM Treasury.
Management of banks:
Individuals performing specific functions at the UK bank are subjected to the regime of
‘approved persons’ under the provisions of FSMA according to D Singh19.This section provides
an overview of the approved person’s regulatory framework. Individuals with an intention to
carry on controlled functions need prior approval from either the Prudential Regulation Authority
or the Financial Conduct Authority. In spite of such management, misconduct results in the
banking regulation as found in 2013. In April 2013, after investigations into misconduct in
relation to various interbank benchmarks, most prominently the LIBOR benchmark in UK,
Financial Conduct Authority has forwarded two new SIFs that are concerned with the
performance in relation to submission and administration.
Such functions are split between the Prudential Regulation Authority and the Financial
Conduct Authority. The Prudential Regulation Authority may specifically mention both the SIFs
and customer dealing functions as the requirement of its approval. The Financial Conduct
Authority is bound by a duty to consider minutely whether a Prudential Regulation Authority
approved person additionally needs the approval from Financial Conduct Authority. Moreover,
the Prudential Regulation Authority may specify the SIFs for approval. The Prudential
Regulation Authority and the Financial Conduct Authority must consult with one another before
mentioning the SIFs related to a firm. The Prudential Regulation Authority must obtain
19 Singh, Dalvinder. Banking regulation of UK and US financial markets. Routledge, 2016.

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permission from Financial Conduct Authority before approving any individual for a SIF unless
such permission is waived by Financial Conduct Authority. Both Financial Conduct Authority
and Prudential Regulation Authority have the power of withdrawing approval from any person
with a SIF. If one regulator has an intention to withdraw approval granted by another, it has to
take prior permission from the other.
Approval is granted by the Prudential Regulation Authority or the Financial Conduct
Authority only after being totally satisfied that an individual candidate is fit and proper to
perform all the functions. Both Prudential Regulation Authority and Financial Conduct Authority
follow ‘fit and proper test’ for selecting approved person that constitutes a number of factors.
Such factors are honesty, integrity and reputation of the individual, his competence and financial
capability. In addition to these, a firm must employ those persons with proper skills, intelligence
and experience needed for the discharge of the liabilities he is entrusted with. However,
approved persons have several liabilities which they must fulfill otherwise they will be removed
by Financial Conduct Authority and Prudential Regulation Authority as per section 56 of the
Financial Services and Markets Act 2000 by issuing prohibition orders thereby prohibiting
approved persons to carry on the controlled functions20. Moreover, the Financial Conduct
Authority and Prudential Regulation Authority are needed to issue codes of Prudential
Regulation Authority to provide detailed information on the circumstances in which the conduct
of the approved person will cease to exist. According to Alexander and Rosa María Lastra, rights
of action’s third party can be raised for contravention done by some firms in respect of Financial
20 Financial Services and Markets Act 2000, s. 56.

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Conduct Authority and Prudential Regulation Authority rules as given in section 138D of the
Financial Services and Markets Act 20002122.
As evident in the empirical studies, the remedies are also available to any approved
persons on being removed from his position where they can apply to court for a restitution. This
is also established in section 382 of the FSMA23.
As per F Schimmelfennig, the main proportion of the banking framework is established
by the European regulations, which are of direct effect in the country24. However, it has been
suggested by E. Mourlon‐Druol, there are other EU regulations that are relevant here in this
regard are Regulation (EU) 596/2014 as Market Abuse Regulation, Directive (EU) 2015/2366 on
payment services in the internal market, Directive 2014/65/EU on markets in financial
instruments, Regulation (EU) 648/2012 on OTC derivatives, central counterparties and trade
repositories, Regulation (EU) 236/2012 on short selling and certain aspects of credit default
swaps, Regulation (EU) 2015/ 2365 on transparency of securities financing transactions and of
reuse and finally, Regulation (EU) 2016/1011 on indices used as benchmarks in financial
instruments and financial contracts or to calculate the performance of investment funds25. But as
per held by D Howarth and Lucia Quaglia, the architecture of the UK regulatory framework is
presumed to change considerably in the coming years26. As evident from June 2016 vote, UK
21 Alexander, Kern, and Rosa María Lastra. "19. Banking regulation and supervision: a UK perspective1." Research
Handbook on Central Banking (2018): 380.
22 The Financial Services and Markets Act 2000, s. 138D.
23 Financial Services and Markets Act 2000, s.382.
24 Schimmelfennig, Frank. "A differentiated leap forward: spillover, path-dependency, and graded membership in
European banking regulation." West European Politics 39.3 (2016): 483-502.
25 Mourlon‐Druol, Emmanuel. "Banking union in historical perspective: the initiative of the European Commission
in the 1960s–1970s." JCMS: Journal of Common Market Studies54.4 (2016): 913-927.
26 Howarth, David, and Lucia Quaglia. "The new intergovernmentalism in financial regulation and European
Banking Union." The New Intergovernmentalism: States and Supranational Actors in the Post-Maastricht Era 146
(2015).