FRE1 LO4: How UK financial services regulation developed (1986 to 2021)

Learning outcome 4 asks you to understand how UK financial services regulation developed. Its single assessment criterion (AC4.1) covers the history of UK regulation from 1986 to 2021, today's regulatory framework, the other regulators and the people inside and around a firm who oversee it. CeMAP® questions on this topic are often about sequence and responsibility: which body existed when, and who regulates what.

History of UK regulation, 1986 to 2021

Self-regulation within a statutory framework (1986 to 1997)

The Financial Services Act 1986 created the first comprehensive statutory regime for investment business. Its main features were:

1. Carrying on investment business needed authorisation.
2. The Securities and Investments Board (SIB) sat at the top, with powers delegated from government.
3. Most firms were regulated day to day by self-regulating organisations (SROs) for different sectors, such as IMRO for investment managers, LAUTRO for life offices and unit trust managers, and FIMBRA for independent intermediaries. LAUTRO and FIMBRA were later replaced by the Personal Investment Authority (PIA).
4. The same year saw "Big Bang": the deregulation of the London Stock Exchange.

The system was criticised as complex and fragmented, with several rulebooks and overlapping bodies. Mis-selling problems, such as personal pensions sold to people who would have been better off in their employer's scheme, added pressure for change.

A single regulator: the FSA (1997 to 2013)

• In 1997 the government gave the Bank of England operational independence over monetary policy and announced a single regulator. The SIB was renamed the Financial Services Authority (FSA) that year.
• The Financial Services and Markets Act 2000 (FSMA) came fully into force on 1 December 2001 ("N2"). The FSA took over from the SROs and other bodies and became the single regulator for banking, insurance and investment business.
• Regulation spread to new markets: mortgages from 31 October 2004 ("M-Day", when the MCOB sourcebook started) and general insurance broking from January 2005.

The financial crisis and the "twin peaks" (2008 to 2013)

The 2007–08 crisis showed weaknesses in prudential supervision and in the split of responsibilities between the FSA, the Bank of England and HM Treasury. The Financial Services Act 2012 abolished the FSA and, on 1 April 2013, created:

• the Financial Conduct Authority (FCA): conduct regulation for all firms and prudential regulation for firms not supervised by the PRA;
• the Prudential Regulation Authority (PRA): prudential regulation of banks, building societies, credit unions, insurers and major investment firms, as part of the Bank of England;
• the Financial Policy Committee (FPC) at the Bank, to watch risks to the system as a whole.

Reform after 2013

Date	Change
31 Dec 2012	Retail Distribution Review (RDR): adviser charging replaces commission for investment advice
1 Apr 2014	Consumer credit regulation moves from the Office of Fair Trading to the FCA
26 Apr 2014	Mortgage Market Review (MMR) rules: stricter affordability checks and wider advice requirements
21 Mar 2016	Mortgage Credit Directive: ESIS, 7-day reflection period, and second-charge mortgages move into the FCA mortgage regime
March 2016	Senior Managers and Certification Regime (SM&CR) starts for banks
Dec 2018	SM&CR extended to insurers
9 Dec 2019	SM&CR extended to FCA solo-regulated firms, including mortgage brokers
31 Dec 2020	End of the Brexit transition period; EU law in force is carried into UK law
2021	Financial Services Act 2021 begins adapting the regime after Brexit

Later developments outside the syllabus window, such as the Consumer Duty (31 July 2023) and the Financial Services and Markets Act 2023, build on this framework.