The Financial Policy Committee is one of the 3 main bodies in the United Kingdom’s financial regulatory system. It was setup in April 2013, following the downfall of the original tripartite system in the United Kingdom, which consisted of the Financial Services Authority, the Bank of England and the Treasury. The Financial Services Authority was a single regulator for all providers of financial services, the Bank of Enlgnad had a general overall supervisory role with responsibility for financial stability and the Treasury was the component government department which had overall oversight of financial regulation, political responsibility for legislation and decision-making involving public sector funding. (Possibly includes text book). However following the Financial Crisis of 2008 it was clear that this system had severely failed to identify the problems that were building up in the financial system in the likes of the mortgages markets and during the crisis itself it failed to act swiftly and decisively. This led to the tripartite system being discontinued and being replaced by a new system of financial regulation where overall responsibility was assumed by the Bank of England.
Following April 2013, the UK financial regulatory system has consisted of three main bodies. The Financial Policy Committee within the Bank of England, who are a statutory sub-committee of the Bank’s Court of Directors and are responsible for macro prudential regulation of the UK financial system as a whole. The second new body was the Prudential Regulation Authority whom are an independent subsidiary of the Bank of England and focus on more firm specific financial regulation, also known as micro-prudential regulation. This is where they manage regulation of financial institutions that manage significant risks on their balance sheets. The Financial Conduct Authority is the final of the new bodies and is a completely independent body. It is responsible for the conduct of firms, protection of consumers, regulating markets and promoting competition.
Provisions for the establishment of the FPC itself were made in the Financial Services Act 2012 and this act received Royal Assent on 19th December 2012. The provisions in the Act for the FPC, established within the Bank and with responsibility for macro-prudential regulation are a key element in remedying perceived defects in the preceding regulatory architecture. (Allen and Overy Document) Since it’s formation the Financial Policy Committee has been tasked with a macro prudential brief and charged with two main objectives. It’s primary objective being identifying, monitoring and taking action to remove or reduce systemic risks with a view to protecting and enhancing the resilience of the UK financial system. (FMRI book) Systemic risk is the risk that the failure of a major financial institution will lead to a wider failure of the whole financial system (FMRI). It is therefore the job of the Financial Policy Committee the macro prudential regulation to foresee these systemic risks and take action in order to mitigate these risks so that markets don’t seize up like in 2008 where the credit markets were frozen. Under the Financial Services Act of 2012, systemic risks include: those attributatble to the distribution of risk within the financial sector, unsustainable levels of leverage, debt or credit growth. (FMRI Book) It’s secondary objective is to support economic policy of the government.
In order to achieve its two objectives, the Financial Policy Committee has two main powers. These are the powers of recommendation and direction. The Financial Policy Committee has the power to make recommendations to the two main regulators, the Prudential Regulation Authority and the Financial Conduct Authority about the exercise of their functions, such as adjust the rules facing regulated financial institutions. These recommendations can be issues either on a comply or explain basis and if the regulators don’t implement these comply or explain recommendations they have to explain why they haven’t. Furthermore, the Financial Policy Committee can make recommendations to the Treasury in relation to the exercise of its powers, the regulated perimeter and the on the additional macro prudential tools that the Committee believes it will need.