5.2 The UK Regulatory Framework and Other Regulators

The Twin-Peaks Architecture

UK financial regulation uses a twin-peaks model: one regulator focuses on the prudential safety and soundness of firms (the PRA), the other on conduct and consumer protection (the FCA). The Bank of England sits above both for systemic stability, and HM Treasury (HMT) sets the legal framework and retains certain policy and resolution powers.

The Bank of England

The Bank of England is the UK's central bank. Its financial stability mission is delivered through:

• The Financial Policy Committee (FPC) — identifies, monitors, and takes action to remove or reduce systemic risks. It can give directions and make recommendations to the PRA and FCA (e.g., the leverage ratio, countercyclical capital buffer). The FPC also has a secondary objective to support the economic policy of the Government.
• The Monetary Policy Committee (MPC) — sets Bank Rate and the stock of asset purchases to meet the 2% CPI inflation target, set by the Government.
• The Prudential Regulation Authority (PRA) — operationally independent subsidiary of the Bank, supervising around 1,500 banks, building societies, credit unions, and insurers.

The Bank is also the resolution authority for banking failures alongside HMT (the Banking Act 2009 special resolution regimes).

HM Treasury (HMT)

HM Treasury is the government department responsible for financial services policy. HMT:

• Sets the legal framework through Acts of Parliament (e.g., FSMA, the Financial Services Act 2012, the Financial Services and Markets Act 2023).
• Sets the FCA and PRA's remits and certain Have regard duties through recommendation letters.
• Holds the resolution powers for major bank failures (transfer to private purchaser, temporary public ownership).
• Owns UK Government Investments (UKGI) and the National Infrastructure Investment Bank.

HMT does not supervise individual firms; that is the FCA and PRA's role.

The Financial Conduct Authority (FCA)

The FCA is the conduct regulator for around 50,000 authorised firms and the prudential regulator for around 23,000 firms not regulated by the PRA. It is a company limited by guarantee, independent of government, funded by fees on the industry.

FCA statutory objectives (under FSMA as amended by the Financial Services Act 2012):

• Strategic objective: ensure that the relevant markets function well.
• Operational objective 1 — consumer protection: securing an appropriate degree of protection for consumers.
• Operational objective 2 — market integrity: protecting and enhancing the integrity of the UK financial system.
• Operational objective 3 — effective competition: promoting effective competition in the interests of consumers.

The FCA also has a duty to discharge its general functions in a way that advances the consumer protection objective, and to have regard to the principles of good regulation including the need to minimise the adverse effects on competition, the international character of financial services, and the desirability of facilitating innovation.

FCA powers include: rule-making (FCA Handbook), authorisation and variation of permission, supervision, enforcement (financial penalties, public censure, prohibition orders, withdraw authorisation), product intervention powers, criminal prosecution of certain offences (e.g., insider dealing), and approving Senior Managers.

The Prudential Regulation Authority (PRA)

The PRA is a subsidiary of the Bank of England. Its statutory objectives are:

• General objective: to promote the safety and soundness of PRA-authorised firms — primarily by ensuring firms carry on their business in a way that avoids risks to the stability of the UK financial system and minimises any adverse effects.
• Insurance objective: to secure an appropriate degree of protection for those who are or may become policyholders.

The PRA regulates deposit-takers (banks, building societies, credit unions), designated investment firms, and insurers. Its powers include authorisation, supervision, setting prudential rules (capital, liquidity, governance), enforcement, and resolution cooperation with the Bank.

Other UK Regulators and Bodies

How the Bodies Interact

The framework relies on memoranda of understanding (MoUs) and statutory coordination duties:

• The FPC issues recommendations to the FCA and PRA; both must act or explain.
• The FCA and PRA coordinate on firms regulated by both (most large banks and insurers): the PRA leads on prudential matters, the FCA on conduct. The PRA must consult the FCA before varying or cancelling a dual-regulated firm's permission.
• The FCA and PRA coordinate on the SMCR: the FCA approves Senior Managers; both enforce the Conduct Rules.
• The PSR coordinates with the FCA and Bank of England on payment-system oversight.
• The ICO and FCA share jurisdiction on data protection in financial services; the FCA expects firms to treat data security as a conduct issue.
• The CMA shares jurisdiction over mergers and markets; the FCA has concurrent competition powers in financial services.
• The FOS and FSCS are arm's-length statutory bodies funded by the industry but operationally independent; the FCA sets their rules and they report to the FCA board.

The Twin-Peaks Model in Practice

For most retail financial services firms (advice, mortgage, general insurance distribution, payments, investment managers below the PRA threshold), the FCA is the sole regulator. For deposit-takers, major investment firms, and insurers, the firm is dual-regulated — the PRA for prudential matters and the FCA for conduct. The PRA leads on the supervision of dual-regulated firms but the FCA has a statutory right to information and to require action on conduct issues.

This split is the twin peaks model: it reflects the lesson from the 2007–08 crisis that prudential and conduct objectives can conflict where they sit in one regulator, and that both require dedicated expertise and a strong, independent voice.