10.1 The FCA and the PRA

The Twin-Peaks Model

The UK operates a twin-peaks regulatory system for financial services, established by the Financial Services Act 2012, which amended the Financial Services and Markets Act 2000 (FSMA 2000). Two separate regulators sit side by side, each with distinct objectives and remits: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The model deliberately splits conduct regulation (how firms behave towards customers and markets) from prudential regulation (whether firms are financially sound and able to meet their obligations).

Quick Answer: The FCA is the conduct regulator for all authorised firms and the prudential regulator for firms not supervised by the PRA. The PRA is the prudential regulator of insurers, banks, building societies, credit unions and major investment firms. Large insurers are dual-regulated — supervised by both.

The Financial Conduct Authority (FCA)

The FCA is the conduct regulator for all authorised firms in the UK, including every insurer and every insurance intermediary. It also acts as the prudential regulator for firms that are not regulated by the PRA — for example, insurance brokers and smaller investment firms.

FCA's Objectives

The FCA's objectives are set out in FSMA 2000 (as amended). Beneath a single strategic objective — ensuring that the relevant markets function well — sit three operational objectives:

A secondary competitiveness and growth objective was added in August 2023 (s.1B(4A) FSMA): so far as reasonably possible, the FCA must act in a way that facilitates the international competitiveness and growth of the UK economy in the medium to long term. This is secondary — it must not override the operational objectives.

What the FCA Regulates in Insurance

• Conduct of business: how insurance is sold, advised on, administered and claimed. The relevant rulebook is the Insurance Conduct of Business Sourcebook (ICOBS) in the FCA Handbook (covered in detail in Chapter 11).
• Insurance distribution: the rules governing brokers, tied agents, appointed representatives, aggregators and insurers' own sales staff (the assimilated Insurance Distribution Directive / IDD framework).
• Prudential supervision of non-PRA firms: insurance brokers, managing general agents (MGAs) and most intermediaries are prudentially regulated by the FCA.

The Prudential Regulation Authority (PRA)

The PRA is part of the Bank of England and is the prudential regulator of insurers, banks, building societies, credit unions and major investment firms. It was established in 2013 alongside the FCA when the former Financial Services Authority (FSA) was abolished and its functions split.

PRA's Objectives

The PRA has two primary statutory objectives under FSMA 2000:

1. Safety and soundness of the firms it regulates — promoting their safety and soundness, having regard to the potential adverse effect on the UK financial system of a firm's failure.
2. Policyholder protection — in relation to insurers, securing an appropriate degree of protection for those whose interests would be adversely affected by the failure of an insurer.

The PRA also shares the secondary competitiveness and growth objective with the FCA.

Governance

The PRA is governed by the Prudential Regulation Committee (PRC), a committee of the Bank of England's Court of Directors. The PRC sets the PRA's strategy and policy and is accountable to the Bank's Court. The Bank of England also houses the Financial Policy Committee (FPC), which has macro-prudential responsibility for the UK financial system as a whole and can issue directions to the PRA and FCA.

Dual-Regulated Firms

Large insurers are dual-regulated: they are prudentially supervised by the PRA and conduct-supervised by the FCA. Examples include the largest UK life and general insurers. The two regulators coordinate under a Memorandum of Understanding (MoU) required by FSMA, which sets out how they share information and avoid duplication or gaps. The PRA is the prudential supervisor and the FCA is the conduct supervisor; the FCA cannot impose a rule that would conflict with the PRA's prudential objectives without consultation. Smaller insurers, and all insurance intermediaries, are regulated by the FCA alone for both conduct and prudential matters.

Solvency UK — Brief Overview

The UK's prudential regime for insurers was historically governed by the EU Solvency II directive. Following the UK's withdrawal from the EU, the PRA and HM Treasury undertook a review of Solvency II to adapt it to the UK market. The rewritten regime is known as Solvency UK. Reforms were phased in: the risk margin reforms and certain early-reporting changes took effect on 31 December 2023, the Matching Adjustment reforms on 30 June 2024, and the bulk of the regime (internal models, group SCR flexibility, third-country branches, mobilisation, thresholds, currency redenomination) came into force on 31 December 2024. Solvency UK is covered in more detail in section 10.3.

Key Takeaways

• The UK's twin-peaks model splits conduct regulation (FCA) from prudential regulation (PRA), both operating under FSMA 2000.
• The FCA is the conduct regulator for all authorised firms; the PRA is the prudential regulator for insurers, banks, building societies, credit unions and major investment firms.
• Large insurers are dual-regulated by both, with coordination governed by a Memorandum of Understanding.
• The FCA's three operational objectives are consumer protection, market integrity, and effective competition; the PRA's are safety and soundness of firms and (for insurers) policyholder protection.
• The PRA's rewritten UK insurer solvency regime, Solvency UK, came into force in phases through 2024, with the bulk effective 31 December 2024.