The Structure of the UK Financial Services Industry: Regulators, Committees and the Safety Net
What this domain tests
Domain 1 is the map of the system: who regulates whom, how the regulators themselves are governed, and how the industry is organised. Questions are factual - statutory objectives, the role of individual committees, compensation limits, and the split between prudential and conduct supervision.
The statutory framework
The Financial Services and Markets Act 2000 (FSMA) is the parent statute. It creates the general prohibition: no person may carry on a regulated activity in the UK by way of business unless authorised or exempt (s19). HM Treasury sets the legislative framework and appoints the regulators, but does not supervise firms.
Since the Financial Services Act 2012 the UK operates "twin peaks":
- PRA - a Bank of England subsidiary with two objectives: general safety and soundness, and, for insurers, policyholder protection. It supervises roughly 1,500 banks, insurers and large investment firms.
- FCA - three operational objectives: consumer protection, market integrity and competition. It sets conduct standards for all firms and prudential standards for those outside the PRA's remit - tens of thousands of firms.
- PSR - an FCA subsidiary acting as economic regulator of payment systems.
Inside the Bank of England sit the MPC (monetary policy), the FPC (financial stability, able to make recommendations and give directions on macroprudential tools such as the countercyclical capital buffer) and the PRC (prudential supervision of individual firms).
The safety net
- FSCS: deposits £85,000 per eligible person per firm; investments £85,000; long-term insurance - 100% of an annuity and 90% of the present value of other benefits, with no upper cap.
- Financial Ombudsman Service: free, independent dispute resolution for eligible complainants.
- Money and Pensions Service: the guidance body created in 2019, replacing earlier arrangements.
Worked example
A question asks which body could require banks to build capital buffers against a credit boom. Supervision of an individual bank points to the PRA; but the macroprudential lever belongs to the FPC, which can direct the PRA and FCA on the countercyclical buffer. The answer is the FPC - not the PRA, and not the FCA, which has no macroprudential direction power.
Traps that cost marks
- Mixing up objectives: competition is FCA-only; policyholder protection is PRA-only.
- Believing HM Treasury supervises firms or writes the Handbook.
- Confusing the FPC (system-wide stability) with the PRC (firm-level prudential judgements).
- Quoting the old £50,000 deposit limit instead of £85,000.