The banking crisis of 2007/08 resulted in radical reforms of the Financial Services Act (2000-2012). After the crisis, the Independent Commission on Banking employed Sir John Vickers to conduct an investigation into the crisis. In his report, he found many systematic flaws; the main one being that banks had insufficient liquid capital.

From this report, there were two main recommendations made: Banks should improve capital levels, and there should be a separation of retail and investment banking.

Therefore the government decided to disband the Financial Services Act and create a new regulatory system that would be based within the Bank of England. This new system would consist of three different components: the Financial Policy Committee, the Prudential Regulatory Authority and the Financial Conduct Authority.

Financial Policy Committee

The Financial Policy Committee is tasked with mitigating the build-up of risks within the system (economy) as a whole. The problem with the previous regime was a lack of a clear mandate, or who was responsible; so this is the main objective of this committee.

The Financial Policy Committee has two key powers over the Financial Conduct Authority and Prudential Regulatory Authority. Firstly, they can recommend a particular course of action to both bodies and then if necessary, they can make formal directions to both bodies.

As a body of the Bank of England, it is clear where the decision-making power lies.

Here is a list of some tools which are available to the Financial Policy Committee:

• Countercyclical capital buffers
• Sector capital requirements
• Maximum leverage ratios
• Time-varying liquidity buffers
• Restrictions on the distribution of profits

Prudential Regulatory Authority

The Prudential regulatory authority is a micro regulator and is a division of the Bank of England and is tasked with the supervision of individual deposit takers.

They have control over approximately 330 banks, 50 building societies and 600 credit unions. The Prudential Regulatory Authority has set a series of threshold conditions that firms must meet to be able to operate, these are concerned with the firm's capital and liquidity and are continuously monitored.

Their main aim is to ensure that if a firm does fail, it does so with minimum impact on the provision of financial services and if a firm is closing, that they have an orderly ‘wind down'. They place firms into different categories based on the risk to the UK system and also have to provide approval for senior individuals who will be taking a position of influence within a firm.

Financial Conduct Authority

The Financial Conduct Authority focuses on the conduct of business regulation and sets out standards to which firms are expected to adhere. Their objectives are to protect and enhance confidence in the UK financial system and to promote competition.

They cover around 24,500 firms within the UK and these firms are categorised according to their impact on customers and the market (C1 - complex to C4 – minimal complexity).