April 16, 2013
Visiting the website of the United Kingdom’s Financial Services Authority (FSA) tells the story: “The FSA has now become two separate regulatory authorities, and this site is no longer updated.” On April 1, 2013, after 16 years as the frontline regulator of the financial services industry in the United Kingdom, and after what some believe were massive supervisory failures, the FSA ceased to exist in its current form.
As of April 1, 2013, the United Kingdom moved to a “twin peaks” supervisory regime:
- The Prudential Regulatory Authority (PRA): A subsidiary of the Bank of England (BoE) responsible for micro-prudential regulation of approximately 1,700 deposit-taking organizations, insurers and a small number of systemically important investment firms. The PRA’s role is defined in terms of two statutory objectives: to promote the safety and soundness of the firms under its jurisdiction and, specifically for insurers, to contribute to the securing of an appropriate degree of protection for policyholders. The PRA is headed by Andrew Bailey, formerly a deputy governor of the BoE. The
- Financial Conduct Authority (FCA): An independent agency responsible for supervising the conduct of business of firms for which the PRA is the prudential regulator as well as 25,000 more financial institutions, of which most are broker-dealers, investment advisers and money managers. The FCA’s objectives are to maintain and ensure the integrity of the market, regulate financial services firms so they give consumers a fair deal, and ensure the financial services market is competitive. The FCA is led by Martin Wheatley, formerly CEO of Hong Kong’s Securities and Futures Commission and deputy chief executive of the London Stock Exchange Group plc.
In addition, to address the perceived historic weaknesses in macro-prudential oversight within the United Kingdom, the Financial Policy Committee (FPC) was established as of April 1, 2013. The FPC operates within the BoE and, with a mandate similar to the United States’ Financial Stability Oversight Council, is responsible for protecting and enhancing financial stability by ensuring emerging risks and vulnerabilities across the financial system as a whole are identified, monitored and addressed. Membership of the FPC is drawn from the senior individuals within the BoE and external members appointed by the U.K. government.
Proponents of the “twin peak” supervisory model, which is also used in Australia and the Netherlands, believe that it effectively provides for a uniform focus on prudential regulation and supervision, while also recognizing the potential inherent conflict between safety and soundness and consumer protection. Opponents of this model, reminiscent of the arguments heard in the United States when the Consumer Financial Protection Bureau was being debated, cite the burden of regulation and the potential challenges in dealing with two different regulators that have very different missions. They also question how the regulatory mandate will be balanced with continuing concerns about the sluggish economy. Like it or not, “twin peaks” is now a reality in the United Kingdom and its impact will be felt by all financial institutions doing business in the United Kingdom, including foreign financial institutions.
What the Change Means for the Financial Services Industry
For the moment, the changes may seem to be only in the names of agencies. The previous FSA Handbook has been split into PRA and FCA Handbooks, with the only noteworthy changes being some of the new powers afforded to the FCA, including promoting effective competition in the interests of consumers, the power to make temporary product intervention rules, and the power to supervise LIBOR1 The FCA also inherits consumer credit regulation from the Office of Fair Trading.
However, the following quotes from Mr. Wheatley and Mr. Bailey, respectively, provide insight into how regulation and supervision may change in the United Kingdom:
“We will spend more time looking at business models. We can demand information that banking analysts can’t, we can see figures privately. We want to move away from regulating by looking in the rear-view mirror. We will be doing interviews with CEOs and looking at where they are exposed to risk.”2
“[We have] a very big question for the biggest firms. Can you control your firm … to a level and degree that society now expects from you? It is a huge challenge for them, now, to prove that it can be done.”3
What this likely means for the financial services industry is:
- Continuing and potentially more intensive and intrusive supervision
- A strong focus on governance, risk management and culture by both the PRA and the FCA
- Challenges to compliance functions and senior management to balance the competing priorities and agendas of two regulators asking different questions around the same issues
- More likely intervention by the FCA in situations where evidence suggests that financial products and services are not operating in the interests of retail consumers or the economy as a whole
- The possibility that regulator judgment will trump management judgment in cases where the regulator believes management is not appropriately managing risk
- Heightened enforcement activity and larger fines
- Increased regulatory fees – 2 percent more compared with the old regime for a company supervised by both new regulators4
Time – and the next financial crisis – will tell whether the new U.K. regulatory regime is successful.
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1“New UK Financial Services Regulators Established and New Rulebooks Come into Effect,” Financial Institutions Advisory & Financial Regulatory Client Publication, Shearman & Sterling, April 4, 2013.
2“Martin Wheatley: the man whose job it is to protect you,” by Patrick Collinson, The Guardian, November 16, 2012.
3“FSA to give way to ‘twin peaks’ system,” by Brooke Masters, Financial Times, April 1, 2013.
4“Supervisory shake-up bumps up costs for banks,” Thomson Reuters, April 9, 2013.