Saturday, February 19, 2011

FSA Dear CEO Letter Updates on New Regulatory Regime as Treasury Committee Says Take Time

In a Dear CEO letter, the UK FSA said that it has changed its management structure in anticipation of a smooth transiton to a new bifurcated system of financial regulation. The Prudential Regulation Authority (the PRA), which will be a subsidiary of the Bank of England, will be responsible for promoting the stable and prudent operation of the financial system through regulation of all deposit-taking institutions, insurers and investment banks. The Consumer Protection and Markets Authority (the CPMA) will be responsible for regulation of conduct in retail, as well as wholesale, financial markets and the infrastructure that supports those markets. The CPMA will also have responsibility for the prudential regulation of firms that do not fall under the PRA’s scope.

Hector Sants, currently FSA Chief Executive, will be the Chief Executive of the PRA, while Martin Wheatley, formerly CEO of the Hong Kong Securities and Futures Commission, will be Chief Executive of the CPMA.

This internal reorganization is the first step on the road to becoming two separate regulators. The FSA assured, however, at this point it will not be moving to twin peaks regulation. Rather, the reorg begins a gradual process of change to ensure that the regime is ready in 2012 to cut over to the twin peaks approach. Integrated supervision will continue until the design and piloting of new regulatory processes and trained staff. The FSA will be subject to integrated executive and board governance throughout the transition process under Chair Adair Turner.

Meanwhile, the Treasury Committee told the Government to take the time it needs to get financial regulatory reform right. In any event, the Committee urges the Government to wait for the upcoming report of the Independent Commission on Banking before coming to conclusions. The Commission report is due in September, with an interim report set for April.

The Committee is also concerned that the current reform proposals say little about some key segments of the UK financial sector. The inappropriate regulation of non-banking sectors could cause serious and unintended damage to companies within those sectors. Thus, it is important that the Government clarify the regulatory impact of its proposals on the non-bank sectors. More broadly, the legislation to establish the new regulatory structure should be subject to pre-legislative scrutiny, over a reasonable timescale