Tuesday, February 21, 2012

UK FSA Will Move to Twin Peaks Regulation Ahead of New Regulatory Regime

Starting April 2, the UK Financial Services Authority will realign into a twin peaks model of regulation paralleling the new financial regulatory system that will take effect next year. In remarks to the British Bankers Association, FSA CEO Hector Sants said that for the rest of the year the FSA will move as close as possible to the new style of regulation outlined in the government’s White Paper. Namely, that firm- specific supervision for banks, insurers and major investment firms will be carried out by two separate entities, one for prudential and one for conduct regulation.

The White Paper announced a plan to transfer prudential supervision for banks, insurers and major investment firms to a new Prudential Regulation Authority, and rename the FSA the Financial Conduct Authority, which will focus on consumer protection and market regulation. These actions will create a twin peaks style regulatory model in the UK. The current expectation is that the move to the new structure will occur early in 2013, noted the official, but this timetable is dependent on the successful passage of proposed new legislation, the Financial Services Bill, which was introduced in late January and is currently moving through the legislative process.

Meanwhile, the FSA must operate within the current legal framework of the Financial Services and Markets Act and thus cannot entirely replicate the approach set out in the White Paper. However, Mr. Sants emphasized that the FSA will move as close as possible to that model in order to ensure that the cutover to the actual oversight by the PRA and FCA is as smooth as possible.
Under the new model, there will be two independent groups of supervisors for banks, insurers and major investment firms covering prudential and conduct. All other firms, such as those not dual regulated, will be solely supervised by the conduct regulators. The supervisors will make their own, separate, set of regulatory judgments against different objectives.

In addition, under the doctrine of independent but coordinated regulation, the conduct and prudential regulators will coordinate internally to maximize the exchange of information which is relevant to their individual objectives. But they will act separately when engaging with firms.
The FSA will retain the principle of seeking to ensure that regulatory data is only collected once. In that regard, the common, current data infrastructure will be retained.

More broadly, the FSA official said that the move to twin peaks is an opportunity to drive home and further embed the move to forward-looking, proactive, judgment-based regulation. The regulator will move from the old style reactive approach to the new style proactive approach. The essence of a judgment-based approach is a willingness to intervene when the regulator decides that the outcomes will, in the future, be at variance to its mandate, even if the firm does not agree. This type of proactive intervention needs to be proportionate and justified.

The objective of the prudential group will be closely aligned with that of the coming Prudential Regulatory Authority. The overarching objective is to seek to ensure the safety and soundness of firms and to avoid disorderly failure with systemic consequences.

Similarly, the conduct group’s objective will be aligned as closely as possible with that of the Financial Conduct Authority. The overarching aim here is to ensure that markets work well by protecting consumers and protecting and enhancing the integrity of markets. Essentially, this can be distilled into three objectives, said Mr. Sants, a fair deal for consumers, fair and resilient markets, and minimizing the possibility that firms may be used for financial crime. The new conduct group within the FSA will not, however, be required to take into account the new responsibilities and powers that the pending legislation is proposing for the FCA. .

Finally, the senior official said that the new regulatory approach will abolish box ticking regulation, which was rooted in the old FSA’s conduct agenda and the days of better regulation and light touch regulation, which essentially meant that regulators were seeking to avoid second guessing management. The FSA believed that it would be sufficient to give consumers risk information at the point of sale and to seek to ensure that firms could demonstrate that they had the right systems and controls in place to ensure consumers were treated fairly.
This focus on ensuring firms had the right systems and controls and right management information led to a proliferation of requests and to the regulator being swamped by data and information. The focus was not on the outcomes experienced by consumers but on the firm’s controls. The official emphasized that in future the focus will be on whether the firms’ judgments and in particular their business models deliver good outcomes for consumers.

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