Financial Crisis Finally Spurs Regulatory Revamp in UK

Jack Humphrey, Regulatory journalist
May 19, 2011 /

Following a number of controversies that hounded the Financial Services Authority (FSA) after the 2008 financial crisis, UK will see next year a fresh and tougher approach to banking regulation with the prospective birth of new financial regulator.

The Bank of England and the Financial Services Authority (FSA) have issued today a joint paper that sets out the current view on how the Prudential Regulation Authority (PRA), which will replace the FSA in December 2012, will approach the supervision of banks, building societies, credit unions and investment firms.

However, Lansons public affairs and regulatory consulting director Richard Hobbs said the regulatory revamp may take another one year before coming into force as the Treasury “has failed to produce draft legislation for pre-legislative scrutiny by early 2011″ as proposed in its July 2010 consultation.

The resulting draft on proposed changes to the UK regulatory framework, which was published by the government on February 17, details the proposals to disband the FSA and establish a new system of more specialized and focused financial services regulators.

The Treasury proposed to establish an independent Financial Policy Committee (FPC) in the Bank of England, a new Prudential Regulation Authority (PRA) as a subsidiary of BoE, and another business regulator, the Financial Conduct Authority (FCA), which was formerly provisionally titled the consumer protection and markets authority.

The PRA will be responsible for the prudential supervision of over 2,000 firms, of which around half will be deposit-takers while the others will be insurance companies. On current data, it will regulate 157 UK-incorporated banks (of which over 60% form part of overseas banking groups), 48 UK building societies, 652 UK credit unions and 162 branches of overseas banks, split roughly equally between the European Economic Area (EEA) and elsewhere.

Hector Sants, FSA chief executive and PRA chief executive designate, said the PRA will have a different purpose “from that of previous regulatory regimes.”

In a conference in London for CEOs and senior managers of firms that will come under the PRA’s supervisory control, Sants said the new banking regulator will be tougher than the FSA and will not hesitate to publish reports on the industry’s failures.

The FSA has been scrutinized for failing to foresee the financial crisis in 2008 and for refusing to publish its report on the collapse of the Royal Bank of Scotland. The Treasury Select Committee, on the other hand, has appointed earlier this month David Walker and Bill Knight to conduct an independent review on the report.

“In designing this new model we have incorporated both the lessons learned from the last financial crisis and those from firm failures of the past,” Sants said in a statement.

According to him, the new regulatory model will be based on forward looking judgements and will be underpinned by the fact that the PRA has a single objective to promote the stability of the UK financial system and in consequence will be a very focused organization.

Andrew Bailey, FSA director of UK banks and building societies and PRA deputy chief executive designate, said the PRA will use a new framework to assess risks to financial stability to deliver its objective of stemming another financial crisis.

The Treasury’s draft presented before the London conference today outlines the principles underlying the PRA’s approach; the scope of the PRA; the PRA’s risk assessment framework; the PRA’s forward looking, judgement-led approach to supervision; the approach to policy-making that will support the judgement-led model; and the approach to authorizing firms and approving individuals.

Come June 2010, a companion paper will be published to cover the PRA’s approach to supervising insurance companies.


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