Nov 2011 – Putting talk into action

Chris Lawrenson, head of legal services, and Jeremy Palmer, head of financial policy, at the BSA, give an update on regulatory reform

It seems remarkable that the regulatory reform exercise is still at a pre-legislative stage, but this long gestation has the advantage of permitting significant scrutiny of the Government’s plans - in a nutshell, these amount to replacing the FSA with a new regulatory regime from early 2013 comprising:

• The Financial Policy Committee (FPC) - a committee of the Bank of England, responsible for identifying and monitoring ‘macro’ or ‘systemic’ risks and taking appropriate action

• The Prudential Regulatory Authority (PRA) – a subsidiary of the Bank charged with ‘micro’ prudential regulation of banks, building societies, insurers and certain investment firms

• The Financial Conduct Authority (FCA) – an independent body given the role of protecting and enhancing confidence in financial services – the FCA will be responsible for conduct of business regulation, protecting consumers and promoting competition.

The Government set out its plans in a White Paper and a draft Bill published in the summer, and there was further information in planned operating models for the PRA and the FCA, which were also launched earlier in the year. The Bill will significantly amend, but not replace, the Financial Services and Markets Act 2000. The Treasury Committee is examining aspects of the proposals and the Parliamentary Joint Committee is undertaking pre-legislative scrutiny of the draft Bill (and plans to report in December). The Bill will then begin its progress in Parliament, which should complete by the end of 2012.

The BSA welcomes the series of helpful, high-level regulatory principles proposed in the White Paper for the new regulators – notably, efficiency, proportionality, consumer responsibility, transparency, promotion of competition, and co-ordination. We also strongly support the Government’s acceptance of the need for a ‘single gateway’ for authorisations and certain other regulatory functions. Banks, building societies and certain other businesses will be ‘jointly regulated’ by the PRA and the FCA, so a high-level of coordination between the regulators is crucial if the new system is not to be undermined by ‘overlaps’ and ‘underlaps’.

However, there are serious concerns about the costs of the migration to a ‘twin- peaks’ (PRA/FCA) regulatory model. The ‘best estimate’ of total costs (in addition to transitional costs) was £400 million in the impact assessment included in a consultation paper in February. By the time the White Paper was published, the estimate had risen to £770 million. The increase seems to be related to the Bank of England’s decision that the PRA should not share the FCA’s IT systems inherited from the FSA. We are seeking clarification and reassurance about regulatory IT costs.

The FCA

The BSA broadly supports the proposals for a more interventionist, pro-active FCA, although a number of elements (not least the new product intervention powers) need careful further consideration. We are working closely with the FCA ‘shadow’ teams to help a smooth passage to effective, fair and proportionate regulation and, in particular, to ensure that smaller firms are not disproportionately affected by regulatory burdens.

It is very important that the new FCA builds on the recent improvements in conduct of business regulation. While we recognise that the proposed regulators will, understandably, wish to make their mark as new organisations, it would be very unhelpful for consumers, businesses and the UK economy if, from early 2013, there was a regulatory ‘hiatus’ while new regulatory approaches were floated. The FSA’s recent supervisory enhancement programme; its strengthened consumer/collective redress powers; its move to a ‘shadow’ FCA; and current regulatory changes, such as the mortgage market review and retail distribution review, should mean that the FCA can ‘hit the ground running’.

We also think it important not to over-load the FCA with additional responsibilities. The key advantage of the twin-peaks regulatory model is that it should enable the regulators to focus on their basic objective and not be looking in different directions. Therefore, we do not agree with other commentators who would like to see the FCA, for example, become a competition regulator (as opposed simply to having a role in promoting competition) or regulate claims-management companies (CMC regulation requires overhauling, but not re-locating). We do see a case for the FCA to regulate consumer credit, but not under a model that dismantled the legislation and transferred into the regulatory handbook – unless it involved a significant streamlining of the rules and a removal of the copious ‘gold-plating’.

The PRA

The BSA welcomes a number of promises made in the May 2011 paper on the PRA’s approach to banking supervision, as well as in the White Paper itself. In particular, that the intensity of supervisory engagement will relate to the degree of systemic risk posed by a bank or society. Also, that supervisors will focus on the big picture and the materiality threshold for issues raised with firms will be high. We also support early intervention to reduce the risk of disorderly failure – as an industry we are still paying the costs of this not having been done with Bradford & Bingley and the Icelandic banks.

Among the points of detail, we welcome the Government’s decision not to limit the scope of appeal to the Upper Tribunal. We remain to be convinced that the White Paper has come up with the right answer on how to have proper consultation on matters of European legislation. Going through the motions at the point of implementation is fast becoming a total irrelevance. Consultation is needed much earlier in the process.

We are also wary about the FSA / PRA’s enthusiasm for the use of third parties, such as auditors, where it is our members who again foot the bill. FSMA Section 166 reports have already become a costly habit at FSA. Moreover, use of section 166 effectively outsources, and thereby conceals, part of the overall regulatory cost burden – so that part can be neither controlled nor scrutinised. We have made a couple of suggestions to help rein in this tendency.

Finally, on a positive note, the BSA is ready to play its part in the public debate and engagement with relevant stakeholders called for in the opening paragraph of the May 2011 paper as the PRA’s approach is further refined.