UK Parliamentary report comments on financial supervision reform
Mon 23 Jan 2012
The Parliamentary Joint Committee on the Government’s proposals to restructure UK regulatory architecture published its findings and recommendations at the end of 2011.
The Committee was set up in September 2011 to review the draft Financial Services Bill, which establishes the new regulatory architecture, and to make recommendations for improvement, where considered necessary.
The Committee received written and oral evidence from a wide range of stakeholders, including market practitioners, supervisory authorities and consumer groups. The report, published on 19 December 2011, discusses concerns raised in the course of the inquiry and suggests a number of changes to the draft Financial Services Bill.
The report is critical of some proposals and says that the Bill needs significant amendment if it is to help prevent a future crisis. It points to change in regulatory culture as a cornerstone of the reform and notes that this will not be achieved without changes to the Bill to clarify objectives, allocate appropriate powers and create proper accountability for the supervisory institutions.
Bank of England and Financial Policy Committee
The report makes recommendations for adjusting the governance structures of the Bank of England and its Financial Policy Committee (FPC), tasked with macro-prudential supervision of the UK financial industry. The report suggests that FPC membership should include experts from across the financial services industry, including insurance.
The FPC should be allowed to request necessary information directly from institutions (rather than rely on the PRA and the FCA) ‘if it thinks that requesting the information directly… could cause delay or have adverse consequences’. This may have unfortunate consequence of supervisory duplication for the regulated firms.
Prudential Regulatory Authority (PRA)
The PRA’s current primary objective focuses on reducing risks to the stability of the UK financial system, which is macro-prudential in its nature. As the PRA is a micro-prudential regulator, this needs to be reflected in its objectives. The report therefore suggests a secondary objective is introduced ‘to reduce potential costs of failure to the Financial Services Compensation Scheme, taxpayer funds and customers’.
When Hector Sants (PRA’s Chief Executive designate) gave oral evidence to the Committee sittings, he suggested that judgment-led supervision should be referred to as ‘forward-looking supervision’, to reflect the nature of regulation that aims to intervene based on assumptions for future developments. The report recommends that the Bill is amended to introduce the concept of forward-looking supervision and give the PRA the necessary powers to implement such a regulatory approach.
The report does not make recommendations for requiring the PRA to have consumer panels, but suggests that public consultation requirements are reinforced. It is also proposed that at least one member of the PRA board has specialist expertise in insurance.
Financial Conduct Authority
One of the main concerns in relation to the FCA is that the definition of ‘consumer’ and, as a result, the FCA’s jurisdiction is too wide. Evidence has been submitted that differentiation needs to be made between different types of consumer that require different levels of protection.
The report by the Joint Committee dismissed the argument and suggests that the scope remains unchanged. On the other hand, the Treasury Select Committee’s report on the FCA, published in January 2012, recommends that further consideration is given as to how the FCA can distinguish between retail and wholesale consumers.
Co-ordination of supervisory activities
Lack of appropriate co-ordination between regulators and duplication of supervisory effort remains a significant concern for the industry. The report recommends that the PRA and FCA co-ordinate their activities as far as possible to minimise the burden on dual-regulated firms. A draft Memorandum of Understanding that sets out co-ordination between the PRA and the FCA should be released at the time the Financial Services Bill is introduced to Parliament.
The Treasury, the Bank of England, the PRA and the FCA will each have separate responsibilities for representing UK interests abroad. It is therefore vitally important that the UK speaks with a single voice at all levels and to all international organisations. The report strongly supported proposals for an international regulatory committee which would co-ordinate views on international matters. Such a committee should include representatives of the PRA, the FCA, the Bank of England and the Treasury and report to the Chancellor on their work.
The Government needs to consider the recommendations of the Draft Financial Services Bill Committee and formally respond before introducing the draft Financial Services Bill to Parliament, which is expected shortly.
The Government aims to have new regulatory architecture in place in early 2013.