Post on 22-Dec-2015
Reshaping the supervisory role in the financial sector
The case of the UK
Charles Taylor – Chief Operating Officer
25 January 2011
icffr.org
The regulatory cycle
Phase 1crisis management and stabilisation
Phase 2 “grand plan” emerges. G20 international cooperation, the Financial Stability Board. Turner / De Larosiere reports. Economies begin to steady
Phase 3 detailed legislative proposals tabled, economies start to recover, the tension between international ideals and domestic imperatives become more apparent. Industry pushback becomes more manifest
Phase 4detail of legislative proposals is tested. Industry pushback grows, political commitment wanes. G20 falters / reassesses. Long implementation phase begins. Regulatory capture
Thirty years of the Basel process
Source: BIS December 2010
01-2019Full
implement’n of Basel III
12-2009Basel III
consultative document
issued
07-2009Revised
securitisation & trading
book rules
06-2004Basel II issued
12-1996Market risk amendment
issued
07-1988Basel I issued
01-2013Implement’n
of Basel III begins
12-2011Basel III
consultative document
issued
12-2007Revised
securitisation & trading
book rules
12-2006Basel II issued
12-1997Market risk amendment
issued
07-1992Basel I issued
11-2010G20 endorsement of Basel III
1990 2000 2010 2020
Existing –vs– new paradigmsExisting paradigm New paradigm
Monetary policy focused narrowly on price inflation
Monetary policy focused on price inflation, but leaning against financial imbalances
Microprudential policy focused on individual banks
Microprudential policy married with macroprudential focus on systemic risk
Reliance on internal risk management, self-regulation and market discipline
Higher bank capital, better governance, and expanded perimeter of regulation
Fiscal policy does not incorporate financial stability concerns
Countercyclical fiscal policy (fiscal buffers)
Domestic focus More global coordinationSource: H Hannoun, BCBS, March 2010
The international regulatory structure
Source: CMS Cameron McKenna
ESRB European
Systemic Risk Board
EU LegislatorsCouncil of MinistersEuropean ParliamentEuropean Commission ESFS
European System of Financial SupervisionEBA Banking (London)
EIOPA Insurance and Occupational Pensions (Frankfurt)
ESMA Securities and Markets (Paris)
G20
BCBS, IOSCO, IAIS, IASBInternational standards bodies and
regulatory forums
FSBFinancial Stability Board
Working with IMF / OECD
Co-ordination
Reports on systemic risk
Provides data from firm supervision
The new UK regulatory structure
Source: CMS Cameron McKenna
GovernmentHM Treasury
Bank of England
PRA: Prudential Regulatory AuthorityJudgement based prudential and financial supervision
CPMA: Consumer
Protection & markets
Authority
FPC: Financial Policy Committee
Macroprudential tools
MPC: Monetary Policy Committee
Banks & building societies Investment banks Insurers & other
financial institutions
Insurance, mortgage and investment intermediaries
Represents UK at EBA, EIOPA and ESRB Represents UK at ESMA
Normal and emergency liquidity provision to banks
Prudential and COB supervision
COB supervision
The new UK regulatory philosophy
Source: ICFR
The majority of policy will be formulated at the EU level• Regulation now more proactive, outcomes based approach, with
focus on forward looking firm based judgement• a key element is that orderly business failure with minimum cost
should not be seen as a regulatory failure• The Prudential Regulation Authority (PRA) will work closely with
the Financial Policy Committee (FPC) to assess systemic risks• The new Consumer Protection Markets Authority (CPMA) to be the
“consumer champion” • The CPMA will aim to balance rules vs. principles in the pursuit of
“deterrence and redress” • Transition to the new structure is planned to occur in the second
half of 2012
Role of the PRA
• PRA will be a focused prudential regulator, equipped with the philosophy, systems and skills to deliver a single statutory objective
• PRA will promote the stable and prudent operation of the financial system through the regulation of individual financial firms with the aim of minimizing the disruption caused should they fail
• PRA will use ”judgement” and risk models to determine potential level of impact and hence engagement
Assessing impact to define approachFirms will be analysed and categorised as low, medium or high impact firms in terms of the impact on the economy of their failureSupervision of low-impact firms • Centre on resolvability• Monitoring of compliance with rules and reacting to any issues that may
arise• Basically an extension of the FSA’s current regime for smaller insurers and
credit unions
Supervision of medium-impact firms • PRA prepared to tolerate failure• PRA will seek to reduce both the probability and the impact of failure
through its supervisory strategy• Failure of such firms may have a non-negligible impact on the financial
system (or be resolved at non-negligible cost)
Assessing impact to define approachSupervision of high-impact firms • For high-impact firms the impact of failure is significant• PRA will focus senior supervisory resource on delivering intensive,
intrusive and judgement-based supervision • Focus on issues that significantly effect the safety and soundness of the
firm• PRA will have a low tolerance for failure• PRA wants to distance itself from ’tick box’ regulation
CPMA – objective and scope
• A more intrusive regulator with earlier intervention• Responsibility for the regulation of conduct in wholesale
and retail markets to ensure market integrity, stability and efficiency
• Specific focus on protecting consumers• Prudential and conduct of business regulation
responsibility for c25,000 firms• Responsibility for the conduct regulation of the 2,200
firms regulated by the PRA• Regulation delivered using a risk model focusing on early
risk identification and prioritisation of interventions
CPMA – consumer protection
• Using tools for comprehensive risk identification and analysis
• Earlier intervention and less reliance on firms’ own systems and controls and on disclosure to minimise risks
• Industry-wide interventions rather than firm-specific inspection (although these will continue at a similar frequency used by FSA)
• Ability to deploy resources flexibly to tackle issues and risks
CPMA – regulation of conduct in wholesale financial markets
• Protecting London’s position as a major global financial centre
• Promoting confidence in the stability, integrity and efficiency of UK financial market
• UK representation to ESMA
Key considerations
• Effective cooperation between national and international regulatory institutions
• Management of systemic risks / data within and cross border• Bankers’ remuneration• Wind down mechanisms / resolution schemes• Competition within the banking sector• Competition between financial centres • Suitably qualified supervisory staff• Economic and financial stability – sovereign and private debt
stabilisation – international capital flows• Assessing the aggregate cost of new regulation
A closing thought• Regulatory effectiveness is determined more
by the underlying philosophy of regulation and quality of the judgements made than the specific regulatory structure
• Will two new focused authorities perform better than the old regime?
• What does good regulation look like?