Financial Services Fireside Friday - Twin Peaks - The FSA operational changes

16 March 2012

Contacts

Peter Snowdon, Hannah Meakin and Simon Lovegrove

Transcript

Interviewer (Simon Lovegrove): Hello there and welcome to the latest Financial Services Fireside Friday. As the Financial Services Bill makes its way through Parliament a number of changes are already happening within the FSA. Peter, starting off, the FSA is moving to what it calls “independent but coordinated regulation”. Could you tell us a bit more about that?

Interviewee (Peter Snowdon):Yes, I think the starting place there is to look at the Dear CEO letter that was sent out at the beginning of February and that confirms that the FSA, from the 2nd April, will be moving to an arrangement whereby it splits itself internally, effectively shadowing the two new regulators, the PRA and the FCA. There will be a group within the FSA that deals with prudential regulation and there will be a group within the FSA that deals specifically with more conduct based regulation. The idea is that they will operate separately but will be coordinated. They will make their own separate regulatory judgments, looking ahead to when they will be separate regulators. There will be a mechanism, we understand, for coordinating judgments at FSA level in certain circumstances, but I think the key thing to take away is that as of 2nd April we will have these two shadow regulators within the FSA umbrella.

Interviewer (Simon Lovegrove): And Hannah from a firm’s perspective what are the key operational changes?

Interviewee (Hannah Meakin): Hector Sants in a speech recently described the key operational change as being in terms of ARROW visits for firms which are due to have an ARROW visit in the course of the next year. That obviously will only affect duel regulated firms which are due to have an ARROW visit during that period, in terms of the changes, because those firms can still expect to have their ARROW visit but it will be conducted by two different groups of people. Those from the prudential side and those from the conduct side of the FSA. And Hector talks about firms expecting to be asked potentially the same questions but the people will be asking those questions for two different purposes based on their two different sets of new objectives. However, as I say, that will really only affect firms that will be dual regulated and we assume that there is also going to be a lot of operational changes that will impact on a more day to day basis. For example, we assume that firms can expect to start dealing with two different sets of people within the FSA, potentially having to provide information to those two different sets of people or fill in their forms for those two different sets of people.

Interviewer (Simon Lovegrove): Peter in the new structure how will these supervisory models differ?

Interviewee (Peter Snowdon): Well, the approach that's going to be taken, its quite an interesting development really, because if one looks back at one time in some of the speeches which Hector Sants gave we saw talk about there being a very much more rules based approach, being the focus of the FCA, whereas the PRA would be more judgement based. In fact what seems to be the case now is that both of these shadow regulatory groups will be focusing on judgements. But I think firms can expect slightly different approaches taken in terms of the day to day, so we understand the prudential group will be looking at certain questions, certain fixed questions which they will approach, focusing on financial stability, which of course is one of the key issues which the PRA will be looking at in the future. Whereas the conduct team within the FSA, will be producing something which is rather more familiar, a letter to the board describing issues which they’ve discovered during visits and so on. I think Hannah also touched on an interesting point which is ARROW visits as such only have a finite life now. We understand that as of the middle of next year we will probably see the end of ARROW visits and perhaps moves to more themed based visits. And I think even pre to 2013, when ARROW is dropped, we are going to see more themed visits and those are different for firms, and firms need to think about managing themed visits in a different way from the way they manage the relationship around ARROW visits.

Interviewer (Simon Lovegrove): Just thinking forward, where do we see the FSA focusing their attention in the next twelve months?

Interviewee (Hannah Meakin): Well, obviously at the end of the next twelve months the FSA will be splitting into two new authorities, as Peter said the PRA and the FCA and there’s a lot of work to be done during that period. In particular, we understand that the authorities will be publishing two new papers setting out how they see those two new authorities working in more detail during the course of the year. However, they have also said that they are going to start working on various things in the meantime. Those include things like developing those two new supervisory structures, thinking about splitting up the FSA Handbook into the parts that will apply to the PRA and those that will apply to the FCA. They have also talked about things like recasting their threshold conditions so that they better reflect the two sets of objectives or the twin peaks model. We’re slightly unclear as to what they mean by that and it also seems a little bit premature given that they will still be working within the scope of the Financial Services and Markets Act for the next year.

Interviewer (Simon Lovegrove): And I think another thing to keep an eye out for is that the MOU on coordination has been published, but the detailed procedures still need to be worked out. Have you any other thoughts Peter?

Interviewee (Peter Snowdon): Yes, I think couple of interesting things there. I think the FSA is very keen that boards continue to manage their businesses properly and this is emphasised in at least one of the speeches that we’ve seen Hector Sants make. I think the other thing, which is a little bit more difficult for firms to deal with, is the FSA, as many people will know, has been looking for some time at behaviours, behaviours of firms towards the FSA. And there is an entreaty in at least one or two of the speeches to say couldn’t you be a bit more co-operative when we make findings against you, could you get on and sort out these issues. And I think there is a sort of an implication there that some firms have been foot-dragging when they have to deal with issues and the FSA is keen to encourage them to act rather more quickly.

Interviewer (Simon Lovegrove): Thanks Peter. Now there’s obviously a lot coming out which we’ll be tracking on our Phoenix technical resources web pages. That concludes this Financial Services Fireside Friday. Bye bye.

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