Financial Conduct Authority
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Delivering a twin peaks regulatory model within the FSA
In a speech to the British Bankers’ Association, Hector Sants, chief executive of the FSA, gave an update on the progress of the regulatory reform programme. He announced a major milestone in the regulatory reform programme, namely the introduction of a ‘twin peaks’ model operating within the FSA from 2 April 2012.
The new model will mean that banks, building societies, insurers and major investment firms will, from this date, have two groups of supervisors, one focusing on prudential and one focusing on conduct. All other firms (i.e. those not ‘dual regulated’) will be solely supervised by the conduct supervisors.
He explained that the FSA could not completely replicate the approach proposed by the Government in the Financial Services Bill published on 26 January, but he emphasised that the changes would go as far as possible to ensure that the cutover to the new regulatory structure in early 2013 will be seamless.
The key characteristics of the model include:
Two independent groups of supervisors for banks, building societies, insurers and major investment firms, covering prudential and conduct;
Supervisors making their own, separate, set of regulatory judgements against different objectives;
‘Independent but coordinated regulation’ designed to allow internal coordination between both conduct and prudential supervisors to maximise the exchange of information relevant to their individual objectives, but with supervisors still acting separately when engaging with firms; and
Retaining the principle of seeking to ensure that regulatory data is only collected once.
He emphasised that the change will embed the forward-looking, judgement-based approach and accelerate the move away from the old reactive style of regulation. He stressed that the changes must not just be structural but must involve behavioural shifts from both supervisors and firms.
Hector Sants said:
“The move to twin peaks is an opportunity to drive home and further embed the move to forward-looking, proactive, judgement-based supervision. It is an opportunity that must not be missed. We must crystallise the change from the old style reactive approach to the new style proactive approach.
“The most important change that will occur at twin peaks, in my judgement, is not the introduction of a new operational framework, but the opportunity to accelerate the process of behavioural change that the FSA embarked on when we began the reform of the supervisory process in the spring of 2008.”
He argued that if this new approach is to work effectively, firms would need to change the way they thought about regulation. Firms will be expected to:
recognise the importance of aligning their goals with those of the supervisors and society as a whole;
show a greater willingness to proactively comply with supervisory judgements. “We are not asking firms to forgo their right to challenge their supervisor if their decisions have not been properly made. But we are suggesting that dragging their feet in complying with requests when it is obvious to all that the outcome is in the best interest of society as a whole is not a behaviour which should survive in the new world”; and
Recognise that this new approach will require greater resources and expertise and thus costs more than the old reactive model which existed prior to the crisis.
Hector Sants concluded:
“It is really important that we must use this opportunity to accelerate the behavioural and cultural change needed in both regulators and firms. The new world of judgement-based regulation needs to be embraced by us all.”
Notes for editors
The FSA regulates the financial services industry and has four objectives under the Financial Services and Markets Act 2000: maintaining market confidence; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.