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Home > Regulation > UK Regulation

By Julie Patient | Published May 09, 2012

FCA/PRA: Twin peaks on the horizon

On 22 March the FSA published what will be its final business plan. The plan for the coming year sets out a clear pathway towards the new ‘twin peaks’ regime which is expected to be fully implemented in the first half of next year with the establishment of the Prudential Regulation Authority and the Financial Conduct Authority.

While the new structures are being established it is also clear that the FSA will continue to embed its revised approach to supervision and carry out the essential tasks related to ongoing monitoring of the financial services sector.

The plan highlights five key areas of focus for the FSA in the coming year.

With effect from 2 April 2012, the FSA moved to a ‘twin peaks’ model reflecting the future split into the PRA and FCA. Although these two regulators will not be formally in existence until the handover time in 2013, when the FSA will cease to exist, supervision of institutions will be based on the ‘twin peaks’ approach, operating through a prudential business unit and a conduct of business unit.

There are a number of important points to note. The FSA will still continue to operate within its existing legal framework and within its current statutory objectives. Ultimate responsibility will continue to sit with the FSA board which will need to ensure that the transition process does not cause too much disruption to the ongoing supervisory work of the FSA.

It will also need to ensure that the transition is managed cost-effectively.

The prudential and conduct of business units will develop their supervisory approaches based on the proposed statutory objectives of the PRA and FCA. Their approaches will reflect their different philosophies and the coming year will be an important period during which there will be continued movement to forward-looking, proactive and judgement-led supervision. There will be a direct impact on how firms relate to their supervisors. For some firms this will mean dealing with two separate supervisory teams and there will be a need to ensure that firms are aware not only of who to deal with, but also how to communicate effectively with the two different units, reflecting their differing emphasis and approach to supervision. Firms will need to consider whether their existing structures of communicating with the regulators remain fit for purpose.

There will be further work on the draft memorandum of understanding that will define how the two regulators co-ordinate their roles. The memorandum is fundamentally important to an effective regime ensuring that the new framework does not replicate the recognised failings of the existing ‘tripartite regime’ and will no doubt undergo some refinement as the ‘twin peaks’ approach is put into practice.

The level of work to be undertaken in transitioning to the new regime highlight the huge challenge being faced by the FSA’s key executives and staff.

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