RegulationJun 12 2013

Dividing line for City watchdog

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      In many respects, the powers conferred on the PRA and FCA are unprecedented in nature and application, including powers to ban the sale of product types; to intervene early and forcefully where firms do not cooperate with the regulator; and to direct certain unregulated holding companies to move capital around the group or stop paying dividends.

      As a counterweight to the breadth of powers entrusted to the two new bodies, parliament has introduced a legal requirement that a full investigation be conducted and a written report provided to HM Treasury wherever there has been a possible significant regulatory failure by the PRA or FCA – or, indeed, by both regulators.

      It was a hallmark of the FSA’s approach to regulation from its creation in 1998 that it wished to be open and learn the lessons where a potential regulatory failure had occurred. It was this approach that led to full investigations through the FSA’s internal audit division, and the publication of detailed written reports following the closure to new business of Equitable Life Assurance Society, the collapse of Northern Rock and the regulator’s oversight of the process for setting Libor. In each case the regulator showed commendable honesty and openness about its own failings of supervision, as well as putting into context the failings of others.

      Despite this apparent willingness to conduct detailed investigations and publish reports on a voluntary basis, parliament nevertheless decided that a formal statutory mechanism was necessary for the future. The reasons why it decided to introduce this hardwired process are the subject of much debate. Relevant context for this decision includes the publicly aired tensions between the FSA’s chairman, Adair Turner, and the chair of the Treasury select committee, Andrew Tyrie MP.

      These tensions were concerning legal restrictions on the FSA’s ability to publish the skilled person’s report prepared in relation to the Royal Bank of Scotland and its acquisition of ABN Amro in 2007 – which eventually led to preparation and publication of a report by the FSA into the background to RBS’s failure and the FSA’s regulation of the bank during that period. In addition, the Treasury select committee publicly raised concerns about the governance and accountability of the Bank of England, which owns and oversees the PRA. The new duty therefore ensures that the PRA will be required to conduct a full investigation and publish findings where a significant failure of regulation by the PRA may have occurred, even where the Bank of England’s preference is for no such report to be produced.

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