Hot Features
Premium
Level up your trading with our powerful tools and real-time insights all in one place.
As we approach the end of 2012, providing of course we get past 21 December when the Mayan calendar seems to indicate that the world will end, the replacement of the Financial Services Authority (FSA) by the Prudential Regulatory Authority (PRA) will take place. There are some signs that the industry is nervous about the impending change. Perhaps it is simply the change in the middle name. Some banks may be a bit way of the term “Regulatory” as opposed to “Services”.
Andrew Bailey, who is potentially the deputy head of the PRA, has already warned this week that the Authority will exhibit “a different model of supervision” than the “light touch” approach of its predecessor. Among other things, he indicated that the PRA will attempt to be more narrowly focused on their visits with the banks, centering in on two or three critical items rather than a broader number of compliance issues. This may be more palatable to some, especially those who have a plethora of issues that need attention, it may end up being more unsettling than one would presuppose. It’s kind of like having a company-wide audit. You can be fairly certain that every rock will be turned over. The narrower approach could end up creating a tendency to hide things under certain rocks that bankers hope will be overlooked.
Frankly, it was a bit disconcerting that Bailey said that he would take the blame if the PRA focused on three particulars, but the bank went bust on a fourth. Gee, thanks, Mr. Bailey, that sure make me feel more comfortable.
In a similar vein, but bordering on scary, Bailey has said that he wants to eliminate “the blame game”. It may just be me, but what I am hearing is that “we are going to deal with the problem but we’re not going to hold anyone accountable. What kind of approach is that? On the other hand, if he means “we are going to hold you accountable, Mr. Guilty Party, so don’t waste your time pointing fingers at others,” then that’s a horse of a different colour.
The mandate of the PRA will regulate” three potential elements: policies and rules on firms’ resilience (covering such areas as capital, liquidity and leverage); supervisory assessments and interventions; and policies and mechanisms to support resolution. The PRA’s approach to regulation will consist of policy-making to guard against a range of possible outcomes and the application of that policy through effective supervision. All firms will be subject to a baseline level of supervisory oversight designed both to reduce the probability of failure and, as it is not the PRA’s role to prevent firm failure in all circumstances, to ensure that if a firm does fail, it does so in an orderly manner.”
In a nasty bit of foreshadowing, Mr. Bailey in his current role as managing director of the FSA, sent a letter to RBS CEO Steven Hester “encouraging” Hester to consider divesting RBS’ US investment banking subsidiary. This is about as close to crossing a regulatory line as Mr. Bailey could come. One little baby step beyond “encouraging” would be construed as “directing”. The rub comes in that both words are sometimes used interchangeably in business conversation, one being just a bit more polite than the other. Neither the FSA nor the PRA has or will have the authority to direct a company’s specific actions to address an operational or governance issue. To this point, Mr. Bailey appears to be getting an itchy trigger finger. I’m just an observer, but it seems to me that a regulator is the last entity that should be pushing boundaries. That’s part of what they are supposed to regulate.
The UK banking system needs to be regulated, but it needs to be regulated, at least in part, by example. Mr. Bailey’s letter did not set a proper example. Any nervousness about the transition from the FSA to the PRA is probably justified. I’m not going to worry about the transition to the PRA until we get past 21 December. If the Mayans were right, it won’t matter.
