Reshaping the supervisory role in the financial sector
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Reshaping the supervisory role in the financial sector The case of the UK Charles Taylor – Chief Operating Officer 25 January 2011 PowerPoint PPT Presentation

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Reshaping the supervisory role in the financial sector The case of the UK Charles Taylor – Chief Operating Officer 25 January 2011 The regulatory cycle. Phase 1 crisis management and stabilisation

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Reshaping the supervisory role in the financial sector The case of the UK Charles Taylor – Chief Operating Officer 25 January 2011

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Reshaping the supervisory role in the financial sector

The case of the UK

Charles Taylor – Chief Operating Officer

25 January 2011

The regulatory cycle

Phase 1crisis management and stabilisation

Phase 2“grand plan” emerges. G20 international cooperation, the Financial Stability Board. Turner / De Larosiere reports. Economies begin to steady

Phase 3detailed legislative proposals tabled, economies start to recover, the tension between international ideals and domestic imperatives become more apparent. Industry pushback becomes more manifest

Phase 4detail of legislative proposals is tested. Industry pushback grows, political commitment wanes. G20 falters / reassesses. Long implementation phase begins. Regulatory capture

Thirty years of the Basel process


Basel I issued


Basel III consultative document issued


Full implement’n of Basel III


Market risk amendment issued


Revised securitisation & trading book rules


Basel II issued






Basel I issued


Basel III consultative document issued


Implement’n of Basel III begins


Market risk amendment issued


Revised securitisation & trading book rules


Basel II issued


G20 endorsement of Basel III

Source: BIS December 2010

Protracted implementation timeline

Existing –vs–new paradigms

Source: H Hannoun, BCBS, March 2010

The international regulatory structure



International standards bodies and regulatory forums


Financial Stability Board

Working with IMF / OECD

EU Legislators

Council of Ministers

European Parliament

European Commission


ESRB European Systemic Risk Board


European System of Financial Supervision

EBA Banking (London)

EIOPA Insurance and Occupational Pensions (Frankfurt)

ESMA Securities and Markets (Paris)

Reports on systemic risk

Provides data from firm supervision

Source: CMS Cameron McKenna

The new UK regulatory structure

Represents UK at ESMA

Represents UK at EBA, EIOPA and ESRB


HM Treasury

CPMA: Consumer Protection & markets Authority

Bank of England

MPC: Monetary Policy Committee

FPC: Financial Policy Committee

Macroprudential tools

Normal and emergency liquidity provision to banks

PRA: Prudential Regulatory Authority

Judgement based prudential and financial supervision

  • Prudential and COB supervision

  • COB supervision

Banks & building societies

Investment banks

Insurers & other financial institutions

Insurance, mortgage and investment intermediaries

Source: CMS Cameron McKenna

The new UK regulatory philosophy

The majority of policy will be formulated at the EU level

  • Regulation now more proactive, outcomes based approach, with focus on forward looking firm based judgement

  • a key element is that orderly business failure with minimum cost should not be seen as a regulatory failure

  • The Prudential Regulation Authority (PRA) will work closely with the Financial Policy Committee (FPC) to assess systemic risks

  • The new Consumer Protection Markets Authority (CPMA) to be the “consumer champion”

  • The CPMA will aim to balance rules vs. principles in the pursuit of “deterrence and redress”

  • Transition to the new structure is planned to occur in the second half of 2012

Source: ICFR

Role of the PRA

  • PRA will be a focused prudential regulator, equipped with the philosophy, systems and skills to deliver a single statutory objective

  • PRA will promote the stable and prudent operation of the financial system through the regulation of individual financial firms with the aim of minimizing the disruption caused should they fail

  • PRA will use ”judgement” and risk models to determine potential level of impact and hence engagement

Assessing impact to define approach

Firms will be analysed and categorised as low, medium or high impact firms in terms of the impact on the economy of their failure

Supervision of low-impact firms

  • Centre on resolvability

  • Monitoring of compliance with rules and reacting to any issues that may arise

  • Basically an extension of the FSA’s current regime for smaller insurers and credit unions

    Supervision of medium-impact firms

  • PRA prepared to tolerate failure

  • PRA will seek to reduce both the probability and the impact of failure through its supervisory strategy

  • Failure of such firms may have a non-negligible impact on the financial system (or be resolved at non-negligible cost)

Assessing impact to define approach

Supervision of high-impact firms

  • For high-impact firms the impact of failure is significant

  • PRA will focus senior supervisory resource on delivering intensive, intrusive and judgement-based supervision

  • Focus on issues that significantly effect the safety and soundness of the firm

  • PRA will have a low tolerance for failure

  • PRA wants to distance itself from ’tick box’ regulation

CPMA – objective and scope

  • A more intrusive regulator with earlier intervention

  • Responsibility for the regulation of conduct in wholesale and retail markets to ensure market integrity, stability and efficiency

  • Specific focus on protecting consumers

  • Prudential and conduct of business regulation responsibility for c25,000 firms

  • Responsibility for the conduct regulation of the 2,200 firms regulated by the PRA

  • Regulation delivered using a risk model focusing on early risk identification and prioritisation of interventions

CPMA – consumer protection

  • Using tools for comprehensive risk identification and analysis

  • Earlier intervention and less reliance on firms’ own systems and controls and on disclosure to minimise risks

  • Industry-wide interventions rather than firm-specific inspection (although these will continue at a similar frequency used by FSA)

  • Ability to deploy resources flexibly to tackle issues and risks

CPMA – regulation of conduct in wholesale financial markets

  • Protecting London’s position as a major global financial centre

  • Promoting confidence in the stability, integrity and efficiency of UK financial market

  • UK representation to ESMA

Key considerations

  • Effective cooperation between national and international regulatory institutions

  • Management of systemic risks / data within and cross border

  • Bankers’ remuneration

  • Wind down mechanisms / resolution schemes

  • Competition within the banking sector

  • Competition between financial centres

  • Suitably qualified supervisory staff

  • Economic and financial stability – sovereign and private debt stabilisation – international capital flows

  • Assessing the aggregate cost of new regulation

A closing thought

  • Regulatory effectiveness is determined more by the underlying philosophy of regulation and quality of the judgements made than the specific regulatory structure

  • Will two new focused authorities perform better than the old regime?

  • What does good regulation look like?

Reshaping the supervisory role in the financial sector

The case of the UK

Charles Taylor – Chief Operating Officer

25 January 2011

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