Financial regulation to be bolder

27 June 2011 Last updated at 12:37 GMT The FCA's powers are aimed at preventing more mis-selling scandals by stepping in earlier The financial services industry faces "tougher and bolder" regulation, under plans for the forthcoming Financial Conduct Authority (FCA).

One of the successors to the Financial Services Authority (FSA), it will come into being by the end of 2012.

The FCA will oversee the way 27,000 firms, including banks, do business with customers and with each other.

It aims to prevent any more of the mis-selling that cost customers billions of pounds in the past two decades.

Margaret Cole of the FSA said the new body would be more proactive and interventionist than the FSA had been in the past.

"We will take action when a consumer detriment is building up, and not wait for it to crystallise first," she told the BBC.

New approach

In its 52-page consultation document on the powers of the new body, the FSA points out that past mis-selling scandals over private pensions, mortgage endowment polices, and split-capital investment trusts have cost customers about ?15bn.

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We will have new powers to make earlier interventions, including banning financial products and financial promotions”

End Quote Margaret Cole FSA It said billions of pounds more in compensation - likely to be well over ?5bn - will be paid when the current scandal over the mis-selling of payment protection insurance is finally resolved.

"The FSA recognises that, overall, its response to the mis-selling of PPI should have been stronger," the FSA said.

"Stronger action sooner could have limited the growth of the problem," it added.

A past criticism of the FSA has been that it watched problems building up, even when they were gaining widespread publicity in the media, and only acted once large numbers of people had been affected.

The FSA acknowledged it had been slow to react in the past.

"The response by society as a whole and, in particular, in Parliament and the media to the major mis-selling events since 1990, demonstrates that the FCA will need to have a lower risk tolerance than the FSA has had historically in this area," the FSA said.

Margaret Cole said its approach would change.

"We will be more engaged with consumer groups and will analyse what is going on, and look at consumer behaviour," she said.

"We will have new powers to make earlier interventions, including banning financial products and financial promotions."

'Restore confidence'

The FCA will be a standalone body and will oversee the conduct of all financial services firms.

It will also be responsible for the "prudential" regulation of the finances of 24,500 firms.

Among them will be personal investment companies, insurance and mortgage brokers, investment managers, corporate finance firms, financial exchanges and travel insurers.

The prudential regulation of the finances of banks, investment banks, building societies, credit unions and insurers will go to the other successor body to the FSA, the Prudential Regulation Authority (PRA).

This will be a direct subsidiary of the Bank of England.

Hector Sants, the FSA's chief executive, said: "Trust in the financial services sector is at an all time low and the new regulatory arrangements provide the opportunity to restore confidence."

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New insurance regulation unveiled

20 June 2011 Last updated at 18:54 GMT Policyholders will be more important than shareholders under the new regulatory regime The protection of insurance policyholders will be a priority for the new Prudential Regulation Authority (PRA), it has been announced.

The PRA will take over the supervision of financial institutions from the Financial Services Authority (FSA) by the end of 2012.

The Bank of England and the FSA say under the new regime, insurers will still be allowed to fail if insolvent.

But the PRA will aim be to minimise the impact on the financial system.

"The PRA's role will be to ensure there is a reasonably high probability that an insurer is able to meet claims from, and material obligations to, policyholders as they fall due," the Bank and the FSA said.

"And to make sure that where an insurer is unable to meet such claims and obligations, the adverse consequences for policyholders are minimised by ensuring that the insurer fails in an orderly manner."

The new authority will regulate 1,094 insurers in the UK as well as the country's banks.

New regime

The PRA will be report to the new Financial Policy Committee of the Bank of England, whose job will be to ensure the stability of the UK's financial system.

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The PRA will expect the firms it regulates not to engage in 'creative' compliance with its rules ”

End Quote FSA and Bank of England Last month Hector Sants, the incoming head of the PRA and the current boss of the FSA, warned that banks in the UK would be much more strictly regulated than they had been before.

Insurers in the UK have already been under the close scrutiny of regulators for most of the past decade and were largely undamaged by the financial and banking crisis of 2007-08.

All firms under the new regime will be subjected to the same "base line" level of supervision and regulation to ensure they have enough money and sufficient reserves to meet claims and pay out on investment policies.

"While insurers are not systemic in the same way as banks, their behaviour or failure nevertheless has the potential to pose risk to the stability of the financial system," the Bank and the FSA said.

"When insurance is combined with banking in a single group (as is the case for many of the largest UK banks) that may give rise to system-wide risk if the failure of the insurer threatens the financial condition of the bank," the regulators added.

Powers

The PRA will not wait for disaster to strike before acting.

It says it will use its powers to interfere directly in the management of a firm if it thinks this is needed to stop an insurer's finances deteriorating and putting the business at risk.

As well as directing management action, the PRA will be able to restrict a firm's ability to operate, impose fines or even go to court to prosecute a firm or individual who refuses to stop acting in a risky manner.

The regulators also said they would not tolerate attempts by insurers to pull the wool over their eyes.

"The PRA will expect the firms it regulates not to engage in 'creative' compliance with its rules and policies and not to engage in regulatory arbitrage designed to mask the riskiness of their activities or financial exposures," the Bank and FSA said.

The PRA will pay most attention to the biggest insurers, whose failure would pose the greatest threat of disrupting the UK financial system, to try to make sure they do not take disastrous risks.

Among them are Aviva, Legal & General, Prudential, Old Mutual, Standard Life, Lloyds banking group, as well as Lloyds of London.

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Banks face 'intensive' regulation

19 May 2011 Last updated at 14:10 GMT Watch: Hector Sants says "regulators cannot rely on the judgement of the firms they supervise"

Banks have been told they will be much more strictly supervised by the new Prudential Regulation Authority (PRA).

The warning came from Hector Sants, the incoming boss of the PRA and the current head of the Financial Services Authority.

He told an audience of senior banking executives that they could not be relied on to avoid making mistakes that endanger the financial system.

He described the new approach as "close intensive engagement".

"Central to this supervisory model is the presumption that regulators cannot rely on the judgement of the management of firms they supervise, and must take their own view formed from their own analysis of the significant issues which affect the safety and soundness of the firm," said Mr Sants.

"Furthermore, where that judgement differs from that of the firm's management, the regulator must act," he added.

'Welcome step'

The decision to carve up the FSA was made by the newly elected coalition government last year after the financial crisis in 2007 and 2008 exposed problems with the regulatory regime.

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A decision has been taken for the PRA to publish all the regulatory data supplied to it by banks... so that banks' investors and creditors will be able see for themselves whether the banks are taking excessive risks.”

End Quote Robert Peston Business editor, BBC News The Treasury published a second formal consultation document on its plans in February this year.

The audience of banking executives was called to hear the latest thinking of the FSA and the Bank of England about how the new regulatory regime will work.

Andrew Bailey, who will be the deputy chief executive of the PRA, warned them that this would not involve trying to save insolvent banks at all costs.

"Key elements... will be to ensure that financial firms do business in such a way that adverse effects on the UK financial system are avoided and to minimise damage to the system in the event that a firm does fail," he said.

"We will seek to ensure that all firms it [the PRA] regulates can fail or be closed in an orderly manner with minimal impact on the financial system, consistent with the PRA's objective of promoting financial stability in the UK," he added.

Angela Knight, of the British Bankers' Association [BBA], said: "Today's announcement, setting out the authorities' approach to banking supervision in the future, is a welcome step forward offering a real opportunity to progress the lessons we have all learned to create a stronger regulatory framework for the future."

New regime

The PRA, which will be a division of the Bank of England, is being created next year to replace and improve on some of the functions of the Financial Services Authority, which is being closed down.

Continue reading the main story Big six UK banks: HSBC, Barclays, RBS, Lloyds TSB, Standard Chartered and the Nationwide building society.Big six UK subsidiaries of international banks: Credit Suisse, Goldman Sachs, Morgan Stanley, Santander, Nomura and JP Morgan.Big six UK branches of international banks: Deutsche Bank, UBS, JP Morgan, Credit Suisse, Credit Agricole and BNP Paribas.Source: FSA & Bank of EnglandResponsibility for supervising the way financial firms treat their customers will go to a separate Financial Conduct Authority (FCA).

The PRA will be responsible for supervising all banks, building societies and credit unions, plus insurance firms, amounting to more than 2,000 firms companies.

All of these will be subject to a minimum "baseline" level of supervision.

The joint FSA and Bank of England discussion document says that collectively the deposit-taking institutions functioning in the UK have worldwide assets worth about ?9 trillion - about seven times the total annual economic output of the UK.

So the PRA will concentrate its efforts on the small number of very large banks, including some investment banks, whose failure would have the biggest impact.

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