New FSA to be EU’s enforcer

FSA chief Hector Sants yesterday unveiled plans for a new UK regulatory authority that critics say will gold-plate European regulation by “second-guessing” the management of financial institutions.

The new Prudential Regulatory Authority, which will take over a portion of the FSA’s functions next year, is to adopt a “forward-looking” approach and will have powers to question the “competency” of management and ban business models that it deems too risky.

KPMG’s Giles Williams said that the PRA’s job will be “second-guessing financial institutions’ own management” while the British Bankers’ Association said the plan was for a “more intrusive” dialogue between regulators and management.

During a conference to explain the PRA’s new regulatory philosophy, Sants said there would be a “fundamental” change from the FSA’s approach.

“Central to this supervisory model is the presumption that regulators cannot rely on the judgment of the management of the firms they supervise,” he said of the PRA.

Sants also appeared ready to sign away UK sovereignty on the crafting of regulation, saying that the PRA would be “essentially a supervisory arm of a European regulatory regime”.

While the new body will not be able to avoid implementing EU rules, it will be allowed to augment them by, for example, imposing additional capital requirements on particular firms.

Simon Hills of the British Bankers’ Association said: “The PRA said quite explicitly that it will go further than maximally harmonised European regulation. We are concerned that in some areas UK regulators may be looking for a carte blanche to gold-plate regulation.”

Sants said that the PRA will try to influence regulations through dialogue with the European Banking Authority (EBA), but many in the City have questioned how effective the UK’s lobbying effort can be while its regulatory bodies are being overhauled.

Baker & McKenzie’s Ian Mason said: “I don’t think the fragmentation of our regulator is particularly helpful from that point of view… It’s not as good as having a single unified regulator in Brussels.”

AT A GLANCE | REPLACING THE FSA

• The Prudential Regulatory Authority (PRA) will be one of three bodies to take over from the Financial Services Authority (FSA) next year. It will monitor and reduce the riskiness of individual firms and feed data to the Financial Policy Committee, which will monitor and mitigate macro-prudential risk.

• The PRA will place firms in one of five categories: the first deemed safe, while the last will involve implementing a resolution plan. The PRA will force firms in the latter categories to revamp their businesses.

• The PRA, unlike the FSA, will have the power to publish reports into firms like RBS that have had to be rescued. It will also require firms to publish some of the data they give to regulators, although the details have yet to be decided.

• All firms will have to create resolution plans to enable an orderly wind-up if they fail. The aim is to be able to impose losses on all creditors “without the financial system falling apart”.