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UK: FSA Moves to "Twin Peaks" Model

April 4, 2012 3:01 PM | Print this page |
On 2 April 2012, the UK Financial Services Authority (FSA) moved to a "twin peaks" model of supervision internally, shadowing the split of the FSA into the Prudential Regulation Authority (PRA) and the Financial Conduct Authority (FCA) that will occur once the Financial Services Bill comes into force in 2013.

The new model will mean that banks, building societies, insurers and major investment firms will have two groups of supervisors, one focusing on prudential matters (which will become the PRA) and one focusing on conduct (which will become the FCA). All other firms (i.e. those not dual regulated) will be solely supervised by the conduct supervisors.

The aim of the prudential group will be to ensure the safety and soundness of firms and to avoid disorderly failure which has systemic consequences. For insurers, there is a further aim of ensuring protection of policyholders through sound financial management. The conduct group's aim will be to ensure that markets work well by protecting and enhancing their integrity and protecting consumers.

From a firm's perspective, the key operational change is that the existing ARROW risk mitigation programme and other supervisory activities will be split between those actions which are relevant to the conduct group's objectives and those that relate to the prudential group. Until the formal split of the FSA in 2013, any firm that is due to complete an ARROW assessment will still be subject to a supervisory review but it will now consist of two separate supervisory teams assessing the risks against their new objectives. In a speech he gave to the British Bankers' Association on 6 February 2012, Hector Sants, FSA Chief Executive, warned that each supervisory group may well ask apparently similar questions but that the purpose of those questions will be different.

While Mr Sants said that the FSA would coordinate the presentation of the conclusions of the assessment from both supervisory groups, it seems likely that firms will begin to experience what seems to be greater, but less well co-ordinated, attention from the FSA. It may be helpful to keep the different regulatory objectives of the new supervisory groups in mind when deciding when and how to respond. Firms should also now begin to build greater lead times into their corporate and regulatory projects to allow for the regulatory interaction that will have to take place before regulatory approvals or responses can be provided.

Details of the FSA's split are set out in its 2012/13 business plan (click here for a copy).

Mr Sants's speech can be found here.