Cooperation between regulators was the 2nd of the indicators to watch in 2018 that I flagged back in January, and it was brought back to mind this week by publication of the FCA and PRA’s joint final notice in the Jes Staley whistle-blowing case. More of that in Wednesday’s blog…
For this weekend, however, I want to write about cooperation between the two regulators more broadly, how it’s changed since the FSA was formed in 1998, how the PRA/Bank and FCA have made progress since 2013, and the inherent challenges they still face because of the twin peaks model.
When the FSA was formed, one of the driving forces behind the legislation was to de-duplicate the FSA and Bank of England’s objectives, to minimise overlaps and costs. It’s fair to say the Bank quickly felt the loss of access to firm-specific data but there was no obvious locus to ask for it and little real attempt was made at the time to maintain strong working relationships with the new regulator.
In retrospect, the gap between firm specific and what would now be called macro-prudential supervision was never really bridged. The FSA instigated tripartite war games (HMT was the 3rd party), but these were never taken up enthusiastically and, as a result, their outputs proved unreliable when the crisis hit in 2007.
Moving on, the twin peaks system that came into effect in 2013 built in specific areas of overlap and duplication, notably in the authorisation process and markets, but also in supervision and some aspects of policy. Initially clunky, these seem to have worked pretty well over the last five years, aided hugely by the unsung work of regulators on the ground, a framework of MOUs and, more obviously, by Andrew Bailey’s move across from CEO of the PRA to CEO of the FCA.
The fruits of this are significant, for both firms and society, and can be seen across both regulators core functions, as well as in such areas as Regtech and liaison on systems work generally. However the twin peaks system puts consistent stress on this relationship and, in the run up to Brexit, this is likely to become more acute.
Here are four of the most vulnerable areas:
1. Supervision model: In the PRA model, each firm essentially has a named supervisor, whereas in the FCA this only applies to the 100 or so deemed the most important. The latest supervision framework tries to flex this, but the disparity is obvious in theory and is often glaring to firms on the ground. It also makes it harder for the respective supervision teams to collaborate.
2. Governance: In general terms, the FCA is more agile in project working, bringing together multi- skilled teams from across the organisation, with shorter reporting lines and quicker decision making. The PRA tends to stick to its structure and to be a little slower and more deliberate, though its decisions, once made, are probably less prone to second guessing.
3. Culture: The FCA is a larger organisation, has quite a complex matrix structure and, counter-intuitively, is also more silo’ed, more prone to left hand/right hand issues – its vast scope doesn’t help. As a result, PRA culture is more institutional, the FCA more likely to be identified with a particular function or division.
4. Objectives: Finally, the two organisations have different, distinct objectives – this, after all, is part of the point of a twin peaks model. To take just the most obvious example, the FCA’s competition objective is much stronger and won’t always sit well with the PRA’s “safety and soundness” mantra.
Both the technical challenges of Brexit (e.g. re-authorising EEA branches, re-writing the Handbooks), and the greater economic volatility (and accompanying stress on business models) that is likely to accompany it have the ability to throw these disparities into stark relief over the coming year.
The FCA/PRA co-ordination MOU sets out the high-level framework which the FCA and the PRA will use to co-ordinate in some areas, and co-operate in others. Where additional detail, often of a technical nature, is required this is set out in an Annex. Memorandum of understanding.