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Financial Services Firms Get Tough Compliance Warning

Financial Services Firms Get Tough Compliance Warning

A new tougher era of compliance lies ahead for banks and financial services firms as regulators sharpen their claws to take on new powers.

The balance of compliance will switch to closer monitoring and more intervention rather than trusting firms to follow the rules.

The new Prudential Regulation Authority that will arise from the Financial Service Authority’s  (FSA) merger with the Bank of England (BoE) will not react to firms but form policies and judgments that will be imposed on the market.

“The FSA’s supervisory approach rested on a presumption which was false; namely that senior management judgment and market discipline should not be questioned by supervisors,” Hector Sants, FSA chief executive and PRA chief executive designate.

“Supervisors did not seek to make their own judgements as to what might happen in the future. Regulators only intervened following observable failings relative to the then set of rules.

“Regulators cannot rely on the judgement of the management of the firms they supervise, and must take their own view formed from their own analysis about the significant issues which affect the safety and soundness of the firm.”

A joint paper outlining the future of banking and financial regulation has been published by the BoE and FSA and  includes explanations of:

  • Principles underlying the PRA’s approach to regulation
  • The scope of the PRA
  • The PRA’s risk assessment framework

Andrew Bailey, FSA director of UK banks and building societies and PRA deputy chief executive designate, said: “Maintaining financial stability is an objective in public policy which we should all value highly.  We have seen what happens when we lose it.  But achieving and maintaining financial stability does not mean that we have an industry in which no-one can fail.

“In order to deliver its objective of stability of the financial system, the PRA will use a new framework to assess risks to financial stability.  This document sets out our thinking so far and aims to foster debate about the design of the PRA.”

The new PRA will supervise around 2,000 insurance companies and deposit-takers. Another paper is due in June 2011 covering the PRA’s supervison of insurance companies.

The scope covers 157 UK banks, 48 building societies, 652 credit unions and 162 branches of overseas banks.

DOWNLOAD the full FSABank of England report here

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