Nearly four years after the Tories promised to replace the “failed” Financial Services Authority with a stronger, more forward-looking system for policing UK financial services, the day has finally arrived.
On Tuesday, two powerful new regulators will throw open their doors and take charge of a reviled and weary sector in need of a fresh start.
Dubbed as “the start of resetting the system of financial regulation” by George Osborne, chancellor, under the new “twin peaks” system the Prudential Regulation Authority, an arm of the Bank of England headed by Andrew Bailey, will supervise 1,700 banks, insurers and large investment firms.
The Financial Conduct Authority, an independent agency led by Martin Wheatley, will supervise behaviour at the same firms and have sole responsibility for 25,000 more, most of them brokers, investment advisers and money managers. The FCA’s multifaceted task includes protecting investors, policing the markets and promoting competition.
Mr Wheatley and Mr Bailey will also sit on the third new UK regulator, the Financial Policy Committee, a consensual body charged with spotting and disarming broad threats to financial stability.
Both men face daunting tasks. London has been hit harder by banking sector problems than virtually any other financial centre. Half a dozen big banks collapsed in 2007-8 and survivors have been hit by huge fines and redress payments for mis-selling and trading scandals.
“The whole culture of the system fell apart to ‘anything goes, as long as the compliance officer doesn’t say no’,” Mr Wheatley explained.
Critics of the FSA say London got what it deserved; known worldwide for its industry-friendly approach, it was dubbed “light touch” by fans and foes alike. Mr Bailey’s job is to make sure UK banks and insurers have enough capital and liquidity to absorb losses and meet their obligations. He has promised that his 1,300 staff members will focus on a couple of big issues at each firm. This means they will be “genuinely asking hard, judgmental questions”, he says, and will be worrying less about the accuracy of individual risk models and more about the overall results.
Regulators have “a very big question for the biggest firms”, Mr Bailey said. “Can you control your firm … to a level and degree that society now expects from you? It is a huge challenge for them, now, to prove that it can be done.”
Mr Bailey has won praise for his low-key style and pragmatism, but the sluggish economy could heap pressure on the PRA to give weaker firms a break.
“The real question is whether the growth agenda creeps into their remit,” said Jon Pain, a former regulator now with KPMG. “There is a trade-off. How hard and how fast do you push to make banks safe?”
Over in Canary Wharf, Mr Wheatley has inherited the FSA’s old office, its clunky IT systems and nearly 2,900 staff. He, too, has promised a fresh approach, seeking good outcomes for customers and businesses rather than stacks of carefully completed forms.
“I characterise it as a move away from looking in the rear-view mirror,” Mr Wheatley said. “The conversations will be much more geared towards … tell us about your growth plans; where do you see your business moving to over the next six months [and] where do you see the risks in those areas?”
The FCA will spend less time visiting individual groups and more time tackling specific issues at a clutch of institutions. Its new risk arm, dubbed its “radar”, will also monitor social media and hire mystery shoppers to get an early feel for potential problems. It will also be able to ban products more quickly and its enforcement arm will be able to go public much sooner when a firm or person is under investigation.
“There is a regulator-knows-best theme that runs through the reforms [and] the potential to lead to direct conflict with the financial services industry,” warned Jason Mansell, a barrister who defends firms.
After raising some initial hackles with his tough-talking approach, Mr Wheatley has taken a more conciliatory line recently, but only up to a point. He told the Financial Times he believes that bank executives are genuinely trying to change their institutions to prevent a repeat of past scandals.
“I think the tone at the top is positive and welcome,” he said. But he added: “We don’t take our eye off the ball just because we’ve heard a few good speeches.”
While the government and the regulators are enthusiastic about having two authorities, each focused on a separate but important task, some in the industry are not so happy. Together the PRA and FCA will cost more, and the City will have to pick up the tab. Executives at the biggest firms are also worried about having to answer to two masters.
“Dealing with separate supervisory teams at the PRA and FCA, with their differing objectives and approaches, will undoubtedly add to the already massive regulatory burden,” said Nathan Willmott, a partner at the law firm Berwin Leighton Paisner.
“Structure is no guarantee of success – supervisory attitudes and approaches are what really matter,” said David Strachan, an ex-FSA regulator now with Deloitte.
In the end, some may wonder whether all the upheaval was worth it.