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The Actuary The magazine of the Institute & Faculty of Actuaries

PRA to be single-minded in approach to banking supervision

The future Prudential Regulation Authority will adopt a more focused and intensive approach to the supervision of banks, building societies, credit unions and investment firms, according to a paper published today by The Bank of England and the Financial Services Authority (FSA).

The paper, which outlines the principles and scope of the PRA, its risk assessment framework, and ‘forward-looking, judgement-led’ approach to supervision, is due to be discussed at a conference in London today for CEOs and senior managers of firms that will come under the PRA’s supervisory control. A webcast of the conference can be viewed here.

The PRA will be responsible for the prudential supervision of over 2,000 firms, of which around half will be deposit-takers. On current data, it will regulate 157 UK-incorporated banks (of which over 60% form part of overseas banking groups), 48 UK building societies, 652 UK credit unions and 162 branches of overseas banks, split roughly equally between the European Economic Area (EEA) and elsewhere.

The PRA will be responsible for supervising both insurance companies and deposit-takers. A companion paper that will cover the PRA’s approach to supervising insurance companies will follow in June.

Hector Sants, FSA chief executive and PRA chief executive designate, said: "The PRA’s purpose is fundamentally different from that of previous regulatory regimes and will lead to a significantly different model of supervision to that which was in use pre-2007. In designing this new model we have incorporated both the lessons learned from the last financial crisis and those from firm failures of the past.

"The new regulatory model will be based on forward-looking judgments and will be underpinned by the fact that the PRA has a single objective to promote the stability of the UK financial system and in consequence will be a very focused organisation. The new supervisory approach will build on the more intensive approach adopted by the FSA since the crisis."

Andrew Bailey, FSA director of UK banks and building societies and PRA deputy chief executive designate, added: "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."

On 17 February, the Government published ‘A new approach to financial regulation: building a stronger system’ giving more detail on the Government’s proposals to disband the Financial Services Authority and establish a tripartite system of more specialised and focused financial services regulators: an independent Financial Policy Committee (FPC) in the Bank of England; the establishment of a new Prudential Regulation Authority (PRA) as a subsidiary of the Bank; and the creation of an independent conduct of business regulator, the Financial Conduct Authority (FCA), which was formerly provisionally titled the consumer protection and markets authority.