In preparation for its break up next year, the UK Financial Services Authority is to adopt the so-called “twin peaks” regulatory model in April.
The twin peaks regulatory model essentially involves separating prudential regulation from conduct regulation. Next year, that split will be formalized when the Bank of England takes over prudential regulation and a new authority is formed to oversee conduct regulation. And, in a speech to the British Bankers’ Association Monday, FSA CEO, Hector Sants, said that it will introduce a ‘twin peaks’ model within the FSA on April 2.
The new model will mean that banks, building societies, insurers and major investment firms will, from this date, have two groups of supervisors, one focusing on prudential and one focusing on conduct. The aim is to ensure that the changeover to the regulatory structure in early 2013 will be seamless.
Sants said that the change will accelerate the move away from the old reactive style of regulation and towards a more forward-looking, judgement-based approach. He stressed that the changes must not just be structural but must involve behavioural shifts from both supervisors and firms.
“The most important change that will occur at twin peaks, in my judgement, is not the introduction of a new operational framework, but the opportunity to accelerate the process of behavioural change that the FSA embarked on when we began the reform of the supervisory process in the spring of 2008,” he said.
Sants stressed that firms need to change the way they think about regulation. Firms will be expected to: recognise the importance of aligning their goals with those of the supervisors and society as a whole; show a greater willingness to comply with supervisory judgements; and recognise that this new approach will require greater resources and expertise and will be more costly than the old reactive model that existed prior to the crisis.
“It is really important that we must use this opportunity to accelerate the behavioural and cultural change needed in both regulators and firms. The new world of judgement-based regulation needs to be embraced by us all,” he said.