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The UK FSA Moves Towards ''Twin Peaks'' Regulation

Wednesday, February 8, 2012
Richard Powell | Bloomberg LawDelivering "twin peaks" within the FSA – Speech by Hector Sants, Chief Executive, FSA, 6 Feb. 2012 Hector Sants, Chief Executive of the Financial Services Authority (FSA), has announced another significant step towards the fulfilment of the UK Government's plans to establish a "twin peaks" system of financial regulation. In a speech to the British Bankers' Association, Sants, who will lead the new Prudential Regulation Authority (PRA), confirmed that authorised firms will, in large part, be supervised according to this model from 1 April 2012. This news follows shortly after the close of pre-legislative scrutiny of the draft Financial Services Bill, the vehicle for implementing these and other reforms of financial regulation, and the introduction of the Bill into Parliament to begin its legislative passage. Notably, Sants believes that the "biggest challenge" for firms and supervisors is behavioural and not organisational.

Prudential & Conduct Business Units

Currently, the FSA is responsible for both the prudential and conduct regulation of all authorised firms. This model was discredited, though, in the financial crisis, where, among other matters, the new Government elected in 2010 considered that it placed all regulation "in the hands of a single, monolithic financial regulator" responsible for the largest investment banks to the smallest financial adviser.1 In contrast, twin peaks places responsibility for prudential and conduct regulation with two separate regulators, respectively, the PRA and the Financial Conduct Authority (FCA). For practical purposes, the latter will consist of the rump of the FSA after abolition. Under twin peaks, banks, savings institutions, and significant investment firms, known as "dual-regulated" firms, will be supervised by the PRA on prudential matters and by the FCA on conduct issues. The remainder, and vast majority, of the 20,000-plus authorised firms will be supervised in respect of both prudential and conduct requirements by the FCA. In anticipation of, and to prepare for, this change, the FSA reorganised its organisational structure in April last year around separate prudential and conduct business units.2 In the autumn, Martin Wheatley, chief executive designate of the future FCA, joined the FSA as head of the conduct business unit. These units will start to operate separately from April 2012. — Restraints Sants explains that while the objective is to "replicate" the twin peaks model as closely as possible over the remaining life of the FSA, this cannot be completely achieved. This is because the FSA must operate within the constraints of its existing legislation, the Financial Services and Market Act 2000, its present IT systems, and staff headcount limitations. The FSA has been recruiting heavily since the financial crisis to increase the number and quality of its staff and, therefore, its ability to more pro-actively supervise firms. 2011 saw an increase in its budget,3 funded by industry levies, of 10.1 percent, and an increase of 15.1 percent to

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