Twin Peaks Regulatory Model Will Bring Profound Changes, Says PwC

From Monday 2 April, the Financial Services Authority (FSA) introduces its new twin peaks regulatory model in anticipation of the Financial Services Bill passing in the UK parliament next month, according to PwC. This involves splitting its supervisory teams into separate prudential and conduct units prior to the commencement of the Financial Conduct Authority (FCA) and the Prudential Regulatory Authority (PRA) next year.

The PRA unit will retain the approach of dedicated supervisors for systemically important firms, while the FCA unit is mainly moving away from fixed, Advanced Risk Response Operating Framework (ARROW)-style of firm supervision in favour of more thematic reviews for all but the largest firms.

Laura Cox, financial services regulatory partner at PwC, said: “This represents a significant milestone in the transition towards the new institutional structure and will bring profound changes to the way financial services companies are supervised. Firms will now begin to get a taste of the long term impacts of the UK’s changing regulatory architecture, particularly the impact on supervision.

“Many large firms will now have to build relationships with two sets of supervisory teams, with their own regulatory judgements and objectives, and often with new personnel. Firms need to be aware that the two sets of supervisors may ask apparently similar questions, but from very different perspectives to address different objectives. Although the FSA has had a £20m increase to its budget for supervision this year, the PRA and FCA units will not have a significant increase in headcount, which could prove challenging over the coming year.”

For firms who have ARROW visits scheduled from now until the PRA and FCA officially launch next year, the new regulatory structure will result in two distinct sets of ‘virtual’ supervisory visits. The FSA has stated its commitment to co-ordinate findings, but firms will be required to manage reviews and any remediation instructions as separate initiatives.

David Kenmir, financial services regulatory partner at PwC, said: “Firms can prepare for supervisory visits effectively by demonstrating that they understand the statutory responsibilities of each regulator and aligning their approaches, risk management, compliance and business models with these objectives.

“In the near term, firms can prepare for the changes by working to understand the focus and priorities of the PRA and FCA under the new regulatory regime. In addition to reviewing FSA publications about the new regulators and engaging directly with the new supervisory units, firms will want to have an eye to the progress of the Financial Services Bill through Parliament,” he concluded.


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