No more light touch regulation, warns new watchdog

The Prudential Regulation Authority (PRA), based at the Bank of England, will be launched in April to oversee banks as part of a shake-up of regulation aimed at preventing a repeat of the taxpayer bailout of banks during the crisis.

The current Financial Services Authority (FSA) will be scrapped and its remaining enforcement and market supervision activities transferred to a new standalone Financial Conduct Authority.

“We need to spend more time looking closely at business models, asking questions such as where does the firm make money and is this sustainable,” said Andrew Bailey, head of banking supervision at the FSA and a leading candidate to head the new PRA.

Mr Bailey was telling a public meeting how the PRA will work differently from the FSA, taking a forward looking, judgement-led approach to draw a line under the ‘light touch’ and ‘box ticking’ style of previous supervision.

The PRA may not always get it right first time.

Mr Bailey said regulators were still grappling with finding the right trade-off between how much capital banks should hold to stay resilient, while not hindering their ability to lend to the struggling economy.

“Fitting those two together is not easy, but is crucial,” he said.

David Rule, who will be a director at the PRA, said the new watchdog will ask large banks for projections of their future revenue, costs and impairments to see how they make money, and whether their growth objectives are sustainable and based on a diversified strategy.

Regulators want to end years of mis-selling where lenders relied on a few very profitable products that were unsuitable for many people.

“We won’t be providing free consultancy here. Our focus will be limited to forward looking views of safety and soundness. Do we think this business model is sustainable? Do we think there are things that could blow up the firm?” Mr Rule said.

“Where we believe that risks cannot be adequately managed or mitigated, we may require changes to the business model.”