Regulation, regulation, regulation: the PRA, the FCA and the FPC
written by Angela Knight on 31/10/2011
Who regulates what in banking is not usually a discussion that causes much excitement. It seems irrelevant to the daily lives of most people. But sweeping regulatory change has been effected in the past three years. Many of the financial institutions, services and products which we rely upon everyday have been criticised, scrutinised and reformed. So while regulation may be far from exciting, it is also far from irrelevant.
The Financial Services Authority is splitting up: the Chancellor abolished the primary regulator last year. In its place, a trio of new bodies with a stake in financial services supervision has been assembled: the Prudential Regulatory Authority (PRA), the Financial Conduct Authority (FCA) and the Financial Policy Committee (FPC).
The Government has assigned to each their own regulatory responsibilities, a good deal of which will be returned to the Bank of England. In the eyes of some, it looks like banking regulation is back in its proper place: at the central bank. But to others, it might just look like the foundation of three distinct regulators creates an opportunity to shunt responsibility from pillar to post.
We all have our own opinions and our own wish lists for what these bodies should and should not do. But what of their respective remits do we know for sure?
The PRA will be the chief regulator for those banks, building societies, insurers and financial services firms deemed systemically important. It will have a board with some independent non-executives as members. It will be chaired by the Governor of the Bank of England. It will have principal responsibility for financial stability.
The PRA will not, however, have responsibility for the conduct of business: that is the charge of the FCA. This means that everyone regulated by the PRA will also be regulated by the FCA.
It is essential that our new regulators talk together and act together. We need one place where reporting data is sent, not two. Supervision must be conducted coherently by both authorities.
To put it plainly, the jury is out on the validity of the FCA. But with regards to the PRA, I hope that the quality of supervision will pick up as it holds the cachet of being a Bank of England operation – I anticipate that association will certainly improve the calibre of individuals attracted into the authority.
What of the new macroprudential regulator, the Financial Policy Committee (FPC)?
The FPC will also be part of the Bank of England. The FPC intends to use macroprudential tools to smooth the peaks of a boom and level the troughs of a recession. This means that the Bank will have responsibility both for regulation and for monetary policy. It will have control over the supervision of banks and the supervision of interest rates on top of its responsibility for macroprudential regulation.
What is more, the Committee can effect changes such as further raising capital ratios. This means that control over both interest rates – held by the Monetary Policy Committee – and the availability of credit – held by the FPC – has been given to the Bank of England.
The Monetary Policy Committee had a good record of controlling inflation in the good times. But with interest rates now at half of one per cent and inflation at over five per cent, the limits of current monetary policy have been exposed.
For someone in the street, monetary policy amounts to how much they have to pay for credit. The FPC affects the supply of credit by its decisions. It can restrict the availability of mortgages for house purchase; it can alter Loan to Value rates. It can constrain the ability for individuals to raise a loan to buy a car. It can limit the supply of finance, particularly to small and medium sized businesses.
Both the price of credit and its supply have then been given to one third party: the Bank of England. This may not be wrong. But as it is, the powers of the regulator reach beyond regulation.
Decisions with a social impact should be taken by a country’s elected representatives – the people you can remove if you do not like what they do. We will see what happens as these new bodies are proposed, opposed and legislated in Parliament. What must be secured is far more open and honest debate about their purpose and their practice.