Sam Woods of PRA Speaks About Style of Regulation in UK After Brexit

He argues that the following principles should form the basis of any regulatory regime that aims to deliver safety and soundness and financial stability in a UK context:

• Robust prudential standards. The goal is to ensure continuity in the supply of vital financial services to the real economy throughout the cycle, including after severe shocks. All other principles should be subordinate to this one.
  
• Responsible openness based on international collaboration and standards. This principle is particularly relevant to the UK, given the Government’s policy of maintaining the UK as a leading international financial center. In practice, this means three things: first, that the mandate is to engage strongly in international standard-setting processes and ensure that UK is at the forefront of implementing those rules in a thorough way; second, the country should adopt practices and structures that promote strong collaboration with colleagues in other jurisdictions; third, UK is open to hosting cross-border business—but only if it is appropriately controlled and governed. 
• Proportionality and sensitivity to business models and promoting competition. Although there will be tensions and arguments between regulator and regulated, these frictions should not be bigger than they have to be. To this end, "we should aim for a system in which the burdens on firms created by our regulation are no greater than they need to be to achieve the objectives set by Parliament. Part of this is about the ability to adapt regulation for different types of businesses, as given the enormous diversity of financial firms operating in the UK it is unlikely that one size will fit all in all cases. The other side of this coin is that we cannot run a zero-failure regime," said Mr. Woods.
  
• Dynamism and responsiveness of regulations. As new players emerge, it should be ensured that regulation is not creating unnecessary barriers to entry and thereby impeding healthy competition. Regulation should be future-facing and keep fit for purpose. 
  
• Consistency. Firms and the public need to be confident that the regulatory framework is stable, that prudential rules are based on clear evidence, and that supervisory judgments are impartial and consistent. It must be ensured that the approaches of regulators are consistent across activities conducted by firms and consistent across sectors where different types of firms happen to provide some similar services. 
  
• Accountability. This is particularly important in a system in which considerable discretion is provided to regulators—both to make rules and to supervise and enforce firms’ adherence to them. There is a strong economic case for giving such responsibilities to an operationally independent regulator with clear statutory objectives defined by Parliament. Like monetary policy, prudential regulation faces a time-inconsistency problem. An independent regulator with a clear mandate for stability can more credibly commit to robust prudential standards. It may also be the case that an independent regulator has more scope to be proportionate while maintaining confidence, because a government may need to over-regulate to establish its credibility. However, in a UK-like democracy, a system of independent regulation can only work if the regulators are properly accountable, particularly to Parliament. 
  

Mr. Woods then outlines the four main legislative styles adopted by Parliament in the last couple of decades—those for delivering Financial Services and Markets Act (FSMA), the Senior Managers and Certification Regime (SMCR), ring-fencing, and the EU model—and argues that the one that fits the above principles best is the approach used for SMCR. He also discussed the differences in the EU approach to regulation, compared with that of the UK and other jurisdictions such as US, Australia, and Canada.According to him, one of the key factors driving this is the goal of harmonizing regulation and supervision across 28 countries. Therefore, it is natural that this need for harmonizing "should lead to a system in which a greater volume of the detail gets locked down in legislation as opposed to regulators’ rules. It is also entirely natural to ask whether such an approach would make sense for the UK once outside the EU." 

He adds that the Government and Parliament will also need to take into account the issue of EU market access, which could in some scenarios lead to greater alignment. Alternatively, UK could adopt a hybrid approach that does not replicate either of the pre-existing EU or British approaches. He concluded that the possibilities are numerous; for instance, one could imagine a "design vs calibration" split (design in legislation, calibration in rules), or a wholesale/retail split with more of the wholesale framework in legislation to keep closer to EU.

Related Link: Speech

Keywords: Europe, UK, EU, Banking, Insurance, Securities, FMI, Brexit, Post-Brexit, Regulatory Framework, Proportionality, PRA