Andrew Bailey, the freshly anointed head of the new Prudential Regulation Authority (PRA), gave the strongest indication yet of the approach that would be taken to regulating and supervising systemic insurers alongside banks and major investment firms. Reading not very far between the lines, Bailey also seemed to be outlining the approach the PRA would take to supervising banks.
Stating that insurers ‘share some of the characteristics’ with big banks, including ensuring the ‘ continuity of access to critical services’, Bailey wasted no time in outlining an approach that will see the PRA – in 2013 and beyond – making a clean break from the way the FSA has regulated in the past. Policy holder protection, or consumer protection, will be at the heart of these statutory objectives, and avoiding ‘too big to fail’ will be a shared objective across the PRA‘s agenda. Ultimately, supervision is set to be more structured, have a transparent framework and maintain accountability in all situations.
Bailey suggests this means being more ‘forward looking’ for potential risks, and that ‘intensive and intrusive supervision’ is justified by the risks. Furthermore, this means systemic risk should be regulated proportionally to the level of risk the bank or insurer poses to the economy.
The good news is that incisive regulation of this type will be more predictable and transparent, for both firms and regulators. This even extends to mistakes regulators have made themselves in their own rulemaking, with Bailey calling out the EU for the ‘shocking’ implementation cost of the continually delayed Solvency II. This is a double edged sword. Clearer, proportionate rules with predictable penalties, and holding regulators accountable for their actions, could be big wins for the industry.
On the other hand, systemic institutions of all types will face heightened scrutiny in the near future, with ‘ rigorous judgement ‘ applied. With that in mind, onwards to the PRA‘s launch in April 2013 ‘
Recommended Further Reading: http://www.bankofengland.co.uk/publications/Documents/speeches/2013/speech634.pdf