A Baptism of Fire for New Financial Regulator

Apr 10, 2013   //   by Keith McDonald   //   Breaking News  //  Comments Off on A Baptism of Fire for New Financial Regulator

From rescuing savers to defending its chairmen, it’s been a true baptism of fire for the new “twin-peak” system of regulation that assumed control from the Financial Services Authority at the beginning of this month.

In little more than a week, the Prudential Regulation Authority, tasked with maintaining financial stability, and the Financial Conduct Authority, the new City watchdog, have already been rescuing savers from the fallout of a banking collapse and opening investigations into catastrophic affairs from last summer – a clear signal of intent about the level of intervention that the dual operation will undertake.

But with the chief executive and chairman of the Financial Conduct Authority already coming under attack for separate reasons, it could be a rocky road ahead for the new regulator to establish its credibility and justify its extra cost to the institutions that fund it.

Successes

Let’s start with the better news. In the early days of its tenure, the Prudential Regulation Authority stepped in to protect 15,000 customers with the UK arm of the failed Laiki Bank, some of whom stood to lose at least 60% on any deposits they held over €100,000 (c. £86,000).

These funds are now camped in the Bank of Cyprus UK and protected by the Financial Services Compensation Scheme. Though still not ‘insured’ as such (the UK’s FSCS still only covers deposits up to £85,000 per person per institution), at least they’re out of the clutches of Cypriot administrators (read more).

Meanwhile, the Financial Conduct Authority has announced that it has opened investigations into the IT meltdown that caused chaos for customers of the RBS Group last summer.

A glitch in a software upgrade caused a failure in overnight transfers between accounts, which meant that customers at RBS, NatWest and Ulster Bank were prevented from accessing their accounts, paying bills and receiving inbound payments.

RBS Sign

RBS’s IT systems have already been brought to attention after a number of unsuccessful attempts to rid the 316 branches the group is required to sell by the European Commission following the taxpayer bailout. Santander withdrew its bid to buy the branches in October after compatibility issues between the banks’ systems caused ongoing delays to the completion date.

If found guilty of a systematic failure for the meltdown last summer, RBS faces an uncapped fine, which will add to the £175 million already set aside for compensation (read more).

Failures

All well and good, but the top brass at the FCA has come under fire from several quarters in the organisation’s opening week.

Chief executive Martin Wheatley has been accused of flunking concerns about the Bank of Ireland’s controversial mortgage rate hikes. The bank is to increase its tracker mortgage rates by more than double this year, despite a persistent record low Bank of England base rate of 0.5% (read more).

Andrew Tyrie, chairman of the Treasury Select Committee, had written to Mr Wheatley in his former role at the Financial Services Authority, asking for more information about the regulator’s plans to investigate these substantial increases. But the reply avoided the main issues, he said, and needed to be much more substantive.

It must exercise judgement to ensure that customers are being treated fairly. Mr Wheatley’s letter appears to fall short on both counts.

Andrew Tyrie takes no prisoners. [Source: Parliament UK]

The FCA has also had to defend its chairman, John Griffith-Jones, following a number of calls for his resignation. Griffith-Jones chaired the accounting team at KPMG when it failed to spot the £46 billion losses accrued by HBOS prior to its collapse in 2008 (read more).

A report issued last week by the Banking Commission said that the bank would have collapsed even without the financial crisis, such was the scale of mismanagement. It added that the regulator was reassured by audits which reported no major problems with the bank.

There have since been numerous calls for Griffith-Jones to be held accountable.

“Griffith-Jones played along with this Alice in Wonderland economics and the taxpayers are now footing the bill”, said Labour MP and Banking Committee member John Mann.

These grossly failed businessmen should not be in any senior positions in any organisation.

Facing an early challenge to its credibility, the FCA has had to defend its chairman by claiming that he was vetted for the role by the Treasury and that he undertook an appointment hearing with the Treasury Select Committee.

Footing the Bill

An explosive opening week has been capped by the news that the new dual regulator will cost £646 million this year – around 15% more than the Financial Services Authority did in the last financial year.

This is to be reflected in increased costs for a fair percentage of larger firms. 42% of authorised firms will pay a minimum £1,000 fee, while larger firms will face the greatest burden of increase owing to ‘the intensive conduct and prudential supervision of high impact firms’. Some, it is thought, could face a hike of 50% on last year’s bill from the regulator.

With this in mind, an industry vote of no-confidence in the leadership is hardly the start the new regulator would have wanted, regardless of the positive headlines and dynamic action it has sought in its opening days.

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