Last year when the changes to FSA were in deliberation I was asked to write an assignment on some of the challenges FSA regulated firms may face with the introduction of the Internal Twin Peaks model. As I received great feedback on this, I thought I'd share it with you all.
At the heart of highly publicized incidents and costly turbulent practices, the financial services sector has lost consumer confidence and become subject to the spotlight of major regulatory changes.
The aftermath of the financial crisis in 2008 which changed the face of UK economy and lending has led in way the Financial Services Authority (FSA) to introduce an “internal twin peaks’ system which will divide the responsibilities into the Prudential Regulatory Authority (PRA) and the Financial Conduct Authority (FCA) which will focus on consumer protection and market regulation
FSA’s Internal Twin Peaks (ITP) Model will mean that:
1. Two independent but coordinated groups of supervisors will cover prudential and conduct for financial services providers such as banks, insurers, investment firms.
2. Internal co-ordination between prudential and conduct is allowed to maximize exchange of information and ensure data is collected only once.
From an Operational Risk view
Dual Risk programs
FSA regulated firms will find themselves subject to two Risk Mitigation Programs and will be expected to treat both prudential and conduct issues with equal priority.
This risk/challenge may become a complex and laborious process as dual consent may be required, causing uncertainties along with each regulator having different requirements. A big challenge can be learnt from the issues faced by the Netherlands' twin peaks system in which there was no built in structure for dealing with cases where both supervisors disagreed, yet still had valid claims for their judgments.
Behaviour, Costs and Time
The operation of such an ‘intervention framework’ highlighted by the FSA is to facilitate the achievement of the overall objective of minimizing the potential and impact of disorderly failure, thus behavioral change will have to accelerate which will mean that potentially firms may have to align and influence change in their goals culturally and within the organization.
The amount of time invested in ensuring compliance to new requirements will be a significant aspect especially taking into account European and International regulations. Paul Scott, Director of Advisory Services (Hunts wood), notes in his study that under ‘internal twin peaks’ over a third of senior stakeholders are already spending 25% more time assisting the FSA than they were a year ago.
As the current nature of risk assessments will change and be organized into various agendas (15 said key themes), such as scope, test, validation etc. submitting documentations to support these will be challenging especially with resources, compliance becoming potentially repetitive, time consuming and costly.
From a prudential point of view, various unit trust providers for example, will undergo assessments on the activities and stability of the UK financial market and whether there are sufficient and appropriate degrees of protection, e.g. to policy holders of all unit trusts. The ITP from this perspective will look at different parts of the financial sector and how the trusts offered will affect stakeholders and the economy such as inflation rates in each country. This may challenge current policies in line with the trust units for example.
From a Conduct point of view the level of customer and investor protection will be a focus, which may lead to re-evaluation of services offered and whether customers are being fairly treated. Ensuring procedures are correctly followed to the new standard may pose a challenge as differences on judgments may arise resulting in implementing re-vised material.
As the FSA rule book will be split between the differences of the PRA and the FCA;
The first step would be to re visit and understand where correct information is categorized for quick and easy referencing and support.
Like with the Netherlands case, firms may face difference of opinions in which case the importance of having clearly organized PRA/FCA supporting documents, contingency plans; risk register (including mitigation plan to reduce identified risk); and current and up to date FSA regulatory framework will be an essential factor.
As more time will be spent liaising with regulators, the ability to effectively communicate and assess relevant requirements whilst keeping the customer focus at heart and articulating to the risk managers and wider business will be vital in support over the coming months.
Lastly, as relationships will change from an integrate approach and differences will appear, having a key point of contact for staff whilst ensuring the cultural/behavioral approach is understood, communicated and the concepts of a ‘pro-active approach’ ( Hector Sants , FSA) is influenced and implemented in a positive light at all levels will also be an important step in dealing with the challenges.