The peer review examines three topics: macro-prudential policy framework; micro-prudential supervisory approach; and supervision and oversight of central counterparties (CCPs). (Includes comment from George Osborne.)
The review focused on the steps taken to date by the UK authorities to implement reforms in these areas, including by following up on relevant recommendations in the 2011 Financial Sector Assessment Program (FSAP) undertaken by the International Monetary Fund.
A new regulatory framework, which came into force in the UK on 1 April 2013, established the Financial Policy Committee (FPC) within the Bank of England (BoE) to monitor and respond to systemic risks; transferred responsibility for significant micro-prudential regulation to the Prudential Regulation Authority (PRA) as a subsidiary of the BoE; and created a new conduct of business regulator, the Financial Conduct Authority (FCA). The UK authorities should be commended for their ability to successfully steer the transition to a new regulatory structure at the same time as undertaking major changes in the supervisory approach, adopting new international regulatory reforms, and responding to broader post-crisis market developments.
Good progress has been made in addressing the FSAP recommendations across all three topics, although many of these reforms are still ongoing. The challenge for the authorities will be to continue their work to roll out and integrate the reforms, address execution risks, and take the necessary steps to ensure the effectiveness of those reforms over the long term. Promoting strong relationships between staff at all levels in the newly-created authorities and within the BoE is an important prerequisite for the success of the reforms.
Prior to its formal establishment, the interim FPC helped develop the framework for macro-prudential policy in the UK and made a series of recommendations focused on creating a better (and more transparently) capitalised banking system. The FPC is now operational and playing a useful role in identifying systemic risks and facilitating coordinated policy action. The peer review noted the need to manage execution risks and to fine-tune the framework as more experience is gained, and identified some issues that warrant further consideration to enhance the FPC’s effectiveness and operations, including by:
further developing the FPC’s relationship with the FCA and enhancing the FCA’s capacity to undertake systemic risk analysis work; and
clarifying the level of detail in the FPC’s comply-or-explain recommendations, and thus the influence that the FPC is expected to have on the broader prudential framework.
The peer review found that significant progress has been made in introducing reforms to the UK’s micro-prudential supervisory approach in response to lessons from the financial crisis and FSAP recommendations. Many of the relevant initiatives are still in their early stages of implementation and are yet to be completely integrated with other supervisory processes. It will be critical for the UK authorities to ensure retention of key senior staff to lead the change over the coming years and to have well-established coordination mechanisms across the different agencies involved in the oversight of the financial sector. The peer review made a number of recommendations to enhance the effectiveness of the supervisory regime. It also recommended that the PRA should ensure that supervised firms are aware of any heightened concerns and accompanying intervention activities, and that it should explore options to disclose the supervisory rating to such firms without triggering public disclosure.
The BoE is also taking important steps to follow up on the FSAP recommendations with respect to sufficient and reliable funding options and central bank settlement for CCPs as well as developing contingency plans to deal with a possible failure of a CCP. Progress on these recommendations has to be seen in the context of ongoing international policy developments and UK/EU regulatory reforms involving CCPs. The peer review noted that the integration of the micro- and macro-prudential perspectives on CCPs is a difficult but critical task, and recommended that the BoE should promote the flow of information and alignment of objectives across relevant authorities by systematically elevating relevant issues on the agenda of the FPC and to the attention of the PRA and the FCA.
Peer review of the United Kingdom
Commenting on the FSB report, Chancellor of the Exchequer George Osborne said:
A new regulatory system, with the Bank of England at its core, that is able to spot risks to financial stability before they hit the economy, is at the centre of the government’s plan for a stronger and safer banking system in Britain. I am pleased that the Financial Stability Board has recognised the progress that Britain has made in making our banking system safer and making sure it works for everyone.
© FSB - Financial Stability Board
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