Monday, 2 August 2010

A New Approach To Financial Regulation in the UK: Lessons from Australia

HM Treasury’s recent consultation paper A New Approach To Financial Regulation: Judgement, Focus And Stability sets out the Government’s detailed plans for the new “twin peaks” model of financial services regulation and supervision in the UK.

As has been noted in the Financial Times (Bank given clear responsibility for financial stability - June 17 2010), Australia has some experience in this area.

In mid-1999 Australia finalised its new financial services regime, comprising a separate prudential regulator and consumer protection commission. Eighteen months later the largest corporate insolvency in Australia’s history occurred - in a general insurer under the supervision of the new Australian Prudential Regulation Authority (APRA).

The collapse of the HIH Insurance group led to the establishment of a Royal Commission to inquire into the reasons for the failure, and to suggest any desirable changes in regulation.

The Royal Commissioner, Justice Neville Owen, found that the regulator was handicapped in its supervision of the insurer by the teething problems of the new regulatory regime, which distracted senior executives and led to staff attrition and loss of skills – a finding in itself worth noting. However he also concluded that many reforms to APRA were needed in the areas of governance, organisation and resources, and supervisory approach.

A key recommendation to improve accountability was that the largely part-time, non-executive board of APRA be replaced by a small full-time executive, comprising a chief executive and two or three commissioners. Another was that the involvement on the board of APRA of representatives of the central bank and the consumer protection commission end. It distracted the focus of the board member concerned, put the chief executive in the difficult position of being assessed by the standards of different agencies, and did little to contribute to inter-agency coordination.

The UK Government’s proposals take a different approach. Whether consciously or not, the suggested arrangements for governance of the new Prudential Regulation Authority emulate the pre-Royal Commission structure of APRA, favouring a largely non-executive governing board and cross-memberships of boards of the co-regulators.

The HIH collapse has been referred to as a “defining moment” in the life of APRA. Beyond governance, the Royal Commission’s recommendations on APRA’s resources and supervisory attitude were also crucial. APRA itself recently acknowledged that the “scrutiny and soul-searching” occasioned by the event strengthened the Australian regulatory regime for the unprecedented stress of recent years.

It would be unfortunate if the new British arrangements failed to benefit from insights hard-won in Australia.

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