Mansion House speeches - a surprise, a little gloom and doom and some confusion

Written by Jonathan Bowdler on Wednesday June 27, 2012

As always there were many interesting points to come out of the UK Chancellor's annual Mansion House speech this year, along with some very bad jokes. But one announcement might well have a significant impact upon the future of regulation in the UK.

The announcement that the Financial Policy Committee (FPC) is to be given a new statutory objective was a surprise.  The government are to amend the Financial Services Bill to give the FPC a secondary objective to support the economic policy of the government.  It will be a legal requirement for the FPC to report, for every action it takes, how that action is compatible with economic growth as well as stability.

Given that its existing strategic objective of maintaining financial stability was fundamental in the reasoning for establishing the Twin Peaks approach, does this new objective represent a significant change in direction for the both the FPC and financial services regulation in the UK?

Probably not.  Although very influential, we should not forget that the FPC is not technically a regulator.  It will be perhaps the most significant influencer on the two new regulators, the PRA and the FCA, but its role is mainly advisory.  Therefore this new objective will influence that advice, and the decisions made by the committee, but will not fundamentally change the objectives and approach of the two regulators.  Interestingly though, I have seen no comment from the financial media on the fact that this objective surely impacts upon the level of political independence from the FPC.

Perhaps the most significant fact to emerge from Mervyn King’s speech was his incredibly pessimistic view of the UK economy.  His speech was littered with phrases such as ‘ugly picture’ and ‘black cloud’ leaving the audience in no doubt that the economic outlook is at its worst for some time, laying most of the blame at the foot of the Euro crisis.

He did also however give some further insight as to what the industry can expect from the Bank of England in terms of style of supervision.  He talked about three key principles.

• Banks must have adequate loss-absorbing capacity
• Banks must be able to fail safely

And perhaps most significantly for those of us working in compliance:

• Less focus on unnecessary details, and more on the big risks.

And once again the wonderful phase ‘judgment-led regulation’ (in this case with reference to replacing rules-led regulation), raised its head.  Hopefully both the Bank and the FSA have been using their best judgement for the last decade, and I do not believe that we are suddenly going to see a great reduction in prudential rules; so if anyone has worked out exactly what this means yet can you let me know please?