A prudent approach to regulation

The Bank of England and the FSA have today published a paper explaining the approach the new Prudential Regulation Authority will take to the regulation of deposit takers – banks, building societies, credit unions and investment firms.

There are few surprises: in accordance with the Government's mandate to the new regulator, the overriding priority is to be the stability of the UK financial system, rather than the interests of any particular institution.

Insurers will be comforted that this paper does not deal in any way with the PRA's regulation of insurance companies. It explicitly recognises that the risks posed by insurers are different from those posed by deposit takers. As the Government has developed its new regulatory proposals, many insurers had worried that the proposals were being developed to avoid repeating the mistakes of the 2008 banking crisis, ignoring the differences between banking and insurance. This regulatory recognition of the distinction will therefore be welcomed by the insurance industry.

The insurance industry will eagerly await the PRA's proposals for prudential regulation of insurance companies, which the FSA has promised for a conference on 20th June. The prudential regulation of insurers is of course dominated by Solvency II, and as we explained in our most recent Financial Services Update, the FSA's role is largely limited to implementing EU policy. It will therefore be very interesting to see if the FSA can have anything useful or new to say on 20th June when the Solvency II Level Two legislation and the Omnibus II directive will by then still be far from finalised.