Double vision

The FSA’s two-pronged regulatory model will cause headaches for companies

Those familiar with the cult television series Twin Peaks in the 1990s and its prequel film, Twin Peaks: Fire Walk With Me, may have heard alarm bells ringing at the FSA’s CEO Hector Sants’ recent speeches, in which he declared that from 2 April this year a ’twin peaks’ model would operate within the FSA.

Rather than a drama concerning murder, double lives, small-town respectability and underlying seediness, this is the drama of the progress of the regulatory reform programme – with some underlying seediness, mystery and double-think thrown in for good measure.

The proposals concern operating two regulatory models within the FSA in preparation for those models becoming separate regulatory entities in early 2013 – one for prudential and one for conduct regulation.

So far, so predictable – we knew this already. Or did we entirely? The proposals include having independent groups of supervisors, each of which will be making their own judgements against different objectives. They will act separately when engaging with companies, but somehow share all data collected from companies. There is no clarity on how this will work, just an FSA buzzphrase, “independent but coordinated regulation”, which seems to mean sometimes acting together, but sometimes not, while simultaneously sharing data.

It gets worse for companies, with the existing ’Arrow’ (advanced, risk-responsive operating framework) risk mitigation programme being split between the twin peaks. The two supervisory teams will assess risk separately, against their own objectives. Sants points out that each group “may well ask apparently similar questions”, but that “the purpose will be different”. Conclusions, however, will be “coordinated”, but there will not be a consolidated list of required actions. Those who have been through the Arrow process will be aware of the enormous amount of preparatory work that is necessary, so it is hardly welcome news to learn that this is about to be doubled.

Companies will be required to make “behavioural changes”, so the approach works to “the benefit of society” as a whole. In line with this, companies must comply with supervisory judgements “willingly” and “proactively” – in other words, not challenge FSA judgements.

So now companies have the best interests of society to contend with. Unsurprisingly, no steer is given as to what those might be, or which “society” the regulator may have in mind.

The killer punch comes in an apparently throwaway line that companies must “recognise that this new approach will require greater resources and expertise and thus costs more than the old reactive model”.

So, more fees. At a time when most companies are feeling the pinch of uncertain markets and falling revenues, the news of greater regulatory costs – and a greater regulatory burden – will not be welcome.

Although Sants’ speeches contain little that is brand new, they are likely to be pretty inflammatory. The twin peaks model is likely to be a firewalk indeed.