The Financial Services Authority (FSA) was ineffective because it failed to deliver a good balance of 'prudential' and 'conduct' regulation, according to the chief executive of the Prudential Regulation Authority (PRA).
Andrew Bailey, deputy governor and chief executive of the PRA, told attendees of the Chartered Banker Dinner in Edinburgh last night that the FSA had been 'ineffective' in its management of these roles.
'Prudential' management of financial services looks at the safety and soundness of institutions with a focus on risk, capital and liquidity, while 'conduct' focuses on how consumers are impacted by the actions of financial institutions.
The new PRA is focused on the former, while the Financial Conduct Authority (FCA) looks at the latter. Both were set up on April 1.
Bailey said last night: "I think the evidence suggests that over the last 15 years there have been periods when either conduct or prudential supervision has been more in the ascendancy to the detriment of the other.
"In the years leading up to the start of the crisis there was a dearth of prudential supervision, but I am quite prepared to acknowledge that there have been periods where the opposite has been true.
"My point here is that I don't think the system of integrated regulation demonstrated the ability to deliver a stable equilibrium of conduct and prudential supervision."
Bailey added was that there is an inbuilt tendency within integrated regulation to play down the active debate of issues where conduct and prudential regulators found themselves with potentially conflicting objectives.
He also made the more general point that it is hard for "any single organisation to balance a wide range of very demanding issues that can come from anywhere in a landscape of about 25,000 authorised firms," he added that this was "particularly hard during a crisis."
He explained that the PRA's objective will be to promote the safety and soundness of firms and that consistent with this objective, it will focus on the potential harm that firms can cause to the stability of the financial system in the UK.
He added that the PRA would not prevent firms from failing but would ensure that this didn't have a detrimental impact on the wider financial system.
