The new Twin peaks model - DLA Piper

The new twin peaks model 

A report on the financial services industry’s 

views on upcoming regulatory issues 

New research by BDO and DLA Piper

New research by BDO and DLA Piper 

1 

Contents 

Foreword 

Executive summary 

Five key considerations for UK financial services firms 

1 – Maintaining the attractiveness of the UK 

2 – How accurate are firms’ expectations of twin peaks? 

3 – UK versus EU regulation conflict 

4 – Expected approach from the regulators and impact on industry culture 

5 – What will the regulated firm of the future look like? 

Where firms will feel the greatest impact: 

– Banks, building societies and credit institutions 

– Insurers (life and non-life) 

– Investment banks 

– Retail intermediaries 

– Investment and fund firms 

Conclusion 

Appendix – Full survey results 

About the research 

References and further reading 

Contact information for BDO and DLA Piper 

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2 The new twin peaks model: A report on the financial services industry’s views on upcoming regulatory issues 

Foreword 

The summer of 2012 witnessed an 

unrelenting assault on the integrity of 

the UK financial services industry. British 

banks became engulfed by a succession 

of scandals including accusations of 

fixing borrowing rates, online banking 

failures, mis-sold insurance and turning 

a blind eye to money laundering. At the 

same time, the new intrusive approach 

taken by regulators deeply concerned 

some members of Europe’s biggest 

financial sector, who fear the post-crisis 

trend of tougher enforcement is heading 

towards an excessively heavy-handed 

and invasive regime that could damage 

London’s ranking as the world’s leading 

financial hub.


3 

As these events were unfolding, BDO and DLA Piper conducted 

a survey of leading industry executives from the financial services 

sector to understand their principal concerns and priorities in 

relation to the forthcoming implementation of the ‘twin peaks’ 

model that incorporates the Financial Services Authority’s 

(FSA) split into the Prudential Regulation Authority (PRA) and 

the Financial Conduct Authority (FCA) in 2013. Following 

the financial crisis of 2007-2008, this decision by the coalition 

government to commit the UK to a new regulatory structure 

has implications for all financial services firms and the individuals 

operating within the scope of financial services regulation. Our 

survey and analysis captures the industry’s perception of this 

change, particularly in light of the power shift towards European 

regulation. 

Although the new legal structure will not come into effect until 

2013, the FSA made the transition to shadow the new structure 

internally on 2 April 2012 and the impact of the handover is 

already starting to be felt by financial services firms. The FSA’s 

pre-crisis ‘light touch’ approach has already been replaced by a 

tougher, forward-looking, judgement-led method of supervision. 

If firms are to be strategically successful under the twin peaks 

regime, strong foundations built to manage the required changes 

will be critical and investment must start now. The new UK 

financial watchdogs will be given powers to police markets and 

protect investors, including the banning of high risk retail products 

and warning investors about pending enforcement actions. 

The urgency behind the current sea change in regulation was 

made explicit in June 2012, when Mervyn King, the Governor of 

the Bank of England, said: “We need to put it right… both the 

culture and structure... from excessive levels of compensation to 

shoddy treatment of customers to the deceitful manipulation of 

one of the most important interest rates.” 

Against this backdrop of higher stakes for firms and a greater need 

to ‘be prepared’, we spoke to key business leaders, including Heads 

of Risk Management and Compliance, Legal, Finance Directors 

and Chief Risk Officers from a wide range of financial services 

sectors. These include banks, building societies, credit institutions 

and insurers to be regulated by both the FCA and PRA, and 

investment firms, fund managers and retail intermediaries to be 

FCA-only regulated. Investment banking respondents represent 

a mix of companies that will be FCA and PRA regulated and also 

those that will be FCA-only regulated. Their insight and opinions 

form the basis of our report and we are extremely grateful for 

their time and valuable contribution. 

BDO and DLA Piper have also added our own view of the five 

key themes we believe should be considered by the financial 

services industry as a result of the move to the twin peaks model 

and how the survey results contribute to these views. We hope 

you enjoy reading this report and find that it provides you with 

a useful insight into the upcoming change in the UK’s financial 

regulatory framework and of the wider issues facing regulated 

firms. We also welcome the opportunity to discuss any issues 

highlighted here and encourage you to contact us should you have 

any feedback or comments. 

We look forward to working with you during these exciting times. 

Michelle Carroll 

Partner, Asset Management 

and Funds, 

BDO LLP 

Michael McKee 

Partner, Head of 

Financial Services 

Regulatory, 

DLA Piper UK LLP


Executive summary 

The survey results offer considerable 

insight into the views held by the UK 

financial services industry with regard to 

the imminent division of the FSA, as well 

as on other regulatory developments. 

Responses received from 350 firms 

throughout the spectrum of financial 

services indicate the industry’s level of 

preparedness and what can be expected 

in the future. 

This report is a summary of our analysis of the survey results, 

incorporating themes extracted from the responses provided 

along with direct presentation of the results. Discussions with 

senior executives within the industry and specialists BDO and 

DLA Piper have identified five key points:


5 

1. 2. The onset of 

Strong regulator 

leadership 

regulatory fatigue 

If the UK is to continue to be an attractive 

international hub for the financial services 

industry, it will require the PRA and FCA to 

provide strong leadership and direction and act 

in a way that is sensible, coherent and above all 

consistent with one another. 

Firms have not expressed serious concerns 

about the challenges that lie ahead, in our 

view underestimating the impact that 

developments to the regulatory environment 

will have in the near future. 

Firms operating in the UK financial services sector have been hit 

by a wave of regulation at both home and abroad as jurisdictions 

across the world respond to the financial crisis of 2007-08. There 

are signs that firms are already struggling to manage the weight 

of regulatory activism, raising concerns that moving to a twin 

peaks system of supervision could exacerbate existing difficulties 

over identifying and prioritising regulatory developments by 

muddying the waters further. Worries that the PRA and FCA 

will not operate together with a consistent approach escalate the 

potential detrimental impact on the UK financial services industry, 

with survey respondents fearing a disjointed regulatory system will 

add to time and overheads spent by regulated firms. 

However, positive signs do exist. The UK regulator has already 

demonstrated a willingness to move more quickly and decisively 

than other jurisdictions when responding to the financial crisis in 

matters such as recoverability and resolvability. The survey results 

also show a healthy majority (79%) of firms believe the changes to 

the regulatory system will result in improved effectiveness, which 

can be expected to contribute to promoting the UK as a global 

hub for the financial sector. The PRA and FCA must continue to 

provide firms with clarity and direction if the UK is to remain a 

leading financial services centre. 

The results of the survey indicate that firms are not greatly 

concerned over the impact that the new regulatory bodies will 

have on them. This is seen across responses to matters such 

as the expected impact on compliance and risk functions, with 

firms anticipating only a short-term and relatively modest spike in 

headcounts. 59% of respondents in our survey stated that they 

expected no change to headcounts in the next 12 months, with 

20% indicating that they expected no changes over the next two 

years. This response most likely represents a form of regulatory 

fatigue but an acknowledgement is required within the industry of 

the need to invest further in risk and compliance functions, which 

cannot be expected to continue fire fighting without missing 

significant issues. 

As a result, a “hiring bubble” may be developing and assumptions 

on the cost of compliance may be arbitrarily low because costs 

associated with personnel are not being factored in yet. We 

envisage a surge in hiring in the next two years as key regulatory 

deadlines become imminent, potentially creating a “sellers market” 

for key skills in which the cost per individual is increased. 

The survey responses and anecdotal commentary also highlight a 

number of other matters firms are yet to fully understand, such as 

the expected impact of the FPC on the industry.


3. 4. 

The UK’s role within 

Europe 

Culture and consistency 

Further control over setting the regulatory 

agenda can be expected to be lost to Europe 

and there are concerns that the UK’s new 

supervisory model will not be consistent with 

EU laws. 

The two new regulatory bodies will have 

different approaches, but both will look to have 

an impact on the culture of firms across the 

industry. 

Discussions currently underway in Brussels over the establishment 

of a new Single Supervisory Mechanism are expected to serve 

to bring all Eurozone banks under the oversight of the European 

Central Bank(ECB). The ECB supervision will not however extend 

to the UK. The result could be that the UK’s interest to influence 

future financial rules may be systematically ignored or outvoted 

in the EU – although political discussions are underway to try 

to resolve this risk. From a prudential regulation view point it is 

noted that the new prudential regulation requirements set out by 

the EU are maximum harmonising, which calls into question the 

extent to which the PRA can follow its planned judgement-based 

approach in prudential supervision. 

Whilst principally the PRA and FCA will focus respectively on 

risks to the prudential health of firms and on risks to customers, 

the culture of the financial services industry as a whole will 

come under further scrutiny. Banks are already seeing increased 

regulator interest in this area, 61% of banks, building societies, 

credit institution and 56% of investment banks in our survey 

expect an increased focus on culture to have a high impact. We 

can expect a bolder and more interventionist stance from the 

FCA, with a focus much more concentrated along thematic lines. 

In contrast, the PRA is to follow a top-down, analytical approach, 

most likely following the direction set out by the Bank of England.


7 

5. 

Alignment to the man 

on the Clapham Omnibus 

Society demands change of the financial 

services industry. The regulated firm of 

the future must demonstrate a genuine 

commitment to respond to this or face a 

legislative backlash. 

Firms are already looking to spread the burden of managing the 

challenge of regulation with the workload being shifted away from 

compliance staff and towards finance, risk and legal functions. A 

shift in the manner in which regulatory compliance is managed 

is also expected to be a feature of the firm of the future, moving 

from a tick-box, review-type approach to a more integrated, 

business-led risk management role. 

However, the industry will be judged not only on its response 

to current regulatory pronouncements, but also on how it is 

perceived to have addressed the concerns of society as a whole. 

The current climate, in which conditions prevail to incentivise 

the delivery of short-term profits, is unsustainable – political 

and moral pressure will continue to intensify unless alleviated by 

demonstrable change to culture within the industry. 

We see an industry on the tipping point. The overly confident 

sector of 2007-08 has had to question every aspect of its identity: 

what it sells, who to, for what remuneration, how much oversight 

by who and ultimately, what is the financial services sectors social 

responsibility role. 

The global regulators and governments are asking these same 

questions and the split of the FSA is one answer. For it to be 

the right answer, the themes identified in this report need to be 

addressed. 

If we move to identify one overarching view from the report it 

would be we, the industry, have a lot to do but we are willing 

and motivated and can deliver on high expectation with the right 

leadership from the UK regulators.


Five key considerations for UK 

financial services firms 

The following pages represent the 

culmination of debate and discussion 

by the financial services teams at both 

BDO and DLA Piper. We have taken the 

survey results, feedback and anecdotes 

to identify themes and patterns and 

have developed five areas for further 

consideration by the industry. We 

welcome your views and encourage you 

to contact us either by talking to your 

regular adviser or using the contact list 

at the end of this document. 

79% 

of firms believe the changes to 

the regulatory system will result 

in improved effectiveness, which 

can be expected to contribute to 

promoting the UK as a global hub 

for the financial sector.


9 

1 – Maintaining the attractiveness of the UK 

An industry in need of leadership and 

direction 

As a fall out from the financial crisis of 2007-08, the financial 

services industry has been confronted with wide-ranging 

regulatory reform. A significant challenge for regulated firms has 

been to balance the increasing level of obligations designed by 

governments, tax authorities and regulators on a local and global 

level. 

To ensure that UK firms are able to navigate effectively through 

the mass of competing demands emerging from the postcrisis 

landscape, the FCA and PRA must come to the fore 

and demonstrate robust leadership and a sensible, coherent 

approach to their supervisory activities. Without sufficient 

guidance from the new twin regulators and without a consistent 

and comprehensible approach by them to the market and to 

individual firms, there is a risk that firms will not focus on, or 

possibly even be able to identify, their most relevant priorities in 

managing regulatory compliance. The survey results support this, 

with concerns over the embedding and maintenance of existing 

regulation (i.e. not new regulation) proving to be the second 

most significant regulatory issue over the next one to two years 

to respondents. If firms do not appreciate the need for sufficient 

resources or expertise to deal with current regulation, they 

cannot successfully manage the implementation of new, more 

complex regulation without significant changes to investment, 

structure and approach. 

Without this understanding, there is an increased likelihood that 

firms will not invest resources appropriately, with increased or 

duplicated costs then being passed on to investors. If other 

markets were able to bring an identical product to customers 

without market cost inefficiencies, then a contraction in the overall 

attractiveness of the UK financial services market would likely 

follow as a result. 

Understanding priorities when everything is 

important 

The survey results indicate that firms are clouded as to ranking 

the expected impact of upcoming regulatory changes, with impact 

scores largely clustered around a ‘medium’ impact score. The 

survey reveals no single clear issue that has been recognised as 

being paramount, with none of the matters put to respondents 

receiving a response to indicate that a majority of firms had 

identified it as having a significant or very significant impact 

to their workload over the next year. This helps illustrate the 

challenges awaiting the FCA and PRA in providing leadership in a 

regulatory environment already flooded with a catalogue of new 

pronouncements from parties both at home and abroad. 

“What will be the most significant regulatory issue to you over the next 1 to 2 years?” 

5 

5 

4 

4 

4 

20 

Consumer protection concerns 

Concerns of existing legislation 

Clarity of objectives / avoid overlaps and conflicts 

Increased costs are anticipated 

Conduct of business 

5 

No impact 

Concerns over increased risk 

Concerns of information exchange between regulators 

Criticism / concerns of twin peak model 

Coordination with EU requirements 

Concerns over change in general 

Other 

6 

7 

10 

12 

18


Providing a complete, yet proportionate 

response 

There are concerns that the new split model will lead to 

disjointed regulation, repetition of efforts (both from the 

regulator and the regulated firms) and / or the risk of issues falling 

through the cracks. Both successor organisations of the FSA will 

need to make enhancements to their operational processes to 

address these concerns, which have been expressed by survey 

respondents in their expectation of significant increases in time 

and hard costs under the new regulatory model. 

Consideration must also be given to the fact that adopting 

twin peaks supervision was a reaction to needing to bring bank 

supervision to the fore. This gives rise to the concern that the 

approach with which the PRA and FCA treat financial services 

firms inside and outside of banking lacks consistency and the 

clarity of rules may be compromised by a dominant focus on 

banks. Non-banking firms may also conclude they are being 

regulated in a way that insufficiently differentiates them from the 

banking sector. This could then have wider reaching implications 

for the UK financial services industry’s image as a whole if systemic 

issues are missed as a result of this spotlight being placed on 

banking, rather than the conduct of the full spectrum of activities 

in the financial services arena. 

Our survey results indicate there also remains some uncertainty 

as to how exactly some full scope investment firms will be 

impacted by the new regulatory structure, particularly those at the 

smaller end of the spectrum such as broker-dealer firms. Given 

that the thresholds for qualifying for PRA supervision are likely 

to capture some firms of this nature, concerns have to be raised 

about whether these companies are likely to receive appropriate 

and proportionate oversight from the PRA. 

“ 

I think there will be 

serious problems with a twin 

peak system… it is very unrealistic 

for two regulators with different 

objectives managing the 

same firm. 

Bank 

“


11 

A supportive sector and a good start 

The survey results show an overwhelming majority (79%) of firms 

believe that the new regime will deliver on its need to be more 

effective, with only 3% responding that they think the new regime 

will be less effective. 

The real challenge now facing the UK’s newly empowered 

regulators will be to find an appropriate balance in response to its 

pre-crisis failings. If it can be demonstrated that the FCA and PRA 

have struck the correct equilibrium in creating a new regulatory 

model that safeguards the customer and sufficiently strengthens 

the financial services industry, then there may well be a positive 

impact on the marketability of the UK as an international business 

hub. 

There are some positive signs. The UK has moved much quicker 

than other jurisdictions in demonstrating that one of the most 

significant lessons of the financial crisis has been learnt, being 

that of ensuring firm failure does not materially harm the stability 

of the financial system. The UK has taken on more of a leading 

role in recovery and resolution planning than other jurisdictions, 

with this comprising one of the key elements making up the 

supervisory approach of the PRA in its objective to “promote 

the safety and soundness of regulated firms”. Moreover, it must 

be acknowledged that one of the benefits of the new regulatory 

model is that greater focus will be applied on the supervision of 

systemically important institutions, in alignment with the regulators’ 

statutory objectives, which further demonstrates a commitment 

to addressing the issues of 2007-08. 

To what extent do you think the changes to the regulatory 

bodies will improve their effectiveness? 

59 

18 

3 

20 

Significant improvement 

Marginal improvement 

No difference 

Make worse 

“ 

With separate objectives, 

we believe that without a 

proper communication channel 

between the regulators significant 

problems can arise… 

Retail Intermediary 

“ 

65%


2 – How accurate are firms’ expectations of twin peaks? 

Regulatory fatigue has set in 

Throughout the survey results, a broad theme has emerged that 

there may be a general underestimation of the impact the change 

in the regulatory environment will have on firms. Although there 

appears to be some recognition of the need to make time to 

develop the right relationships with supervisory teams at both 

the FCA and the PRA, responders have generally not expressed 

serious concerns over future impact on costs, including IT costs 

and key staff numbers, indicating that firms may be understating 

the complete picture of future pressures upon them. 

This most likely represents a form of regulatory fatigue. There has 

been an influx of new rules impacting upon the market every year 

since the financial crisis and, as highlighted in the previous section, 

firms are still attempting to get to grips with already-established 

rules such as client asset protection and anti-money laundering. 

This view is supported by recent high profile enforcement cases 

where banking and asset management firms have been sanctioned 

in respect of deficient anti-money laundering controls and client 

asset breaches. 

Consequently, as firms struggle to embed current regulation, 

little attention is given to appreciate the scale of change on 

the horizon and to identify matters that will require significant 

future investment as a result of new regulatory requirements. 

Additionally, because of delays in delivering final regulation, such 

as with the Alternative Investment Fund Managers Directive, 

(AIFMD) and late revisions of requirements, such as with the 

Foreign Account Tax Compliance Act (FATCA), firms do not want 

to invest now in managing their readiness for future regulatory 

developments. This can be seen in the survey results, which 

indicate respondents are unclear as to where future priorities lie. 

Taking a specific example from the survey, the PRA has stated 

that its role will not be to prevent firm failure through the use 

of bail-outs, so a focus on recovery and resolution planning and 

living wills is expected. However, respondents do not predict 

this to have an especially significant impact on workloads in the 

coming year, highlighting a focus area of the new regulatory regime 

from which firms may have underestimated the potential impact, 

possibly underestimating the time and expertise required to 

properly assess the impact of multiple third party providers on 

the Recovery and Resolution plan. 

This is a consistent theme throughout the survey results, with very 

few of the FCA and PRA’s new powers or changes in approach 

eliciting a response to suggest that respondents are particularly 

concerned. In reality, however, the move to a twin peaks approach 

will be far from straightforward for regulated firms. 

Please rate the following in terms of impact on your firm’s workload over the next 12 months: 

Recovery and Resolution Planning / Living Wills 

34 

Total 

Banks, building societies, 

credit institutions 

Insurers (life and non-life) 

Investment banks 

Investment / fund firms 

Retail intermediaries 

45 

29 

35 

0 

0 

4 

0 

2 

1 

22 

42 

24 

30 

41 

27 

40 

26 

17 

21 

25 

10 

23 

20 

7 

20 

12 

12 

18 

13 

Very significant 

impact 

4 3 2 

No impact

New research by BDO and DLA Piper 13 

Impacts on sub sectors will be different 

The move to twin peaks will have an effect on the logistics of 

working with the regulators, with many firms being required to 

adapt to the split in dealing with prudential issues with the PRA 

and conduct issues with the FCA. To confuse matters, the FCA 

will also have some prudential supervision responsibilities. The 

FSA has already transitioned to this new structure internally, 

with the supervision teams for larger firms split along these lines. 

As such, it is likely that banking institutions will have a greater 

awareness of how the move will directly impact them from an 

organisational point of view. However, smaller firms will not have 

the same exposure to the new framework and so may not have 

the same level of appreciation or readiness ahead of the split, 

although a consultation paper released by the FSA in September 

2012 (CP 12 / 24), supplemented by the more recent PRA and 

FCA Approach Documents, provides some detail as to what can 

be expected. 

Meanwhile, for banks and large investment firms the change 

in UK regulators will happen at the same time as new detailed 

European reporting requirements are applied directly to UK 

institutions. This may mean that some firms will be providing data 

in respect of prudential and conduct of business matters to three 

new supervisory bodies at the same time. For those regulated 

by the PRA, the detailed European reports (COREP) do not sit 

easily with the PRA’s objective of judgement-based supervision. 

In addition, the PRA’s macro prudential and resolvability focus 

means that PRA firms may receive more ad-hoc regulatory 

reporting requests. Therefore, many firms will need to rethink 

their approach to regulatory reporting, even if they already have 

COREP or FINREP projects underway. 

The survey results show insurers have a relative lack in confidence 

about the new regime. As seen by the graph below, insurers 

represented the lowest proportion of firms that expected 

a significant improvement in the effectiveness of regulatory 

supervision as a result of the changes to the regulatory bodies, 

with only 14% of respondents expressing this view. 

To what extent do you think the changes to the regulatory bodies will improve their effectiveness? 

59 

67 

45 

52 

Total 







Significant 

improvement 

17 

21 

27 

14 

20 

20 

Marginal 

improvement 

64 

59 

No difference 

10 

21 

22 

30 

15 

18 

Make worse 

3 

2 

6 

4 

1 

3


Impact on headcounts 

Firms acknowledge that an increase in compliance and risk 

function headcounts will be necessary to manage the new 

relationships under the split regulatory model. More than 50% 

of survey respondents indicated that they expected a relatively 

modest increase (1-10%) in personnel in these areas over 

the next 12 months. However, this is only anticipated to be a 

short-term spike, with an expectation that headcounts will be 

unchanged in two years time. 

These results highlight an under-appreciation in the potential 

increase in workload, particularly with regards to regulatory 

compliance. The signs emanating from the industry are that many 

firms are fire fighting just to keep on top of current requirements, 

even when it comes to relatively simple issues such as governance. 

A survey conducted by Robert Half reported in September 

2012 that six out of ten executives in 17 the UK financial services 

sector said they were spending “more” or “significantly more” 

time on regulation, whilst half have seen their compliance budget 

increase. Meanwhile, a Thomson Reuters 17 study in February 2012 

announced that companies around the world were hit by 14,215 

regulatory announcements globally in 2011, or 60 per day. 

If compliance functions have their hands full with the current 17 

17 

catalogue of regulatory developments, then an acknowledgement 

17 

17 

17 

17 

17 

of the effort that will be required to embed new regulations 

should follow in the form of increases in compliance team 

headcounts of 40-50%, rather than 10%. The fact that more 

survey respondents suggested that these would decrease by 

1-10% than increase by more than 20%, both over the next 12 

months and in two years, strongly illustrates just how contrasting 

the industry view of future compliance workloads are. This is 

compared with the likely impact of both the move to the twin 

peaks framework and additional regulatory pressures from home 

and abroad will have. 

Consideration should also be given to the demand for compliance 

specialists, both within regulated firms and the new regulators. 

If, as suggested, pressures increase on compliance teams to the 

extent that sizeable increases in headcounts are required, this 

would be expected to have a significant impact on the number 

of available resources in the market, the time required to identify 

and recruit them and their market price. Consequently, although 

we anticipate staff levels to increase by 40-50%, salary pressures 

resulting from the increased need for compliance specialists can 

be expected to drive staff costs upwards by a disproportionate 

amount. 

Pressures in this area may also arise as a result of the regulators 

demanding an enhanced internal audit department to act as a 

In terms of the size of your Compliance / Risk function which of the below do you anticipate reflects likely headcount 

change in the next 12 months and in 2 years? 

23 

1 

3 

20 

7 2 6 

26 17 

19 

2 years 12 months 

53 

59 

Decrease of 1-10% 

No change 

Increase of 1-10% 


Increase of 21%+


15 

“ 

Costs: Regulatory issues will 

increase our cost of operation in 

terms of more people and new 

infrastructure. 

Bank 

“ 

‘deputy’ on their behalf, thus leading to a reduction in supervisory 

staff. Whilst this has not been publicly stated as an objective to 

follow from the split in the regulatory model, this matter has been 

flagged by the Internal Audit Working Party currently working with 

the FSA. 

The need for investment in systems 

Further to the need to increase resources in their regulatory 

teams, the split regulatory model is likely to necessitate further 

investment elsewhere. Specifically, it is anticipated that firms 

will need to upgrade current systems in order to cater for new 

demands and information needs resulting from the move to twin 

peaks. 

highlighted that this requirement for future investment is on the 

radar. 

The demand for technology and infrastructure specialists is also 

likely to be boosted by regulatory need. The PRA and FCA will 

be keen to avoid the teething problems that can arise as a result 

of changes in reporting systems, the hope being that lessons have 

been learnt from the arduous introduction of GABRIEL by the 

FSA in 2008, together with perpetual challenges with transaction 

reporting requirements. 

Perhaps not surprisingly, the majority of survey respondents (63%) 

anticipate the new regulatory system will be installed at significant 

cost to them, only some of which will ultimately be passed on 

to customers. With margins remaining tight, firms will need to 

consider how to ensure they get value for money from their 

regulatory spends. 

Whilst there is a risk that the need for investment in systems and 

IT infrastructure will not be recognised, or the challenge posed 

as a result will be underestimated, survey respondents have 

Thinking about working with the new regulators, how do you expect the amount of your relationship management time to 

change under the new regulatory model over the next 12 months? 

47 

25 

19 

11 

42 

12 

63 

13 

68 

Significant increase 

Significant decrease 

Stay the same 

Time / overhead spent Financial costs spent Time spent communicating benefits / 

changes to clients of the firm as a whole


Cost / benefit paradox 

It is interesting to note that, whilst the majority of survey 

respondents were keen to flag the significant costs anticipated to 

result from a modified regulatory environment, there remained an 

expectation that installing the twin peaks approach would greatly 

benefit customers. A majority of those questioned (58%) believed 

the greatest benefit to arise from the costs of implementing 

regulatory change would be a benefit to clients. As this has been 

a catch cry of the FSA, they will be pleased to hear that our 

survey shows it has been heard. 

However, this highlights a paradox in the thinking of those in 

the industry. If substantial additional costs are to be inflicted 

on firms, it is logical to assume that these will be passed on to 

customers in some way. Consequently, the assertion that clients 

are to be the most significant beneficiary from the costs of 

implementing regulatory change may not have been made with 

full consideration of this in mind. Instead, customers will be paying 

for it and if they feel that cost pressures are too high, they will 

likely go elsewhere. 

Expecting the FPC? 

Whilst the survey results indicate firms are aware of the 

impending arrival of the FCA and PRA and the impact that both 

organisations may have on their business, it appears that the 

power of the FPC (Financial Policy Committee) may have been 

overlooked. 

As outlined in the Financial Services Bill, the role of the FPC is to 

identify, monitor and take action to remove or reduce systemic 

risks with a view to protecting and enhancing the resilience of the 

UK financial system. An amendment to the Bill was announced 

in June 2012, which would give the FPC a further objective of 

supporting the economic policy of the UK Government. 

The macro-prudential tools available to the FPC will have a 

significant impact on the financial services industry in the UK. 

Banks, for example, can expect to be required to build up capital 

buffers during periods of strong economic growth so that they 

may have a cushion to draw down upon when the going gets 

tough. 

What benefit(s) do you expect from the costs of implementing regulatory change? 

65 

49 

51 

60 

27 

48 

Total 







16 

18 

12 

28 

15 

17 

Financial benefit to 

the firm 

65 

58 

Benefits to clients Manage risk better None of the above 

41 

36 

29 

37 

3 

6 

4 

4 

6 

13


17 

“ 

Concerned with issues like 

disclosing the detailed information on 

deals and transactions made. 

Investment Fund 

“ 

Capital conservation standards will automatically apply should this 

buffer not be maintained, which will directly restrict a firm’s ability 

to distribute retained earnings as dividends. The FPC will also 

be expected to react to changing macroeconomic conditions by 

adjusting leverage ratio caps and preventing ‘overheating’ through 

the imposition of sectoral capital requirements where conditions 

demand. 

Due to the nature of the FPC’s objectives and the ever-changing 

business environment, the FPC is likely to have a more profound 

impact on the day-to-day supervision of regulated firms than 

firms currently envisage. A demonstration of such influence being 

exercised can be found from the first interim FPC meeting, which 

required the FSA to monitor and assess provisioning levels on 

real estate portfolios of certain regulated firms, thus driving the 

supervisory agenda. 

The FPC’s influence will be indirect; as it is not empowered 

to intervene directly with individual firms, but its impact will 

nonetheless be significant due to the actions it will ask or require 

the PRA and FCA to undertake. 

Transparency and disclosure 

Within their respective launch documents, both the FCA and PRA 

have detailed their intention to focus more on using requests for 

transparency and disclosure as regulatory tools, with the intention 

that market participants have the necessary information about 

regulated firms to combat information asymmetries. 

Given that firms generally resist any requests for additional 

disclosures, such as in financial statements or offering prospectuses, 

there appears to have been a general underestimation of the 

challenge to be posed in this area when looking at the survey 

results. This is particularly relevant for retail intermediaries, with 

only 19% seeing increased disclosure powers as having a significant 

impact on their firms. In contrast, nearly three times as many 

(55%) fund managers judged this to be of high significance. In the 

case of the fund managers, this probably represents an anticipation 

of the impact of AIFMD and UCITS V. 

Which of the new powers given to the FCA and the PRA, or anticipated change in approach, do you think will have the greatest 

impact on your firm? 

Increased disclosure powers? 

62 

26 

67 

19 

55 

Total 







53 

28 

26 

5 

19 

19 

38 

46 

47 

10 

12 

37 

14 

Low Medium High n/a 

0 

0 

0 

11 

4 

2


3 – UK versus EU regulation conflict 

Monetary and fiscal union 

It is well recognised that Europe’s future regulatory landscape 

will see EU institutions gain influence over regulation of firms 

in individual member states. The first steps towards the EU 

gaining such influence were achieved by creating three new 

European Supervisory Authorities (ESAs): the European Banking 

Authority, the European Securities and Markets Authority and 

the European Insurance and Occupational Pension Authority. 

Discussions are currently underway in Brussels on proposals for 

a Single Supervisory Mechanism (SSM) for banks in the euro 

area. This is seen in Europe as an important step in strengthening 

the Economic and Monetary Union (EMU). In the new SSM, 

ultimate responsibility for specific supervisory tasks related to the 

financial stability of all euro area banks will lie with the European 

Central Bank (ECB). National supervisors will continue to play 

an important role in day-to-day supervision and in preparing and 

implementing ECB decisions. 

Exactly how this will tie in to the dual regulation model under 

the FCA and PRA is currently unknown. Both new regulatory 

bodies will however have to consider their approach in light 

of the developments in Brussels and each devise a strategy 

for persuading European authorities to develop regulatory 

approaches which will not harm the relative attractiveness of the 

UK financial services market. 

Judgement-based approach and EU laws 

The PRA’s launch document outlines its approach to supervision 

as a prudential regulator and its style of supervision as judgementbased. 

As well as placing more emphasis on being centred on 

the ‘big picture’ of where main risks to the financial system lie 

and being forward looking, this approach is more focused on 

the substance of, rather than strict compliance with, rules in 

place. However, the new prudential regulation requirements 

in the Capital Requirements Regulation (CRR) are maximum 

harmonising and this may limit the PRA’s capacity to apply its 

own judgment and interpret the requirements differently relative 

to other member states. This potentially impedes the PRA from 

delivering its promised approach. 

Further potential conflicts with the maximum harmonising 

requirements of the CRR may also arise from the FPC’s activities. 

As part of the macro-prudential approach to supervision, the 

FPC is charged with identifying, monitoring and taking action to 

Four out of five survey participants 

across all business types currently 

view their respective trade bodies as 

being either fairly or very effective 

at influencing EU regulatory policy.


remove or reduce systematic risk. The FPC will also have powers 

in direction in relation to the counter cyclical capital buffer and 

other aspects of the macro-economic tools under Basel III & CRR. 

While many of these will be discretionary there is potential for 

friction between the FPC’s use of its macro-prudential powers and 

macro-prudential policy within the Eurozone. 

However, conflict risk should not be the sole cause for concern 

in relation to EU regulators. Four out of five survey participants 

across all business types currently view their respective trade 

bodies as being either fairly or very effective at influencing EU 

regulatory policy. This high level of confidence is unlikely to last. 

The ability to wield influence with such self-assurance may well 

be compromised as a consequence of the protracted Eurozone 

crisis, which threatens to make UK concerns peripheral at best 

at EU level. Moreover, trade associations themselves describe an 

environment where EU and UK policymakers are less open to 

listening to the industry as a result of the financial crisis. 

“ 

Redesigning the 

regulatory framework 

needs to align within an 

EU Context. 

Investment Bank 

“ 

How influential do you believe your trade body is in terms of influencing EU regulatory policy? 

63 

16 5 

No influence 

Not very influential 

Fairly influential 

Very influential 

16


4 – Expected approach from the regulators and impact 

on industry culture 

Regulators 

The move to a twin peaks model will see the two new regulators 

emerging with their own distinct cultures defined by separate 

agendas. Whilst the PRA has been charged with assessing the risk 

that financial products pose to the prudential health of firms, the 

FCA has made clear that it shall instead be focused on risks posed 

to the end customers. 

The way in which the two bodies are structured is also expected 

to influence their respective approaches to supervision; the FCA’s 

policy-making powers are expected to be more independent 

and unrestricted as the PRA will be operating under the Bank of 

England and consequently strongly aligned with the work of the 

FPC. 

FCA 

The main message emerging from the tone of both the FCA 

launch document and recent FSA speeches is that the FCA’s 

approach to conduct regulation will significantly differ to that of 

its predecessor. Central to this will be a more issues-based and 

thematic style. Banks are likely to feel the greatest impact from a 

move to regulation that is based more on judgement, with 88% 

of banks in our survey indicating that the impact on their firm 

would be high or medium. However, as can be seen from the 

chart below, firms across the whole spectrum of financial services 

expect this to be significant to their business. 

The FCA is also expected to exercise its enforcement powers 

more regularly and boldly than previously seen from financial 

regulators in the UK, with the launch document outlining a more 

pre-emptive and interventionist stance coupled with lower 

tolerance for consumer detriment. In response, the survey results 

expose concerns on the impact that more demanding policy 

making may have on market confidence. 

The supervisory approach to be adopted by the FCA is 

anticipated to directly contribute to the increase in costs 

highlighted earlier in this report. In order to successfully fulfil 

its objectives and operate under a culture based on judgement 

and sound analysis, the FCA will have to invest in attracting and 

retaining key staff with sufficient knowledge and experience. 

Further to this, as a result of the amendment to the Financial 

Services Bill allowing direct contracting of a section 166 

investigation by the regulators there is an expectation that the 

use of section 166 skilled person reports as a supervisory tool 

will significantly increase, thus adding to cost pressures. However, 

given that the FCA will be responsible for supervising the conduct 

Which of the new powers given to the FCA and the PRA, or anticipated change in approach, do you think will have the 

greatest impact on your firm? 

Judgement based regulation 

31 

32 

34 

41 

50 

33 

32 

Total 







5 

6 

39 

59 

12 

15 

29 

26 

45 

32 

11 


4 

3 

0 

0 

0 

2


21 

of 20,000 firms and given the issues-based and thematic approach 

to be followed, many firms are likely to continue to have very 

limited contact with their regulator, albeit that regulators profess 

this will not be the case. 

PRA 

The PRA’s overall supervisory style is expected to provide 

contrast to that of the FCA. The PRA is instead anticipated to 

follow a top-down, analytical approach. The fact that the PRA 

will not be involved in the supervision of the whole spectrum 

of financial services firms will also allow it to focus on a smaller 

number of key issues and engage with senior management on a 

far more extensive basis. 

The establishment of the PRA as a subsidiary of the Bank of 

England is also expected to impact the approach to supervision. 

This reflects an international trend, growing as a result of the crisis, 

to place prudential supervision in the Central Bank or subsidiary 

of the Central Bank, underlining the need for Central Bank money 

and even government bail-outs in cases of key financial institution 

insolvency. 

In general, the PRA’s approach is likely to focus heavily on 

obtaining information on capital, liquidity, stress-tests and a firm’s 

overall financial health and soundness, together with discussions 

with senior executives on the overall strategy and business focus 

of PRA supervised firms. 

On the face of it, the focus of the PRA is very much geared 

towards the banking sector, the prudential health of which is a key 

area of focus following the financial crisis. Consequently, it is likely 

that insurance companies may not be attributed the same level 

of significance as banks. Insurers are particularly concerned that 

the PRA will be too influenced by banking supervision approaches 

and less able to adapt its approach to insurance companies, which 

consider themselves to be a much lower stability risk. 

“ 

More stringent regulations 

will lead to major loss of 

confidence in the market 

place with investment firms. 

Investment Bank 

“ 

“ 

I believe in the future a 

conflict of interest between both 

the regulatory bodies can arise. 

We have to wait and see. 

Bank 

“


Impact on industry culture 

Much media attention has been devoted to the need for cultural 

change across the financial services sector. So, it is surprising 

that less than half of firms in the survey recognised an increased 

focus on company culture due to new powers given to the 

FCA and PRA would have a high impact on their business. The 

UK’s reputation as a financial centre has, after all, been under 

siege throughout 2012. The Libor borrowing rate scandal, the 

IT meltdown that left thousands of customers without access to 

cash, the PPI mis-selling bill and money laundering and sanctions 

issues have all served to ramp up political criticism and expose 

the huge challenge ahead if trust is to be rebuilt. Furthermore, 

as detailed in its launch document, the attention of the FCA will 

be specifically placed on the culture of firms in the UK financial 

services industry as a ‘potential root cause of poor outcomes for 

retail or wholesale customers, recognising its determining role in a 

firm’s regulatory behaviour’. However, significant challenges exist 

for the regulators given that this is a difficult concept in which to 

set clear expectations, measure performance and challenge firms 

judged to have a ‘deficient’ cultural environment. 

Opinion is strongly divided between company types, with more 

than twice the number of respondents from the banking sector 

(96%) expecting a medium to high impact from a greater focus 

on company culture compared to those from retail intermediaries 

(46%). One possible explanation for the scale of this disparity is 

that a significant proportion of retail intermediaries, in spite of also 

having to implement change in response to the Retail Distribution 

Review (RDR), are mostly not relationship-managed by the FSA 

and therefore scrutiny of their company’s culture is considerably 

limited. Banks, on the other hand, have already experienced a 

significant crack down, particularly concerning the way consumers 

are sold financial products. 

This expectation is also set against the backdrop of the 

Parliamentary Commission on Banking Standards being 

established, which is to consider and report on professional 

standards and culture within the UK banking sector as one of its 

terms of reference. The commission is set to deliver proposals for 

legislative action by December 2012. 



Increased focus on culture within firms 

38 

49 

8 

56 

32 

5 

39 

0 

32 

50 

47 

61 

16 

35 

48 

21 

31 

19 


4 

3 

0 

0 

4 

2 

Total 






Retail intermediaries


The survey also highlights a measure of concern as to the type of 

impact a ‘crack-down’ on culture in the financial services industry 

may have on the operating style and potential returns of firms. 

A more intrusive approach from regulators, coupled with larger 

sanctions in respect of misdemeanours, is likely to foster an 

atmosphere of risk aversion. 

“ 

We’re concerned that 

the business will become 

too risk-averse. 

Investment Fund 

“ 

Banks are likely to feel the greatest 

impact from a move to regulation 

that is based more on judgement, 

with 88% of banks in our survey 

indicating that the impact on their 

firm would be high or medium.


5 – What will the regulated firm of the future look like? 

No clear vision 

The survey results paint an unclear picture of how regulated 

firms will look as a result of the changing regulatory environment. 

The general consensus appears to be that responsibilities of 

the compliance, risk, finance and legal functions under the new 

framework will be unchanged in respect of both prudential and 

conduct regulation. However, if the level of responsibilities is to 

change at all, then the clear expectation from the results is that 

they would increase, rather than decrease. 

The clearest indication of an increase in responsibilities is in 

relation to the finance function’s role with respect to prudential 

regulation, with 42% of respondents sharing this view and 39% of 

respondents also expecting greater involvement from finance in 

conduct regulation. These results support comments emerging 

from the industry suggesting there has already been a greater 

shift in prudential regulatory focus from compliance to finance 

teams. This clearly reflects the regulators’ increased focus on 

financial information required to monitor capital and liquidity. 

The responses to the survey also show signs of uncertainty as to 

whether firms are aware of where they fit into the scope of the 

twin peaks framework. Although the FSA has been operating 

internally with a split structure since April 2012, it appears some 

firms may still be unaware who will be regulating them from 2013 

onwards. The survey results show that 65% of banks, building 

societies and credit institutions and 62% of insurers have indicated 

they will only be regulated by the FCA. This appears to be at 

odds with the scoping documents of the PRA, which state that 

all deposit takers and insurers will be under their supervisory 

jurisdiction. 

However, the question of what regulated firms will look like in 

the future goes deeper than expectations set out by the survey 

results. It is necessary to consider the changes in approach to 

be brought in by the new regulators, as discussed in the previous 

section, to really provide some insight as to how firms are likely to 

conduct themselves in five or ten years time. 

Will the following functions have the same, more or less 

responsibilities going forward in respect of prudential 

regulation? 

Finance function 

59 

Will the following functions have the same, more or 

less responsibilities going forward in respect of conduct 

regulation? 


63 

38 

50 

47 

51 

36 

40 

57 

47 

45 

46 

45 

50 

50 

31 

42 

69 

55 

3 

3 

4 

4 

0 

3 

44 

35 

39 

61 

57 

1 

3 

8 

6 

4 

4 

More Same Less 


Total Banks, building societies, credit institutions Insurers (life and non-life) Investment banks Investment / fund firms Retail intermediaries


Given that the survey results point to the suggestion of increased 

involvement in prudential and conduct regulation across finance, 

risk and legal functions, the potential role of risk committees 

comprised of staff in these positions may be of further significance 

when it comes to managing the ever-increasing tide of regulation. 

The UK financial services industry will need to respond to new 

regulatory pronouncements from the US (FATCA, Volcker Rule, 

Dodd-Frank), Europe (CRR, AIFMD, UCITS V, MiFID II) and the 

UK itself, often being dealt with simultaneously, with each involving 

new skill sets, reporting and changes to systems as well as the 

need for greater knowledge at Board level for each firm. Indeed, 

it may be necessary for some firms to appoint a regulatory 

specialist to the Board to ensure sufficient know-how at the top. 

Furthermore, given the regulators’ increased expectations of all 

Board members, executives will face a continued challenge to 

demonstrate up-to-date knowledge 17 across all areas of regulatory 

change. 

In terms of the size of your Compliance / Risk function how many members do you currently have in your UK regulated firm? 

17 

1 0 

4 

15 

0-3 people 

4-6 people 

7-10 people 

11-20 people 

46 

0 

6 2 

10 

21-50 people 

51+ people 

63 

36 

Banks, building societies, credit institutions 

Insurers (life and non-life)


Impact of supervisory approach and of 

societal response to the financial crisis 

Given that the nature of regulatory supervision in the UK is to 

become more issues-based and thematic, as well as being more 

focused on culture, it is natural to expect some impact on how 

firms in the financial services industry operate. 

The interventionist stance to be taken by the FCA, coupled with 

its ‘zero-tolerance’ approach to consumer detriment, is anticipated 

to result in greater emphasis on the cultural ‘tone’ being 

disseminated from the top. How this cultural leadership from 

Boards and management manifests itself is open to speculation, 

but a greater crackdown is expected on staff that deviate away 

from behaviour judged to be acceptable under tougher standards. 

Financial penalties for misdemeanours, such as mis-selling of 

products, misleading customers and market abuse, may be used 

by firms to demonstrate their response to society’s concerns over 

the culture of the financial services industry. 

Meanwhile, it is anticipated that regulatory principles around 

matters such as anti-money laundering will take on more of an 

‘ethereal tone’ within financial services businesses. This represents 

a shift in attitude to the extent that principles of strong regulatory 

governance flow throughout the business, rather than being a 

mere box-ticking exercise. To fit into this approach, compliance 

and risk teams will have to shift focus away from a more narrowly 

focused, review-type function and towards a proactive risk 

management role that demonstrates in-depth appreciation of the 

subtleties of the business. 

Since 2008, financial services firms have come under increasing 

moral and political pressure to change. Public perception of a 

culture of greed and excess has been demonstrated through 

protest movements such as Occupy, whilst politicians across the 

world have won much political capital through targeting the sector. 

Society’s response to the financial crisis continued in the form 

of Professor Kay’s review of UK equity markets and long-term 

decision making, which was released in July 2012 and paints a 

picture of what the future may hold, particularly with regard to 

remuneration policies. 

Kay was critical of the culture of annual bonus awards, noting 

that “we don’t pay politicians bonuses, we don’t pay surgeons 

bonuses... if we did... it wouldn’t affect how hard they work, 

but it would affect the way in which they work.” The City’s 

remuneration culture has resulted in bonuses becoming analogous 

to a guaranteed supplement to salaries, a consequence of the 

perception that executives really have to blunder to lose their 

bonus entitlements. In place of this, Kay suggests that executive 

pay should be designed to focus on long-term goals, through the


payment of bonuses in shares, rather than cash, with a required 

holding period after the individual has left the business. This 

would mark a clear shift in remuneration policy, acknowledging 

society’s demand that the financial services industry acts to 

create long-term value, rather than short-term profit, and would 

go some way to changing the individual priorities of each role. 

Of course, it is not only Kay that proposes this change to how 

financial services firms reward their staff; the provisions in the 

FSA’s remuneration code, as well as the proposed remuneration 

guidelines for alternative investment fund managers issued by 

the European Securities and Markets Authority (ESMA), already 

highlight that change is on the way. Firms need to consider 

how this change of mindset in respect of culture around 

remuneration is going to impact the placement of key staff and 

whether it changes behaviour in a way they are equipped to 

handle. They also need to consider how long it will take before 

these changes in behaviour and culture will be evidenced. 

Firms need to consider how this 

cultural thought change around 

remuneration is going to impact 

the placement of key staff and 

whether it changes behaviour in 

a way they are equipped to 

handle.


Where firms will feel 

the greatest impact 

In addition to considering the overall 

response of the industry, we also looked 

at responses on a sector-by-sector 

basis. This disclosed some interesting 

distinctions between sectors reflecting 

the different areas of focus of the current 

regulator and incoming legislation, but 

also reflecting varying degrees of concern 

about the new regulatory regime. 

Banks, building societies and credit 

institutions 

The area of greatest potential impact for banks, building societies 

and credit institutions concern measures to increase competition. 

As detailed in section 3.2 of the FCA’s launch documents, the 

FCA will be charged with the responsibility of fostering an 

atmosphere of competition: 

“The government also proposes that the FCA must, so far as is 

compatible with its objectives, discharge its general functions in a 

way which promotes competition. (The FCA’s general functions 

include rule-making, guidance and general policies.)” 

98% of respondents rank measures to reduce barriers to new 

entrants and allow customers to easily switch banking relationships 

as a high or medium concern. It is likely that implementation of 

the Vickers Report, which will require retail banks to be ringfenced, 

is a significant factor behind this opinion. 

98% 

of respondents rank measures to 

reduce barriers to new entrants 

and allow customers to easily 

switch banking relationships as a 

high or medium concern.


Rules that direct firms to withdraw misleading financial 

promotions and the need to promote a culture of fairness are 

also ranked as significant factors. New investigatory powers 

and increased disclosure are given least priority. However, more 

than 80% of firms still rank these measures as a high or medium 

concern. 

The majority of these companies (84%) believe the changes will 

improve the effectiveness of the regulatory bodies. However, 

benefits are likely to be restricted and limited just to customers. 

Almost two-thirds (65%) believe there will be benefits to 

customers, but a significantly lower number (29%) compared to 

investment and fund firms (48%), for example, think the changes 

will help manage risk better and just 15% believe they will benefit 

financially. 

Firms in the banking sector can expect a high level of interaction 

with twin peaks regulators but most of the major requirements 

applying to them will be set out at the EU level by either EU 

financial services legislation or EBA Technical Standards. The 

increased influence of the EU is likely to be the single greatest 

impact to banks, particularly in light of the proposed single 

supervisory mechanism for banks in the euro area. 

New Powers – areas of greatest concern 

Rank Power High / Medium Concern % 

1 Increased competition powers 98 

=2 Directing firms to withdraw misleading financial promotions 96 

=2 Increased focus on culture within firms (PRA / FCA) 96 

=4 Product intervention powers 94 

=4 Increased focus on culture within firms (FCA only) 94 

=6 Early publication of enforcement actions 92 

=6 Markets related powers applicable to the UK Listing Authority and Recognised 92 

Investment Exchanges 

8 Increased enforcement action and fines against individual senior managers 90 

=9 Powers of direction over unregulated holding companies 88 

=9 Judgement based regulation 88 

11 Increased disclosure powers 84 

12 New investigatory powers 81



Insurers share the concerns expressed by banks, building societies 

and credit institutions about increased competition powers. 

The reasons for this vary from sector to sector, but the insurance 

community will have concerns about being attacked by both the 

Competition Commission and the FCA, which goes some way to 

understanding why this was flagged as a high or medium concern 

by a hefty 90% of firms. 

In contrast to banks, insurers attach much higher importance – at 

least in ranking terms – to market-related powers applicable to 

the UK Listing Authority and Recognised Investment Exchanges. 

This may be explained by their role as investors, particularly in UK 

plc stocks. The areas of least concern for insurers involve powers 

of direction over unregulated holding companies and increased 

enforcement action, as well as fines against individual senior 

managers. 

Of all company types, insurers are the most negative about 

the effectiveness of changes to the regulatory bodies, with the 

survey results highlighting concerns over a lack of focus from the 

regulators on this particular sector. Although 66% believe the 

changes will be beneficial, 30% feel the reforms will not result in 

more effective regulation. The PRA’s responsibility for regulating 

both banks and insurers is a primary concern. Insurance firms, 

which were less affected by the financial crisis, will be hoping 

for better representation on the PRA board to ensure a sound 

understanding of capital adequacy, risk management, governance, 

remuneration and distribution. Insurers tend to feel that the PRA 

will be a bank-focused regulator and are concerned it will impose 

banking regulatory solutions on insurers without appreciating 

business differences that set apart the two sectors. At the time 

of publishing this report, there were however no measures in 

place in the Financial Services Bill to ensure insurance industry 

representation, although the UK Government has declared its 

commitment to addressing this. 

Insurers are now wrestling with a demanding Solvency II timetable 

and the new PRA supervisory framework. This perhaps explains 

why this sector more than any other expects to increase their 

compliance and risk headcount over the next two years. 



Increased competition powers 

51 

Total 







62 

46 

33 

19 

10 

33 

10 

3 

42 

2 

8 

31 

15 30 

48 

67 

56 

6 

9 

6 

7 

0 

6 

Low Medium High n/a


31 

Insurers are the most negative about 

the effectiveness of changes to the 

regulatory bodies, with the survey 

results highlighting concerns over 

a lack of focus from the regulators 

on this particular sector. 30% feel 

the reforms will not result in more 

effective regulation. 




2 Increased focus on culture within firms (FCA only) 87 

3 Markets related powers applicable to the UK Listing Authority and Recognised 84 


4 Product intervention powers 81 



=5 Increased disclosure powers 79 

=5 New investigatory powers 79 

9 Directing firms to withdraw misleading financial promotions 74 

10 Judgement based regulation 71 


12 Powers of direction over unregulated holding companies 63



Investment banks are principally concerned with the need to place 

a greater focus on culture, with 95% of firms ranking this measure 

as a high or medium concern. Increased disclosure powers are 

recognised by investment banks as being equally significant, which 

is in marked contrast to the bottom ranking given by banks, 

building societies and credit institutions for this issue. 

Three-quarters of firms (72%) 

believe the changes to the system 

will improve the effectiveness of 

the regulatory bodies. 

New investigatory powers are also viewed as a major concern by 

this sector, and to a far greater extent than any other company 

type, suggesting investment banks are apprehensive above 

all about giving regulatory bodies greater formal powers of 

intervention. On the other hand, directing firms to withdraw 

misleading financial promotions and powers of direction over 

unregulated holding companies are areas of least concern, 

reflecting this sector’s focus on non-retail clients. Finally, almost 

three-quarters of firms (72%) believe the changes to the system 

will improve the effectiveness of the regulatory bodies. 





3 New investigatory powers 94 

4 Early publication of enforcement actions 83 



=7 Markets related powers applicable to the UK Listing Authority and Recognised 73 




=10 Judgement based regulation 67 


12 Directing firms to withdraw misleading financial promotions 61



Retail intermediaries appear relatively comfortable about the 

potential impact of changes to the regulatory environment and 

three-quarters of firms (76%) believe the changes will lead to 

more effective regulation. Although a large number of companies 

believe many of the new powers will impact them, this proportion 

is still lower than other sectors of the market. This gives rise to 

the concern that firms in this sector are less engaged, or possibly 

unaware of the significance of the challenges that await them. 

76% 

believe the changes will lead to more 

effective regulation. 

The areas of greatest potential impact are early publication of 

enforcement actions, increased competition powers, and product 

intervention powers. The fact that government plans to give 

the FCA power to ban products and make enforcement actions 

public at an earlier stage has met with some criticism is widely 

known. Companies have warned that significant damage may 

be caused by early stage publicity of enforcement proceedings 

relating to alleged misconduct prior to full determination of the 

facts, where concerns may later be proved unfounded. 




=1 Increased competition powers 84 


=4 Increased focus on culture within firms (FCA only) 81 


6 Directing firms to withdraw misleading financial promotions 80 

7 New investigatory powers 77 


9 Powers of direction over unregulated holding companies 73 


11 Markets related powers applicable to the UK Listing Authority and Recognised 64 


12 Increased focus on culture within firms (PRA / FCA) 46


Investment and fund firms 

Increased focus on culture represents the biggest challenge to 

investment and fund firms. Out of the firms regulated by the 

FCA, 91% rank a focus on culture as a high or medium concern. 

Early publication of enforcement actions was also viewed as 

a major worry, especially across smaller firms. Both trends 

consistently appear in this survey across the different sectors. 

Investment and fund firms also registered the highest level of 

concern amongst any sector over increased disclosure powers. In 

addition, investment and fund firms predict that the RDR and the 

Alternative Investment Fund Managers Directive will have a major 

impact on their workload in the short term. 

Increased focus on culture 

represents the biggest challenge 

to investment and fund firms. 

Of least concern are powers applicable to the UK Listing 

Authority and Recognised Investment Exchanges. The shift to 

judgement-based regulation is also not seen as a significant worry. 

Compared with firms in other sectors of the market, investment 

and fund firms strongly expect planned changes to the regulatory 

system will improve the effectiveness of the regulator, with 88% 

believing improvements will occur. Unlike other sectors of the 

market, a large proportion (48%) of investment and fund firms 

feel that changes will also lead to better risk management. 




2 Early publication of enforcement actions 87 


=3 New investigatory powers 81 


=3 Increased competition powers 81 


=3 Directing firms to withdraw misleading financial promotions 81 


10 Product intervention powers 79 


12 Markets related powers applicable to the UK Listing Authority and Recognised 


64


Conclusion 

The breadth and number of the issues discussed above illustrate 

just how much firms have to deal with over the coming months. 

With continual developments to the European agenda, and with 

different sectors within the industry having their own particular 

areas of concern, it seems to us that there is a real risk of the 

set in of regulatory fatigue, whereby firms are unable to stand 

back and effectively prioritise the most significant issues and plan 

appropriate resource and investment to respond in a proactive 

manner. This will be essential in order for the UK to maintain its 

pre-eminent position in the global financial services market place. 

Perhaps this publication will have alerted you to an issue that you 

had yet to consider, or perhaps it will simply re-affirm the scale of 

the task ahead. 

Whatever your current perspective, it seems imperative that a 

clear view of the road ahead, together with all of its potential 

hazards and detours, will be needed in order to successfully 

manage the unprecedented amount of regulatory change across 

our industry over the coming months.


Appendix – 

Full survey results 

Q1: “Who will you be regulated by?” 

34 

65 

69 

Total 




56 




59 

65 

66 

FCA only 

PRA and FCA 

62 

65 

35 

31 

35 

38 

2 

66 

35 

34 

FCA only 

PRA and FCA 

Q2: “In terms of the size of your Compliance / Risk function how many members do you currently have in your UK regulated 

firm?” 

40 

Total 

FCA only 

PRA and FCA 

37 

47 

33 

16 

14 

15 

44 

35 

5 

4 

4 

0 

2 

1 

2 

0 

1 

0-3 people 4-6 people 7-10 people 10-20 people 21-50 people 51+ people


17 

17 

17 

17 

17 

17 

17 

17 

17 

Q3: “In terms of the size of your Compliance / Risk function which of the below do you anticipate reflects likely headcount 

change in the next 12 months and 2 years?” 

1 

23 

3 

20 

7 2 6 

26 17 

19 

2 years 12 months 

53 

59 

Decrease of 1-10% 

No change 



Increase of 21%+ 

Over the next 12 months 

Over the next 2 years 

59 

45 

55 

Total 





63 

70 

47 



47 

3 

1 

4 

4 

4 

3 

10 

23 

18 

22 

32 

20 

50 

65 

53 

27 

25 

25 

14 

21 

23 

2 

1 

2 

0 

0 

13 

1 

5 

6 

8 

2 

7 

6 

42 

60 

59 

20 

17 

29 

42 

29 

26 

8 

6 

10 

14 

3 

7 

4 

1 

6 

0 

1 

132 

Decrease of 

1-10% 

No change 

Increase of 

1-10% 

Increase of 

11-20% 

Increase of 

21%+ 

Decrease of 

1-10% 

No change 

Increase of 

1-10% 

Increase of 

11-20% 

Increase of 

21%+


Q4: “Please rate the following in terms of impact on your firm’s workload over the next 12 months (1 = No Impact, 

5 = Very Significant Impact)” 

MiFID II 

Retail Distribution Review 

63 

70 

49 

56 

59 

Total 



63 

Insurers (life and non-life) 70 


6 

49 

53 

47 


impact 

0 

2 

4 

0 

2 

2 

37 

22 

7 

65 

6 

2 

5 

6 

51 

12 

4 3 2 

23 

24 

35 

46 14 

17 

27 

No impact 



9 

11 

14 

12 

30 

14 

47 

42 

4 

2 

0 

0 

59 

4 

12 


impact 

13 

35 

21 

23 

43 

40 

7 

41 6 

20 

22 

4 3 2 

15 

11 

22 

36 

14 

32 

21 

No impact 

5 

11 

11 

18 

18 

12 

Mortgage Market Review 

Solvency II 

63 

70 

47 


impact 

1 

0 

0 

2 

0 

1 

56 

49 

23 

19 

11 

28 

41 

18 

38 

22 

36 

5 

28 

25 

25 

4 3 2 

36 

41 

21 

14 

31 

31 

No impact 

5 

21 

20 

20 

24 

18 

Total 








impact 

1 

0 

0 

4 

0 

1 

51 

61 

39 

48 

56 

16 

12 

12 

20 

52 

20 

16 

4 3 2 

12 

16 

31 

14 

16 

17 

11 

8 

20 

18 

14 

14 

No impact


Basel III and CRD IV 

AIFMD 

42 

Total 



36 

60 



50 


impact 

0 

1 

4 

2 

1 

1 

35 

27 

30 

16 

20 

56 

24 

28 

48 

23 

4 3 2 

11 

17 

29 

28 

14 

18 



No impact 

6 

1 

20 

12 

16 

10 


impact 

0 

6 

0 

0 

0 

2 

16 

25 

23 

28 

37 

48 

22 

31 

40 

25 

4 2 

27 

15 

20 

32 

14 

20 

No impact 

6 

7 

21 

18 

18 

13 

FATCA 

Banking Reform / Independent Commission on Banking 

38 

31 

Total 




46 

50 


impact 

0 

0 

2 

0 

3 

1 

31 

16 

25 

48 

29 

36 

18 

25 

36 

23 

4 3 2 

23 

37 

24 

16 

32 

28 

7 

4 

23 

14 

18 

12 

No impact 





impact 

0 

1 

0 

0 

0 

1 

57 

48 

7 

17 

57 

25 

13 

12 

17 20 

16 

18 

12 

14 

51 

14 

21 

20 

15 

17 

15 

16 

4 3 2 No impact


Recovery and Resolution Planning / Living Wills 

Financial Crime, AML and Bribery Act 2010 


impact 

0 

0 

4 

0 

2 

1 

34 

45 

29 

35 

22 

42 

24 

30 

41 

27 

40 

26 

4 3 2 

17 

21 

25 

10 

23 

20 

Total 







No impact 

7 

20 

12 

12 

18 

13 


impact 

4 

2 

4 

2 

5 

3 

28 

35 

28 

14 

42 

31 

33 

38 

37 

42 

36 

37 

4 3 2 

27 

18 

29 

36 

17 

24 

No impact 

8 

7 

202 

6 

12 

12 

0 

18 

5 

Board Effectiveness, Governance and Control Frameworks 

Client Money and Client Asset Protection 

48 

Total 

29 

47 




40 

50 


impact 

3 

1 

2 

0 

3 

2 

45 

27 

33 

46 

27 

49 

28 

29 

47 

29 

4 3 2 

13 

15 

20 

20 

16 

16 




No impact 

9 

4 

6 

6 

3 

6 


impact 

4 

2 

2 

4 

1 

3 

33 

39 

35 

46 

22 

43 

39 

35 

41 

4 3 2 

7 

11 

10 

13 

8 

15 10 

14 

No impact 

4 

9 

11 

20 

14 

14


Q5: “Thinking about working with the new regulators, how do you expect the amount of your relationship management time 

to change under the new regulatory model over the next 12 months?” 

47 

25 

19 

13 

Significant increase 

12 

Significant decrease 

Stay the same 

11 

42 

17 

63 

68 

Time / overhead spent Financial costs spent Time spent communicating benefits / 

changes to clients of the firm as a whole 

Q6: “Which best describes your usual approach towards financial services regulatory policy developments at UK level and 

EU level?” 

30 

6 

Principally via regulator 

Principally via trade association 

Both 

29 

10 

19 

No route – we don’t 

try to influence policy 

23 

31 

33 

38 

UK level 

EU level


17 

Q7: “Please indicate your ability to influence the development of financial services regulatory policy at UK level and EU 

level?” 

21 

5 

19 

15 

Very easy 

Easy 

Difficult, but possible with 

significant effort 

Not possible at all 

19 

8 

12 

59 

61 

UK level 

EU level 

Q8: “Which one trade association do you use most regularly?” 

% of respondents 

AIMA (Alternative Investment Management Association) 

13 

Association of foreign banks (AFB) 

Finance and Leasing Association (FLA) 

6 

7 

12 

AIFA (Association of Independent Financial Advisers) 

6 

BBA (British Banker’s Association) 

ABI (Association of British Insurers (life and non-life)) 

TISA (Tax Incentivised Savings Association – UK) 

FSA and Lloyds London 

5 

5 

5 

5 

ISDA (International Swaps and Derivatives Association, Inc.) 

IMA (Investment Management Association) 

4 

4 

0 3 6 9 12 15


Q8a: “How influential do you believe your trade body is in terms of influencing EU regulatory policy?” 

63 

16 

5 

16 

No influence 

Not very influential 

Fairly influential 

Very influential 

Q9: “Have you seen any changes in the last 1 – 2 years in the way that the FSA interacts with your firm?” 

43 

37 

45 

68 

48 

57 

63 

55 

32 

52 

Total 







2 

46 

54 

No, not really 

Yes


Q10a: “Will the following functions have the same, more or less responsibilities going forward in respect of prudential 

regulation?” 

Compliance function 

Risk function 

37 

14 

28 

24 

29 

42 

26 


72 

75 

59 

56 

83 

71 

Total 







0 

1 

12 

2 

3 

3 

49 

57 

65 

46 

64 

36 

5 

25 

63 

7 

10 

30 

6 

5 

32 

58 

7 

35 



Legal function 

59 

Total 

55 

38 

50 

47 

51 






66 

65 

45 

50 

31 

42 

46 

69 

55 


3 

3 

4 

4 

0 

3 

41 

34 

29 

48 

19 

34 

46 

80 

63 

4 

0 

6 

6 

1 

3 


More Same Less


Q10b: “Will the following functions have the same, more or less responsibilities going forward in respect of conduct 

regulation?” 

Compliance function 


19 

14 

35 

38 

20 

23 


77 

82 

63 

62 

77 

74 

Total 







4 

4 

2 

0 

3 

3 

63 

57 

36 

47 

40 

45 

50 

44 

61 

35 

57 

39 


1 

3 

8 

6 

4 

4 

Risk function 

Legal function 

57 

54 

Total 




67 

61 



70 

35 

34 

29 

40 

25 

33 

52 

68 

58 


8 

12 

10 

8 

7 

9 

32 

28 

49 

50 

25 

35 

49 

44 

73 

63 

1 

2 

2 

6 

2 

2 


More Same Less


Q11: “Which of the new powers given to the FCA and the PRA, or anticipated change in approach, do you think will have the 

greatest impact on your firm?” 

Powers of direction over unregulated holding companies 

Increased disclosure powers 

8 

23 

16 

16 

32 

18 


27 

45 

39 

58 

69 

48 

41 

5 

46 

36 

28 

19 

28 

Total 







4 

3 

5 

4 

6 

17 

5 

19 

19 

10 

12 

14 


62 

26 

67 

53 

38 

47 

19 

55 

28 

26 

46 

37 

0 

0 

0 

11 

4 

2 

Early publication of enforcement actions 

New investigatory powers 

38 

27 

45 

46 

58 

50 

29 

42 

33 

11 23 

61 

4 

37 

11 

16 

12 

31 

13 

51 

16 

35 


Total 







4 

0 

6 

5 

4 

3 

23 6 

19 

19 

16 

15 

16 


27 

45 

46 

31 

32 

33 

47 

23 

33 

46 

49 

61 

32 

58 

49 

4 

0 

0 

5 

4 

2


Q11 (cont.): “Which of the new powers given to the FCA and the PRA, or anticipated change in approach, do you think will 

have the greatest impact on your firm?” 

Increased focus on culture within firms 

Directing firms to withdraw misleading financial promotions 

Total 

38 



74 

46 

8 

32 

49 

56 





69 

43 

5 

39 

0 

32 

50 

47 

61 

16 

35 

48 

21 

31 

19 


4 

3 

0 

0 

4 

2 

14 

13 

4 

24 

26 

15 


61 

71 

66 

6 

12 

13 

14 

18 

25 

6 

6 

15 

0 

0 

5 

Product intervention powers 

Markets related powers applicable to the UK Listing Authority 

and Recognised Investment Exchanges 

46 

57 

50 

19 

10 

37 

69 

6 

29 

15 

15 

25 

57 

16 

12 

26 


27 

45 

39 

27 

60 

36 

52 

Total 







6 

6 

12 

3 

0 

5 

22 

50 8 

24 

24 

13 

19 

46 

57 


27 

39 

51 

33 

48 

49 

45 

25 

13 

40 

36 

43 

29 

14 

12 

3 

3 

0 

7


Q11 (cont.): “Which of the new powers given to the FCA and the PRA, or anticipated change in approach, do you think will 

have the greatest impact on your firm?” 

Increased competition powers 

Judgement-based regulation 

46 

Total 

51 



41 

62 



50 


31 

46 


33 

32 

33 

33 

48 

19 

34 

32 

10 

33 

6 

10 

67 

9 

5 

39 

59 

3 

42 6 

6 

2 

7 

12 

8 

0 

15 

29 

31 

56 

6 

26 

45 

32 

15 

30 

11 



4 

3 

0 

0 

0 

2 

Increased enforcement action and fines against individual 

senior managers 

Total 

37 

53 





12 

7 

12 

12 

4 

12 

29 

46 

42 

45 

45 

37 

27 

24 

26 

45 

32 



2 

3 

0 

0 

0 

1 

Low Medium High n/a


Q12: “To what extent do you think the changes to the 

regulatory bodies will improve their effectiveness?” 

Q13: “What benefit(s) do you expect from the costs of 

implementing regulatory change?” 

59 

Total 



65 

67 



49 

45 

52 



51 

60 

27 

48 

Significant 

improvement 

17 

21 

27 

14 

20 

20 

Marginal 

improvement 

64 

59 

No difference 

10 

21 

22 

30 

15 

18 

Make worse 

3 

2 

6 

4 

1 

3 

16 

18 

12 

28 

15 

17 

Financial benefit to 

the firm 

65 

58 

Benefits to clients Manage risk better None of the above 

41 

36 

29 

37 

3 

6 

4 

4 

6 

13 

Q14: “Please indicate what the most significant regulatory issues will be for you over the next 1 to 2 years.” 

5 

5 

4 

4 

4 

20 

Consumer protection concerns 

Concerns of existing legislation 

Clarity of objectives / avoid overlaps and conflicts 

Increased costs are anticipated 

Conduct of business 

5 

No impact 

Concerns over increased risk 

6 

7 

10 

12 

18 

Concerns of information exchange between regulators 

Criticism / concerns of twin peak model 

Coordination with EU requirements 

Concerns over change in general 

Other


Survey demographics 

Total respondents by company type 

Number of 

Total 

350 

Banks, building societies, credit 

75 


50 


51 


99 


75 

Total respondents by job title 

Number of 

Total 

350 

Head of Risk Management 

43 

Head of Compliance 

199 

Head of Risk and Compliance 

10 

Head of Legal 

39 

Financial Director 

14 

Senior Risk and Compliance 

Chief Risk Officer 

18 

27


51 

about the survey 

The research was conducted by Coleman Parkes Research for 

and on behalf of BDO and DLA Piper. Fieldwork was undertaken 

during June / July 2012. All 350 respondents were key business 

leaders from a wide range of financial services sectors. 

Please note that not all answers add up to 100% because of 

rounding up or because respondants were able to give multiple 

answers to the same questions. 

References and further reading 

The Bank of England, Prudential Regulation 

Authority – Our approach to banking supervision: 

www.bankofengland.co.uk/publications/Documents/other/ 

financialstability/uk_reg_framework/pra_approach.pdf 

The Financial Conduct Authority – Approach to 

regulation: www.fsa.gov.uk/pubs/events/fca_approach.pdf 

Settlement Agreement between the Central Bank 

of Ireland and UBS International Life Limited – 19 

June 2012: www.centralbank.ie/publications 

FSA Annual Report – 2011/12: www.fsa.gov.uk/pubs/annual/ 

ar11-12/ar11-12.pdf 

FSA Consultation Paper CP 12/24 – Regulatory reform: 

PRA and FCA regimes relating to aspects of authorisation and 

supervision: www.fsa.gov.uk/static/pubs/cp/cp12-24.pdf 

Robert Half – UK Financial Services Executives Spend One 

Day A Week Managing Regulatory Change: www.roberthalf.co.uk/ 

id/PR-03420/time-spent-on-regulatory-change 

Thomson Reuters – Companies hit with 14,215 regulatory 

announcements globally in 2011: http://thomsonreuters.com/ 

news_ideas/press_releases/?itemId=543469 

The Kay Review of UK Equity Markets and Long- 

Term Decision Making – July 2012: www.bis.gov.uk/ 

kayreview 

Journey to the FCA – released on 16 October 2012 

http://www.fsa.gov.uk/about/what/reg_reform/fca


About BDO 

BDO is the world’s fifth largest accountancy and professional 

services firm, with nearly 49,000 partners and staff across 119 

countries, including all major financial centres. We have deep 

experience in financial services and a multidisciplinary approach 

combining strategy, regulation, risk, tax, corporate finance and IT 

specialists. 

We have specialists in all areas of financial services, including banking, 

insurance, capital markets and asset management and our financial 

services professionals truly understand the nature of the industry 

and can help you navigate through the challenges you are facing. 

Our clients range from domestic financial services firms to complex 

global financial services groups. 

We offer exceptional client service backed by solutions that are 

technically excellent, practical and tailored to the special needs of 

each client. 

CONTACTS 

Michelle Carroll 

Partner, Asset Management 

and Funds 

+44 (0)20 7893 2711 

michelle.carroll@bdo.co.uk 

Neil Fung-On 

Partner, Head of Financial 

Services Audit 

+44 (0)20 7893 3779 

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Neil Griggs 

Partner, Hedge Funds 

+44 (0)20 7893 3775 

neil.griggs@bdo.co.uk 

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Partner, Banking 

+44 (0)20 7893 2746 

dan.taylor@bdo.co.uk 

Angela Foyle 


Services Tax 

+44 (0)20 7893 2475 

angela.foyle@bdo.co.uk 

Mark Hunt 


Services Advisory 

+44 (0)20 7893 2284 

mark.hunt@bdo.co.uk 

George Quigley 

Partner, Risk and Advisory 

Services 

+44 (0)20 7893 2522 

george.quigley@bdo.co.uk 

Alex Ellerton 

Director, Financial Services 

Regulation 

+44 (0)20 7893 2713 

alex.ellerton@bdo.co.uk 

Andrew Richardson 

Director, Capital Markets 

+44 (0)20 7893 2308 

andrew.richardson@bdo.co.uk 

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Partner, Forensic Services 

+44 (0)20 7893 3094 

merryck.lowe@bdo.co.uk 

Gervase MacGregor 

Partner, Head of Advisory 

+44 (0)20 7893 2570 

gervase.macgregor@bdo.co.uk 

David Morrey 

Partner, Financial Services 

Advisory 

+44 (0)20 7893 3559 

david.x.morrey@bdo.co.uk 

Paul Crean 

Director, Financial Services Tax 

+44 (0)20 7893 2274 

paul.crean@bdo.co.uk 

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by guarantee, and forms part of the international BDO network of independent member firms. A list of members’ names is open to inspection at our registered office, 55 

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lawyers in 77 offices across Asia Pacific, Europe, the Middle 

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Regulatory - Contentious 

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+44 (0)151 237 4766 

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Markets 

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Copyright © 2012 DLA Piper. All rights reserved.

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should be seen as broad guidance only. The publication cannot be relied upon to cover 

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