The Prudential Regulation Authority’s judgement based approach to regulation is justified because regulators have different incentives and more information than individual firms, according to its chief executive designate Hector Sants.
The PRA will begin operating in 2013 with a “forward looking” supervisory approach, requiring the regulator to make judgements about what it expects to happen in the future.
It will also have the power in certain circumstances to overrule decisions made by a firm’s management, force a firm to stop writing business or to wind itself up.
During a speech setting out the PRA’s approach to regulating insurers at a conference in London yesterday, Sants asked himself why the judgement of regulators should be taken over that of firms.
He said: “My conclusion on this difficult topic is that we should not presume regulators are somehow of a better quality and competence than management, and thus more likely to reach better judgements.
“However, it is reasonable to assume regulators have different incentives in reaching their conclusions and it is also reasonable to assume they can draw upon greater information, particularly in respect of peer group analyses, than individual management. In my view a judgement based approach is justifiable.”
He added the new powers should not be seen as a substitute for good governance and that they will not mean mistakes are not made.
He said: “A regulator cannot and should not absolve management of the primary responsibility of running their firm responsibly. Nor will the regulator always be right. It is inherent in the judgement based system that both management and regulators will, at times and in hindsight, make mistakes.”