Sam Woods speaks on importance of supervision

Sam Woods has given a speech at the Building Society Association Annual Conference on why supervision matters. The speech was given in May, but has just been published. Among the key points covered were:

1. Supervision is distinct from regulation. Regulation concerns the framework of rules and legal standards which govern the way firms operate, whereas supervision is the pursuit of the relevant authority’s statutory objectives, through oversight of firms’ activities. However, in order to supervise effectively there must be a system of robust regulations in place.
2. PRA is committed to a judgement-based, forward-looking supervisory approach. PRA has adopted a proactive approach to supervision and its methods evolve as existing markets develop and new ones emerge. Its focus is on business models and the prudential health of firms rather than a sole preoccupation with firms’ regulatory compliance.
3. Whilst the UK’s withdrawal from the EU will change many things, it does not change PRA’s statutory objectives. Supervisors will maintain their normal approach and focus on the biggest risks at each firm. PRA is keen to ensure that it doesn’t lose sight of risks as structures and business models change, or as activities adapt. PRA also expect to have discussions with firms about their contingency plans as part of their ongoing supervisory interactions.
4. PRA is mindful that some institutions can innovate faster than the prudential rulebook can be modified and in order to remain fit for purpose, the regulatory framework must be responsive to changes in the behaviour and structure of the financial system and identify any gaps, faults or incoherence that can lead to perverse behaviour. In order to tackle this challenge, PRA needs well-informed rule-makers and alert supervisors, who together identify and mitigate risk.
5. Some firms take action simply to reduce specific regulatory requirements without any commensurate reduction in their risk. In light of this, PRA expects firms to defend their compliance, not only with the letter of the regulation, but also with our principles of prudence, effective risk management and adequacy of financial resources at all times.
6. It is still the responsibility of senior managers and Boards of Directors to identify and mitigate the risk that firms are not complying with the spirit of the regulation.