How the UK’s financial service sector is responding to the new ‘Twin Peaks’ regulatory model


The reputation of the UK financial services industry has taken something of a battering in the post-financial crisis years, with the LIBOR scandal, the PPI scandal, high-profile failures of online banking systems, and accusations of turning a blind eye to money laundering. This has brought political pressure on regulators to take a more heavy-handed, intrusive approach to what are perceived as the excesses of the industry, but there are fears within that industry that the regulators may have gone too far in terms of tougher enforcement, and that London’s place as the world’s leading financial services hub could be under threat.

One of the upshots of the move towards tougher regulation was a shake-up of the regulatory structure, with the Financial Services Authority (FSA) being split into the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA), which came into effect in 2013 – a structure referred to within the industry as the ‘Twin Peaks’ regulation model.

A changing landscape

The impetus behind the latest regulatory changes began in 2008 in the aftermath of the financial crisis, when the coalition government decided to commit the UK to a new regulatory structure. This was in light of an increasing power shift towards European regulation, as well as pressure to clamp down on an industry that was seen as being at fault in the financial crisis and the chaos that ensued.

In the year preceding the new regulatory structure coming into effect, the FSA started making a shadow transition to the new structure internally, and the impact of this was already being felt by financial services firms as early as 2012. Prior to the crisis, the FSA employed what would now be regarded as a ‘light touch’ approach to regulation in the financial sector, but this has been replaced with a much tougher, judgement-led type of supervision. The new structure gives the UK financial watchdogs the powers to protect investors and police markets, and this has been evidenced in the banning of high risk retail products as well as issuing warnings to investors about pending enforcement actions.

Mervyn King, former Governor of the Bank of England
Mervyn King, former Governor of the Bank of England

In June 2012, then-Governor of the Bank of England Mervyn King set out his stall with regards to the need for a major overhaul of the regulatory structure, and a new emphasis on curbing market excesses in the wake of the LIBOR scandal:

“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.”

BDO Survey

In mid 2012, a survey carried out by accountancy and business advisory firm BDO and DLA Piper canvassed more than 350 executives from the financial services sector to gauge their views and concerns about the new regulatory model. The headline finding of the survey was that, in spite of various concerns about certain aspects of the new model, most of the respondents (79%) think that it will result in improved efficiencies and ultimately be of benefit to clients.

Other major findings include the suggestion that financial services firms are, on the whole, underestimating the financial ramifications of the new regulations. While the respondents recognise that the new regulations will drive up costs, this was not reflected in their projected staffing costs, with 59% predicting that there would be no change in headcount between 2012 and 2013, and 20% predicting no change between 2012 and 2014.

In addition to these key findings, the survey identified five key findings that could define the new regulatory landscape and the financial services sector in the UK over the coming years:

1: Strong Regulator Leadership

“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.”

UK financial firms have faced a vastly increased regulatory burden both domestically and abroad since the financial crisis, and there are signs that some firms are struggling to deal with the increased activism of regulators. This has led to concerns that the new Twin Peaks model of supervision could make matters even worse, particularly if the two organisations do not operate together with a consistent approach, as this would add further to the already growing regulatory burden faced by firms.

However, it’s not all bad news, and the fact that the UK regulator moved more quickly and decisively in the wake of the financial crisis than other jurisdictions to attend to matters of recoverability and resolvability have given the industry some cause for optimism. With firms optimistic that the new regulatory system will be more effective than the old one, the onus is on the PRA and FCA to coninue to be clear and decisive in their approaches if the UK is to retain its status as a global financial hub.

2: The Onset of Regulatory Fatigue

“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.”

The survey shows that firms are not overly concerned about the impact that the new structure will have on their operations, with companies expecting only a short-term, modest increase in headcounts, and the majority expecting no increase at all. This may be more a reflection of regulatory fatigue than an earnest acknowledgement of what lies ahead in terms of necessary investment in risk and compliance staffing costs.

3: The UK’s Role Within Europe

“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.”

At the time of the survey, there was a lot of discussion around the topic of how the UK’s new regulatory model fits in with that of its European partners. With the rest of Europe moving towards a new Single Supervisory Mechanism administered by the European Central Bank (ECB), there are concerns that future efforts by the UK to influence future EU financial rules will be ignored, and that we could see a divergence in regulation between the EU and the UK that could drive a wedge between the two.

4: Culture and Consistency

“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”

Although the primary focus of the PRA will be the risks to the prudential health of firms, and the FCA will be focused on the risks for customers, it is inevitable that the culture of the financial services industry will come in for deeper scrutiny in the years to come, and banks are already seeing an increase in regulatory interference in this area with 61% of banks, building societies, and credit institutions and 56% of investment banks expecting this focus on culture to have a high impact.

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.”

Although the industry will be judged in part on its response to the new regulatory requirements, it will also be judged on the matter of how it has addressed the concerns of society as a whole. In order to do this, the culture of incentivising short-term profits at the expense of long term financial stability will have to change, or political and moral pressure will continue to weigh on the industry.


The financial services industry in the UK is at a crossroads, where the overconfidence of the pre-crisis years has been replaced by an enforced culture change and a much more hands-on regulatory approach. But while the regulators are keen to avoid the excesses that lead to the crisis, they will also be acutely aware of the value of the sector to the UK economy, and will have to strike the right balance if they are to avoid throwing out the baby with the bathwater.