New financial regulator 'must be able to report on failed giants'

Britain's new financial regulator must be able to publish reports on big financial firms that fail in order to maintain public trust, its chief executive-designate has warned.

The comments by Hector Sants, chief executive of the Financial Services Authority (FSA) and the proposed new boss of the Prudential Regulation Authority, coincide with the controversy about the much-delayed FSA report into Royal Bank of Scotland's collapse.

Speaking yesterday at the unveiling of plans for the new body, Sants said: "It is vitally important that the PRA has the ability to give a full public account to Parliament when firms fail.

"This process will be an essential component of the framework necessary to maintain trust in the organisation through demonstrating openness and a willingness to be a learning and reflective organisation."

Sants told a packed audience of City and financial industry figures that the "difficult question" in a system where firms must be allowed to fail was when to decide a public report was justified.

"One possible approach would be to say that the reports would be merited where public money has been spent," he said. "I fully support this proposal to give the PRA the power to publish reports on firm failures, when needed. This is a view I held prior to the recent debate on the current FSA report on RBS."

Sants added that the PRA "must not suffer the same fate" as the FSA, which he said was set up by Parliament as a supervisory and enforcement authority but without the mandate to produce public reports on the failure of financial organisations.

"The consequence of this is that there is now a misalignment between the public's expectations of what the FSA should be doing in this vitally important area and what it is set up to do," Sants said.

Under the new regulatory framework, to be in place by end-2012, the PRA will regulate individual banks and insurers, while the Financial Policy Committee will regulate systemic risk and perceived credit bubbles. The Financial Conduct Authority will be responsible for financial markets, investor protection and fighting financial crime. All three will be under the wing of the Bank of England.

Sants also warned his audience that successful "resolution" - typically the orderly winding down of financial firms' activities that hit serious trouble - "seem some years off" in the case of complex, cross-border banks.

Paul Tucker, deputy governor of the Bank of England, spoke of the new regulatory approach, saying: "The regulatory supervisors will work backwards from the endgame. 'What will happen if this firm fails, can we resolve it?'"Andrew Bailey, the PRA's deputy chief executive designate, said it was undecided whether the PRA would go public when it deems a firm needs "proactive intervention".

Transparency had to be balanced against stability, Bailey said, particularly if the regulator was uncertain about its ability to put in place a successful "resolution" plan for the firm involved.