Regulatory relationships – co-operation or combat?

Regulatory relationships – co-operation or combat?


Viewers of the TV Show Billions could be forgiven for thinking that relationships between rule enforcers and those they oversee are always full of conflict, personal vendettas and elaborate schemes to get one up on the other. However, my research on regulatory interactions within the UK banking industry since the financial crisis shows that regulatory relationships, like all human relations, are more complex, nuanced and dynamic.

Changing relationships

In the period of light-touch regulation that characterized the years before the financial crisis, my interview participants described their relationship with the regulator (the Financial Services Authority) as ‘laissez-faire’, ‘benign’, ‘soft-touch’, with the Regulatory Affairs teams a ‘sleepy backwater’ of the bank. This fitted with the prevailing economic orthodoxy that markets were efficient, risk would be effectively diversified throughout the financial system and banks’ management could be trusted to do the right thing. In this climate, the FSA was not seen as a threat to banks, managing regulatory relationships was not an organizational priority and banks often pushed back on the requests made by their supervisors who, in turn, were reliant on the expertise of bank staff.

Following the crisis for several years, the nature of regulatory interactions changed significantly. Gone were the cosy fireside chats, now the FSA (and then PRA) had teeth. The PRA signaled its new approach to supervision which was to be ‘based on forward-looking judgements, with supervisory interventions clearly directed at reducing the major risks to the stability of the system. These shifts in supervisory style were not merely rhetorical – they were felt on the ground by those interacting with the PRA who experienced relations as more intrusive, robust, challenging, tougher and more assertive.

This tougher mode of regulation manifested in four key ways:

  • Increased levels of regulatory communications – both frequency and quality
  • Greater volume of regulatory requests for information
  • Change in the tone of regulatory interactions
  • FSA / PRA less willing to provide implementation guidance or rule interpretations

Banks’ responses

This period also saw a significant change in how banks managed their regulatory relationships – this was partly a reaction to this new mode of supervision but also a recognition that the political and public mood had changed, and the crisis had significantly damaged the legitimacy of the banking sector. My research showed there were four main ways in which banks altered their approach to regulatory interactions.

First, they re-organized the way in which they managed their regulatory relationships by restructuring existing Regulatory Affairs teams, augmenting these teams with new and more experienced staff (including ex-regulators), and the creation of new teams to manage specific aspects of the new regulations.

Second, there was a notable change in the banks’ attitude towards their supervisors. My interview participants claimed that their organizations had made a concerted effort to take regulation more seriously since the crisis. and that this was seen most clearly in the way that regulatory relationship management had changed. Their objective was to be open and transparent with the regulator and that honesty was important to (re)build trust in these relationships. There was less push back and resistance to regulatory requests, with more focus on being co-operative and ensuring regulatory interactions were constructive and proactive.

Third, the quality and frequency of regulatory interactions increased between 2009 and 2010 and so did the volume of information requests from the regulator. Adapting to these changes required banks to devote more time and effort to the production of the materials they shared with the regulators. One interviewee described how these materials were of the same presentation standard as would be used for client meetings. Others emphasized the need for the information to be accurate with any underlying assumptions explained clearly and consistently.

Finally, banks paid more attention to preparing staff due to meet with the regulator. This included employees at all levels of seniority. Such pre-meeting briefings would be written and/or face-to-face, depending on the circumstances. There was an unwritten ‘code of conduct’ as to how to behave in regulatory meetings which might include communicating clearly and concisely, not answering questions if the employee was not sure of the answer, treating all regulatory personnel with professional respect and courtesy and not taking in papers to meetings that staff members would otherwise be reluctant to share with the regulator. Careful consideration was also paid as to who was meeting with the regulator. This might be done through a formal regulatory contact policy setting out the ground rules and lists individuals who are permitted to speak to the regulator. Alternatively, there may not be an explicit strategy but careful thought was still given as to who should meet with the regulator.

The bigger picture

As regulatory scrutiny intensified after the financial crisis, the management of regulatory relationships became more formalised, and banks devoted more time and effort to rebuilding trust and awareness of their regulatory identities. We can thus think of banks and their supervisors as being engaged in an ongoing relationship of interdependence, each providing the other with a variety of signals which the other party then interprets. As a result, actors on each side of the relationship make adaptations in response to the other. The regulator may use these signals to make determinations about regulatory compliance but banks also interpret these signals to understand what is and is not appropriate. These ongoing adaptations can be thought of as a dialectical dance between the supervisors and the banks the steps of which are not only influenced by each other but also by what is happening in the broader political and social environment.

Following the crisis, the FSA/PRA significantly altered its supervisory approach, partly due to political (and public) pressure but also to rehabilitate its own reputation. At the same time, the banks changed how they interacted with the regulator by hiring in new people, professionalising their approach to regulatory relations and attempting to demonstrate a more transparent and open approach to their supervisors. In response, there were signs that supervisors were becoming less hostile, most trusting and potentially be willing to reward banks for their remediation efforts.

The downside of this dialectical model is that it makes regulatory relationships less certain and less predictable because of the influence of the wider environment. Significant political changes will have an impact on supervisory and bank behaviour, requiring further regulatory identity construction work and renegotiations of the nature of the regulatory relationship. Brexit is a good example of this – there are already discussions and warnings of a regulatory ‘race to the bottom’, which is likely to change regulatory interactions once again.

This is the second of three posts which discuss my PhD research. If you would like to receive a copy of my full research report, please send an email to


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