The UK’s Treasury Select Committee (TSC) has just published an exchange of correspondence between Andrew Tyrie MP (chair of the TSC) and Andrew Bailey (CEO of the Prudential Regulation Authority (PRA)). The correspondence is mainly about bank capital; but, in his last letter, Tyrie expresses concern about the “‘doctrine’ of supervisory confidentiality“, and “the danger … that regulatory convenience allies with the commercial advantage of non-disclsoure, to the dis-benefit of investors, consumers and taxpayers“.

Tyrie closes his last letter by asking two questions:

  1. Is the PRA confident that the current balance between secrecy and public disclosure is appropriate?” and
  2. What … supervisory information now kept confidential might … be made public in the future?

The PRA could answer these questions shortly and simply:

  1. The PRA and FCA try to keep confidential, all of the information they receive about the business or other affairs of any person (Confidential Information);
  2. They sometimes want or need to disclose this information – But they’ll only do so if:
    • the person who provided the information, and the person the information is about, have given their consent; or
    • somebody other than the PRA and FCA has already put the information into the public domain; or
    • the information has been summarized and presented in a way that makes it impossible to work out which information is about which person; or
    • the (so called) “Gateways Regulations” allow disclosure, for example, in connection with a criminal investigation, a criminal prosecution, or insolvency proceedings;
  3. The regulators try to keep Confidential Information confidential because section 348 of the Financial Services and Markets Act 2000 makes it a criminal offence for them to release that information in most circumstances;
  4. Parliament created section 348 … and it was right to do so:
    • Because, if people thought the regulators would release Confidential Information, they’d be reluctant to give them that information, and that would make it difficult or impossible for the regulators to do what they’re expected to do;
    • Although the regulators might be able to work out some of the benefits of releasing Confidential Information, they’re unlikely to be able to work out quite how much harm releasing that information might do, not only to the relevant authorised firms, but to their customers and investors as well; and
    • If the UK was to meet its European legal obligations.

But Tyrie’s arguments suggest that this is unlikely to be an adequate or appropriate response in this case. For example, Tyrie argues that:

The high levels of volatility in financial markets earlier this year can … be explained partly by inadequate bank and regulatory disclosures, leaving markets operating with far from complete information … [S]ignificant amounts of information remain confidential between supervisors and the banks. It may … be important that some information … remain[s] confidential. Nonetheless, the [TSC] would be concerned if a ‘doctrine’ of supervisory confidentiality were to restrict unnecessarily the dissemination on information useful to the market, Parliament and the wider public.

[Such] information consists both of material that banks provide to supervisors, … and of instructions, directions and advice that supervisors issue to individual banks … Shareholders, holders of debt securities, and depositors do not have … access [to this information]. [Their] inability to obtain information relevant to investment decisions can only make it more difficult for them to make good decisions, more likely that they will make bad ones, and increase the probability that risks will be mispriced. If more supervisory information were to be made public, the market mechanism for imposing good behaviour on banks might work better … Its manifest shortcomings were brutally exposed in the crash. The case for greater disclosure is now strengthened, not weakened, by the greatly increased intrusiveness and complexity of the supervisory process and of financial regulation. And, of course, the risk of leaks of confidential information – with the attendant volatility – would be reduced by greater public disclosure.

The danger is that regulatory convenience allies with the commercial advantages of nondisclosure, to the dis-benefit of investors, consumers and taxpayers. Although some welcome progress has been made since the crisis … to raise the level of regulatory disclosure, it is still not clear that the optimum point [has been reached]. The [TSC] would be grateful if the PRA Board could set out its approach, in detail, on supervisory confidentiality, to the banks and towards other regulated financial companies.

At least in narrow terms, these are powerful arguments, and they could easily lead to:

  • a change in regulatory practice – more information could easily be released in summary form, if doing that would satisfy a reasonable cost / benefit analysis; and
  • a change in UK law – a careful analysis might show that the regulators could be allowed or required to release more information than section 348 allows, without breaching European law … and #Brexit could allow or require the release of more information than that.

Recent experience suggests that, if the TSC asks for changes, they will eventually be made; and that any changes that are made are unlikely to be restricted only to the banks. Insurers and asset managers, in particular, have been warned.

The Tyrie / Bailey correspondence is available here, here, here, and here.