Good cop/bad cop Speech given by Sam Woods, Deputy Governor, Prudential Regulation and Chief Executive Officer, Prudential Regulation Authority  Mansion House City Banquet, London 25 October 2018  I am grateful to Ivar van Hasselt and Joanna Keeble for their assistance in preparing this speech and to other colleagues for comments and contributions. 1  All speeches are available online at www.bankofengland.co.uk/speeches  Lord Mayor, Ladies and Gentlemen, Andrew and I have worked together for a long time, and we’ve often found it useful to adopt a regulatory good cop/bad cop routine. In the context of Mansion House, the rules are simple: whoever gives the shortest speech is good cop! Now Andrew I timed you just now, and with a few edits I think I can sneak in under the line… But why am I talking about the police at all? Police metaphors are dangerous, but as it happens “good cop/bad cop” is a good analogy for two different aspects of our role as regulator:   First, bad cop: areas where we need actively to insert the public interest into privately or mutually-owned firms, because some of the costs of their failure would be externalised and they therefore have an incentive to run too much risk. Here there is inherently a degree of conflict between regulator and firm – it is the way our system is set up. Capital is the most obvious example of these battlegrounds, where reasonable people with different objectives quite naturally come to different answers.
Compared to our framework for things like capital, liquidity and accountability, the regulatory framework for operational resilience is thoroughly under-developed not only here in the UK but also internationally. This matters more than it used to for a number of reasons, but let me pick out two. First, the emergence of cyber-attacks is a clear and present danger to the financial system which our forebears simply did not have to worry about. And second, as more and more of us access banks and insurance companies digitally, with a major programme of bank branch closures in full swing, and in the age of social media where problems become very visible very quickly, operational failures hurt more than they used to. For the same reasons the Treasury Select Committee is rightly taking a strong interest in this topic. 1  £ as at year-end 2017 4  All speeches are available online at www.bankofengland.co.uk/speeches  4  We therefore published during the summer – jointly between the PRA, FCA and Bank as supervisor of market infrastructure – a discussion paper proposing a new framework for thinking about these issues. The central idea is a simple one: how much operational disruption to key business services should firms, the PRA, the FCA, and the wider Bank of England be prepared to tolerate? We call this ‘impact tolerance’. The focus of our future policy will be on the continuity of the business services that a firm’s customers and the wider economy rely upon.