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. 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. but there are many others. second, good cop : areas where we and firms are collectively facing a shared challenge. there is no inherent conflict between the public and private interest – we have a shared interest in mitigating the risk, and there is a role for both public and private sectors. cyber is the classic case of these shared endeavours. with the post - crisis reform job now largely complete, i will set out what firms should expect to see from the pra across these areas as we enter a new phase. bad cop let me turn first to areas where our incentives and those of firms are not perfectly aligned, and where there may therefore be a degree of tension between us as we seek to secure the benefits of the new system we have spent the last decade putting in place. i will give you five examples – in highly abridged form, as i ’ m determined to beat andrew ’ s time. first, our brand - new retail ring - fence, the

that is a fairly high bar. in practice this is likely to mean that we put more emphasis on operational resilience for larger firms doing activity whose disruption could have a financial stability impact. for smaller firms we are only strongly interested where something is going on that is big enough to threaten the firm ’ s safety and soundness. so for example : if you are a big bank you can expect us to take an interest in your ability to process payments ; if you are an insurer with a large annuity book, we will want to know what the operational risks are to your ability to supply people ’ s retirement income ; and if you are a smaller firm spending huge sums on a all speeches are available online at www. bankofengland. co. uk / speeches major it project, we will be interested in that. across all of these, we will also want to dig into systemic risks – most obviously those associated with cyber - attacks and the risks associated with a heavy concentration of activity across firms with a handful of outsourcers. but there is also a much wider set of more day - to - day operational issues and problems which arise for firms, and given the increasing importance of digital service delivery firms need to get much better at this. sometimes these issues will engage the fca ’ s objectives, which will be a judgement for andrew and his team. but in general, they will only be a priority for the pra if they meet the criteria i have just mentioned. with sufficient but limited resource we need to focus our efforts where they can have the biggest impact in terms of advancing our statutory objectives. brexit now lord mayor, i admit that i am very tempted to conclude this speech without a mention of the b - word, not least because this would surely guarantee a speech shorter than andrew ’ s. but our philosophy on brexit issues happens to illustrate the point i am making here about shared endeavours. because getting from a to b on brexit is very much a shared endeavour, although let ’ s be honest it doesn ’ t always feel like that! of course there are some debates between us and firms as they restructure, in particular where we see structures that appear overly complex or lacking in proper accountability. but in general this is not a battleground where the incentives of regulator and regulated are inherently in tension : we all want as smooth a transition as possible, and to reduce cliff - edge risks as best we can. actions speak louder than