Reform will only come if both the regulator and the regulated are committed to genuine change, according to Financial Services Authority (FSA) chief executive Hector Sants.
Speaking today at Bloomberg, London, Hector Sants emphasised how the FSA has changed and how its radical new intensive supervisory regime is already delivering the right outcomes for firms, consumers and for financial stability, but that there needs to be genuine cultural and behavioural change within the financial industry to ensure the lessons of the crisis provide the outcomes society expects.
Hector Sants warned:
"There remains, I believe, an absence of the acceptance of collective responsibility for what has happened. I personally remain unconvinced that all senior management have taken on board the need to change and operate in a genuinely different manner."
Hector Sants demonstrated how the experience of the past two years has equipped the UK regulator to deliver a new, stronger supervisory approach. Having completed the implementation of its Supervisory Enhancement Programme (SEP), it now has 280 more supervisory and specialist staff, a new training regime and a new risk identification process. Supervisors are now judging firms on the likely consequences of their decisions and proactively challenging business models.
This radical new approach to supervision has successfully delivered results on both prudential and conduct issues; helping to protect consumers and secure financially stronger, more resilient firms. This year, the FSA has taken action and secured redress for consumers in respect of payment protection insurance for both mortgages and personal loans (MPPI and PPI), for mortgage arrears handling and pension switching. It will be increasingly proactive in testing risks inherent in products from their development and using techniques such as mystery shopping to test the true outcome for consumers.
Stronger prudential supervision is already ensuring that firms are able to better deal with financial pressures, enhancing financial stability throughout the crisis. Without the FSA’s rigorous stress tests the recent bank recapitalisations would not have been possible and the FSA was the first major regulator, globally, to introduce new rules to tackle liquidity risk.
However, Hector Sants continued:
"I believe it is important to recognise that there are limits to what regulatory rules can achieve. It would be a mistake not to recognise that some of the failures which have occurred have their roots in the issues of culture and behaviour."
The FSA has already introduced a tougher approval process for senior management and has seen a number of applicants withdraw as a result of greater challenge, but is now looking to explore an individual’s ability to create a strong ethical framework. Acknowledging that culture is driven by those at the top of an organisation, the FSA will be opening the debate on how it can assess a senior executive’s impact on an institution’s culture as part of its authorisation regime. This topic will be included in a forthcoming FSA discussion paper.
Commenting on the current debate on regulatory structure, Hector Sants stated that all organisational structures will have fault lines but given the demonstrable effectiveness of the revised FSA approach of integrated supervision of individual firms it is critical that "society must not lose the benefits of the hard learning experience the FSA has been through".
