08 May 2009, Victoria Pennington, Operational Risk & Regulation
Sants said the crisis had demonstrated that "there are some management decisions that have revealed a degree of incompetence, and at times a rather cavalier approach regarding risk management. The necessary challenge was missing from governance structures, in particular boards, and there may well be questions that can reasonably be asked about the openness and thus, arguably, the integrity of firms dealings with regulators, shareholders and their customers."
Sants stopped short of calling for a complete overhaul of the current governance structure however. "The structure of governance in financial companies does not need radical overhaul. The attitudes and competence of the individuals who conduct that governance does. In particular, we need to create governance that fosters challenge without creating conflict. The effectiveness of governance is the key issue and addressing this challenge is the responsibility of all of us, not just regulators and boards."
He stressed, however, that "this by no means weakens our fundamental view that firms' senior management carry primary responsibility for their actions and their resulting consequences."
The FSA is not seeking to establish non-executive directors as a competing governance mechanism against the executive; rather its aim is to ensure that these both function more effectively. The FSA has stated that it continues to support the 'unitary board' model but, as Sants said: "It must be recognised that such a structure runs the risk of encouraging the herd instinct both in the sense of encouraging 'follow the leader' behaviour and in the sense of the reluctance to 'break away from the pack' and express an independent view."
As part of the Significant Influence Function (SIF) review, the FSA has introduced interviews for candidates for a number of the key functions in an authorised firm. The presumption is that any application submitted by a high-impact firm for the roles of chair, CEO, finance director or CRO/risk director will result in an interview. Other SIF candidates may also be interviewed at the supervisor's discretion.
In the first six months of the enhanced approval process, 51 SIF interviews were carried out. In a number of cases applications were or are being refused, as the FSA was not satisfied the candidates had demonstrated fitness and propriety. The FSA has published a consultation paper in December 2008, which outlines a number of proposed changes to significant influence controlled functions under its approved persons regime. The authority also expects to publish a further statement on this alongside Sir David Walker's review of governance.
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