People should be frightened of FSA, says Sants

The UK Financial Services Authority (FSA) will adopt a tougher, more intrusive regulatory policy, in an attempt to bring the fear factor back to regulation, chief executive Hector Sants warned today.

"There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA," he explained.

Sants described a new regulatory philosophy, dubbed 'the intensive supervisory model', under which firms will be judged on "the outcomes and consequences of their actions, not on the compliance with any given individual rule".

In recent years, the UK has operated under a principles-based regulatory system under which banks have been able to self-regulate so long as they had appropriate systems and controls in place. However, Sants said today that "markets did not self-correct" in the recent crisis, warranting a new style of regulation.

"It was not seen as a function of the regulator to question the overall business strategy of the institution or more generally the possibility of risk crystallising in the future," he said. Looking forward, "we will seek to make judgments on the judgments of senior management and take actions if in our view those actions will lead to risks to our statutory objectives", he added.

While the new regulatory style represents "a fundamental change", Sants insisted it does not constitute an abandonment of principles-based ideas. "We have significantly modified and adjusted our historical approach. We have not jettisoned it, but we have adapted it," he said.

From now on, "what principles-based regulation does mean and should mean, is moving away from prescriptive rules to a higher-level articulation of what the FSA expects firms to do".

However, he added that interventionism is not without its dangers: "This will of course carry significant risk, and our judgments will necessarily not always be correct with hindsight. Furthermore, too aggressive intervention will stifle innovation and arguably reduce risk to a level that inhibits economic prosperity."

To expand its supervisory capabilities, the FSA will recruit an additional 280 extra specialists and supervisory staff by the end of 2009, representing a 30% increase in personnel.

The FSA will provide more details on changes to the regulatory architecture in a discussion paper due to be published on March 18.

See also: Bank losses highlight flaws in FSA capital measures
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