Mar 30 2009 Peter Elstob Complinet exclusive
The Financial Services Authority's front-line supervisors will in future be making "judgements about judgements", forming an integrated picture of banks' risk appetites, business models and strategies, Hector Sants, the FSA's chief executive, said last week. The FSA had previously said that business models were a matter for banks' managers, with the regulator's role confined to ensuring that directors "understood" their models.
Speaking on a discussion panel at a public meeting to debate the high-level policy review by Adair Turner, the FSA's chairman, Sants said that whatever improvements were made to the overall regulatory framework, any regulator that failed to deliver effective supervision would fail. The manner in which supervision was delivered at individual firms was as important as the underlying supervisory philosophy, Sants told the large gathering of market participants and practitioners. "I think everyone would agree that micro-supervision is a critical aspect of the overall framework."
Referring to Lord Turner's review, Sants told the meeting: "As Adair has already said — somewhat in a simplistic way in terms of characterising what the FSA did, but it is the right way of thinking about it — which is that we historically focused principally on systems and controls, and we relied on management to make the right judgements. As I say, a little unfair possibly, but I think it is the simple way of thinking about it. And in the future we need to make judgements ourselves … judgements about those judgements that senior managers are making. That of course is a fundamental change."
At the heart of this fundamental change, said Sants, was a shift in emphasis from (but not an abandonment of) "principles-based" supervision, in favour of "outcome-focused" supervision, which involved making "forward-looking" judgements, and which, he insisted, had "always been part of our lexicon".
Sants said that it was crucial that supervisors on the ground had an integrated picture of all the risks at the supervised bank, which involved both the prudential and the conduct of business dimensions of supervision. "When a supervisor is making a judgement about the judgements that managers are making [they] have to look at the overall risk position, which does indeed integrate prudential and conduct [of business] issues, [which] thinks about the business model of the firm, thinks about the strategy of the firm, and of course think how that fits in with the macro-prudential framework. So that macro-prudential analysis does become both a bottom-up and a top-down process."
Sants was anxious to stress that this new "judgements about judgements" supervisory model would not lead to letting banks' managers off the hook. "However effective the supervisory process might be, at the end of the day it is still senior management that have to be responsible for delivering an effectively run business model."
This recognition of "the primacy of management" clearly has important enforcement implications, and Sants confirmed that the FSA would be holding individuals to account when they deliberately and knowingly committed reckless acts, or acts at variance with the overall regulatory framework. "And that's why we've emphasised delivering a good, credible deterrence, which, again, is a shift."
Finally, Sants said that the FSA and its front-line supervisors needed to act, not just with managers, but with all stakeholders, including shareholders, and also with auditors. "That theme will need to be developed further over coming months as we take forward the debate on the new regulatory framework," he said.
