FSA: Frightened? Scared? Afraid?

“There is a view that people are not frightened of the FSA,” said Financial Services Authority chief executive Hector Sants in mid-March. “I can assure you this is a view I am determined to correct. People should be very frightened of the FSA.”

Principles-based regulation will be under threat: “A principles-based approach does not work with individuals who have no principles,” he said. No more Mr Nice Guy.

His comments come a month after Sir David Walker, a former executive director of the Bank of England, was asked by the Treasury to look at corporate governance in the banking industry, including such topics as the effectiveness of risk management at board level and the balance of skills, experience and independence required by the boards of banks. Whether in these respects the review can devise recommendations that are markedly different and more effective than the 2003 Higgs and Smith reports (on non-executive directors and audit committees, respectively) is a question that will remain unanswered until at least the summer when a consultation document is published.

Engaging investors
One area that has often been given inadequate attention will be addressed by Walker – the role of institutional investors in engaging with companies and monitoring boards. This is a very significant avenue: shareholders should have almost as good a helicopter view of how all the players’ strategies interconnect as do regulators, and so could play a more prominent role in making their concerns felt. Walker’s questioning could well start by asking investors (a) whether they understand in some considerable detail what each bank’s annual report means, and (b) whether they believe the bank boards also genuinely understand at a deep level what those accounts mean – and what they think employees are up to.

FSA chairman Lord Turner’s newly-published report promises an approach that looks at individual banks’ strategies and at system-wide risks. There will be a new approach to counter-cyclical reserves and banks’ remuneration policies will be scrutinised to prevent excessive rewards for excessive risk-taking. And the credit rating agencies will likely fall under the FSA’s remit to prevent conflicts of interest with the clients who pay them. “Much financial innovation has proved of little value, and market discipline of individual bank strategies has often proved ineffective,” Lord Turner said in the report.

* Curious historic fact: Four years ago, Philip Hampton, then chairman of Sainsbury’s, was asked by the Treasury to prepare a report on the regulatory burden facing British industry and to recommend areas where red tape could be cut.

In his report he said of the FSA: “The review has been impressed with the FSA’s risk profiling system, which has a firm-specific component and a component for industry-wide risks. The application of such a risk assessment protocol across the whole financial sector makes resources more flexible and regulation better targeted than if the regulation had been delivered by nine separate bodies.” Philip Hampton is now the chairman of Royal Bank of Scotland.