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Ambivalent attitude angers FSA

“We can no longer rely on senior management judgements…
there are some management decisions that have revealed a degree of incompetence
and, at times, a rather cavalier approach regarding risk management.”

So said Hector Sants, chief executive of the Financial Services Authority, in
a speech to the Securities & Investment Institute Conference on 7 May. He
said that as a result of flawed management thinking, the regulator warned it
will take “more action against senior management where there is evidence of
culpable misconduct”.

Sants outlined a number of problems that need to be resolved if corporate
governance and risk management are to improve. He said there needs to be a more
effective challenge in the boardroom, particularly from non-executives. He also
said companies need to be more open in their dealings with regulators,
shareholders and customers.

“The historical philosophy was that supervision was focused on ensuring the
appropriate systems and controls were in place and relied on senior management
to make the right judgements,” Sants told the audience.

“In future, we will seek to make judgements on the judgements of senior
management and take action if… those actions will lead to risks to our statutory
objectives.”

Non-exec failures
Non-executive directors were particularly singled out for criticism. Sants said
that non-executives “have struggled to fulfil their role of providing strong
independent oversight of the executive management,” adding that while it remains
“reasonable” not to expect non-executives to have detailed quantitative
knowledge of risk measurement, “it is surely reasonable to expect them to have a
clear understanding of the nature of the risks and be able to ask the right
questions.

“Ensuring individuals have the necessary resolve to restrain over-bearing
chief executives is undoubtedly a challenge, and I believe, here, the regulators
have a role in providing support and encouragement. I would expect a key
component to be a greater direct communication between non-executives and the
regulators,” said Sants.

Sants warned that non-executives will need to commit to raise their technical
skills in order to exercise rigorous oversight, adding that “they will need to
demonstrate competence with regard to risk management, regulation and the
business model of the firm.” He added that non-executives will need to work on a
more full-time basis and be compensated appropriately for the extra time they
will need to put in.

Sants also said organisations should have an executive director solely
responsible for risk sitting on the main board. “We need to raise the risk
officer up to the level of business unit heads.”

But the FSA does not put all the blame on non-executives. He also says that
shareholders have a duty to raise objections. “Shareholders must take
responsibility to be active individually and, more importantly, in collaboration
with other investors, to engage with senior management and non-executive
directors in companies and question the effectiveness of the construct of their
boards,” said Sants. “They should also challenge management to ensure business
plans are credible,” he added.

Sants said the regulator would crack down on people who are not suitable to
take on senior positions in financial firms. As part of its Significant
Influence Function (SIF) review, the FSA has introduced interviews for
candidates for a number of the key functions in an authorised company. The
presumption is that any application submitted by a “high impact” business for
the role of chairman, chief executive, finance director or risk director, will
result in an interview.

Raising concerns
In the first six months of the enhanced approval process, 51 SIF interviews were
carried out. In a number of cases applications were withdrawn following
interviews which raised questions concerning the candidate’s fitness and p
ropriety. The number of SIFs under investigation increased threefold in the
past 12 months. Some notable recent cases include the decision to prohibit Milan
Vukelic, the former chief executive of a business unit of General Re and the
decision to fine Land of Leather and its chief executive, Paul Briant, for
failing to prevent mis-sales of payment protection insurance.

Sants tried to reassure audience members that the FSA does not want to impose
more rules on financial services businesses. Rather, it is seeking to test the
effectiveness of those in charge, as well as the measures to keep boards in
check. “The structure of governance in financial companies does not need radical
overhaul,” said Sants. “The attitudes and competence of the individuals who
conduct that governance does.”

Do you have the right stuff?
The FSA will be carrying out assessments of those people proposed to lead key
functions in financial firms. The key areas the regulator wants assurance on
are:
• Knowledge Does the individual have and use the generic knowledge of the sector
and the specific knowledge of the firm necessary to fulfil the role?
• Skills Does the individual demonstrate the business and interpersonal skills
required to fulfil the role and to meet the required standards?
• Behaviour Does the individual demonstrate the attitudes and standards of
ethical behaviour required to fulfil their role?
• Expertise Does the individual achieve positive and fair outcomes and meet the
performance standards expected for the post?

Useful links
To read Hector Sants’ speech, go to
www.fsa.gov.uk/pages/Library
and search for ‘judging competence’

Related reading

/IMG/350/328350/intelligence-database
/IMG/200/112200/fraud
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