The chief executive of the Financial Services Authority, Hector Sants, and the Chancellor Alistair Darling, have called for more regulation of the banking industry to prevent similar credit crises occurring in the future.
In a speech about 'Delivering intensive supervision and credible deterrence', Mr Sants spoke about the changing role of the FSA in light of the recent financial crisis.
"The historical philosophy was that supervision was focused on ensuring that the appropriate systems and controls were in place and relied on management to make the right judgements," he said. "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."
But in the future, he said, "we will seek to make judgements on the judgements of senior management and take actions if in our view those actions will lead to risks to our statutory objectives. This is a fundamental change. It is moving from regulation based only on observable facts to regulation based on judgements about the future."
This new and more intrusive style of supervision will be dubbed 'the intensive Supervisory Model', he told attendees of The Reuters Newsmakers event. "To see the full picture it is important to ally this with our more proactive approach to enforcement – 'our credible deterrence philosophy.'
"Since we set out this philosophy, last year, we have demonstrated by our actions that we will use all our powers including criminal prosecutions to deliver our mandate and we are not ducking that responsibility."
"There is a view that people are not frightened of the FSA." Mr Sants noted. "I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.
Meanwhile, speaking ahead of the G20 finance ministers' meeting, Mr Darling has said he wants to see new international powers put in place to prevent banks from stretching their finances to thin and being unprepared when things go awry, the Press Association has reported.
Both national and international regulators, like the FSA, need to adopt more power, he said, which will help to restore confidence in the banking
system, and suggested that the International Monetary Fund could act as a global "watchdog" for the banking system.
Not having such safety guards in place carries "catastrophic" consequences for the global economy, Mr Darling warned, and the events of recent months have also highlighted the importance of banks having built up capital reserves during periods of growth in order to protect themselves during periods of downturn.
"That is one of the problems that we have had to face," the Chancellor added. "Banks took on too much risk - RBS, for example, buying the Dutch bank ABN. They took on too much risk with catastrophic consequences for them and the wider economy," he said. "Making sure that they have got adequate capital against times when things are tough, I think that is very, very important."
Mr Darling explained that for this to be effective, greater supervision of the banks would have to be adopted on an international levels, because "you can't possibly have a situation where one set of banks have got a different regime to another."
Adam Phillips, acting chairman of the Financial Services Consumer Panel, said of Mr Sants speech that "The FSA
's new commitment to focus on outcomes is long overdue," adding that "the FSA's supervisors need to see how things look from the point of view of the customers dealing with firms, rather than relying on what firms tell the regulator."
He continued: "It is only in this way that those in the industry who fail to meet acceptable standards will become genuinely afraid of the FSA, as Hector Sants wants, and we fully support."
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