UK: FSA annual report published

Earlier this week the Financial Services Authority published its annual report for the period 1 April 2008 to 31 March 2009. In his chairman's statement, Lord Turner provides an overview of what the FSA has done to meet its regulatory objectives. He notes that maintaining financial stability has been a major task and states that it should explicitly be made one of the FSA's statutory objectives under the Financial Services and Markets Act (2000). This may well happen: the Financial Times today reports:

Alistair Darling is planning a new Banking Act this year that will strengthen the role of the Financial Services Authority, in an unexpected move that follows criticism that the Bank of England failed to warn adequately of the impending banking crisis. The chancellor wants to give the FSA a new statutory objective of maintaining financial stability, making it partly responsible for a function currently entrusted to the Bank".

Hector Sants, in his chief executive's report, describes the FSA's regulatory philosophy as "outcomes focused" and notes the shift away from "principles based" regulation. Mr Sants observes:

We are now focusing on questioning the overall business strategy of the institution and more generally on the possibility of risk crystallising in the future. This is a fundamentally different way of supervising firms. We are now making judgements on the judgements of senior management and taking action if, in our view, those decisions will lead to risks to our statutory objectives. We believe this move from regulation based only on observable facts to regulation based on judgements about the future is vital to help us deliver our statutory objectives".

Another example of the FSA's new approach is given in section one of the report - titled "Financial stability and supervision of firms – responding to the crisis" - where the FSA's Supervisory Enhancement Programme is explained. It is stated:

The presumption is that any application submitted by a high-impact firm for the roles of Chair, CEO, Finance Director or Risk Director will result in an interview. Other [Significant Influence Function] candidates may also be interviewed at the supervisor’s discretion – for example, if there are concerns about the compliance culture of the firm or the track record of the candidate. In the first six months of the enhanced approval process, 51 SIF interviews were carried out. In a number of cases applications have been withdrawn following interviews that raised questions concerning the candidate’s fitness or competence. The focus on assessing key competencies, as well as matters of probity and past compliance record, represents a significant shift in our supervisory approach".

The appendices are particularly interesting. Appendix 1 contains data on the costs of regulatory authorities in other jurisdictions including the USA, France, Germany, Hong Kong, Ireland, and Singapore. Appendix 5 contains statistical information in relation to cases investigated by the FSA's Enforcement Division and the outcomes of the investigations.