UK: directors, ethics and the FSA

The chief executive of the Financial Services Authority, Hector Sants, delivered a speech yesterday titled Intensive Supervision: delivering the best outcomes. Mr Sants used his speech to defend the current tripartite regulatory structure and to make the case for cultural change within regulated firms. Regarding the latter, Mr Sants envisaged a greater role for the FSA with regard to the assessment of senior executives' ability to set a "strong ethical framework". To quote directly from his speech:

Real reform requires both change to the regulatory rules and change to the industry’s culture. Expressions of acceptable ethical frameworks exist in a variety of guises. There are numerous thoughtfully articulated industry codes. The problem is not so much about defining the ethical framework but rather the issue of identifying and encouraging the right cultures which ensure their application. The FSA believes that such issues are potentially so important to improving governance that we, as the regulator, should try to take them into account. We recognise that there is no single ideal culture across the financial services industry, and that all cultures are likely to have good and bad aspects. Our aim would, therefore, be to seek to facilitate the creation of good cultures and intervene when bad ones seem to be creating unacceptable outcomes.

There are two principal tools at the disposal of the regulator to influence culture: governance systems and people. Going forward, we will be seeking to identify mechanisms for assessing the effectiveness of culture during our risk review process. This would certainly include when assessing board effectiveness, looking at their impact on an institution’s culture. However, I believe the key enabler should be our ‘fit and proper’ regime. We all recognise that culture is driven by individuals and in particular senior executives who: ‘set the tone from the top’. I thus strongly believe that our authorisation regime should seek to make a determination of an executive’s ability to set a strong ethical framework and to foster the right culture".