Tuesday, 24 April 2012

UK: effective corporate governance and the role of financial regulators - speech by the FSA's chief executive

The chief executive of the Financial Services Authority, Hector Sants, delivered a speech today titled Delivering effective corporate governance: the financial regulators role: see here. There is a great deal of interest in the speech, which will be Mr Sants last as he will be leaving the FSA in June. An indication of its wide-ranging content can be gained by quoting four points Mr Sants chose to highlight in his conclusions:

The role of a regulator is to create boundaries within which firms take responsibility for their own decisions. In the past the capital and liquidity boundaries for banks were nearly non-existent and thus management were not sufficiently constrained in their judgements. The new capital and liquidity standards will address these shortcomings but will not remove the necessity for management to make good judgements and the need for regulators and shareholders to hold those firms to account. 

Central to a regulator’s role in promoting effective boards is the utilisation of the authorisations process to encourage firms to make the right appointments. History clearly demonstrates the importance of a regulator having a proactive approach to judging the suitability of directors, in particular their competence. This proactive approach must be focused only on those key roles and has to be a judgement not just about the effectiveness of individuals, but about the board as a whole. 

Good governance and a strong culture are a necessity for maximising the likelihood of the right judgements being made by management. Regulators have a role to play in ensuring that firms have the right governance and culture. But I should stress that it is not for the regulator to determine the culture. Ultimately, however, even a successful regulatory regime will not be sufficient to ensure good outcomes. Crucially, firms need to have an appropriate culture and one which is focused on the firm delivering the right long-term obligations to society. The right cultures are rooted in strong ethical frameworks and the importance of individuals making decisions in relation to principles rather than just short-term commercial considerations. In particular, this means that when a regulator expresses a clear instruction then firms should not continue to resist for reasons of expediency and short-term gain. 

Nevertheless, history tells us that we cannot rely on the motivation of individuals alone and that we need credible enforcement to require individuals to be driven by principles rather than just commercial expediency. Commercial success should not place an individual above the law".

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