The chief executive of the Financial Services Authority warned the City yesterday to be "very frightened" of its tougher stance and said the watchdog was looking at whether action could be taken against former top managers of failed banks.
The FSA would adopt a more "direct and intrusive" approach to supervising companies, backed up by prosecuting wrongdoers, said Hector Sants, adding: "There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA."
Asked whether the former bosses of failed banks should be frightened, Mr Sants said: "We take our obligations very seriously. We will look at significant failure to see if there is action to take in relation to senior managers."
Whereas the watchdog previously left management to make business decisions within the principles it laid down, it will now question business models and strategies to maintain market confidence, protect consumers and prevent financial crime.
"A principles-based approach does not work with individuals who have no principles," the chief executive said, adding that markets had been unable to tame excess. "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 also emerged yesterday that Royal Bank of Scotland (RBS) had tied up at least £25bn in complex international tax avoidance schemes, costing the UK and US treasuries more than £500m in lost revenue. The new management at the bank has disbanded the department responsible and says it will end the practice. Under the previous management, led by Sir Fred Goodwin, there had been a huge expansion of "structured trades" – massive deals across national borders, to make a profit from tax avoidance.
Mr Sants said the FSA's "principles-based" regulation would give way to "outcomes-focused" supervision. The FSA and the Government boasted about enlightened regulation when business flowed in from New York after the US tightened its rules, but the financial crisis has exposed the regulator as too lenient in dealing with risky bank strategies. Mr Sants, who took over at the FSA just as the crisis was starting in July 2007, and Lord Turner, who became its chairman last September, have effectively thrown out the "light touch" approach championed by their predecessors John Tiner and Sir Callum McCarthy. Lord Turner will unveil his plans to overhaul the regulatory system next Wednesday.
Peter Snowdon, a partner at the law firm Norton Rose, said: "It is hugely significant as a speech. They are effectively saying that principles-based regulation is being replaced by a different approach. It is almost as if they are going to be looking over the shoulders of institutions saying, 'Why are you doing that?' and 'We don't like you doing this'."
Mr Snowdon said there was limited scope for the FSA to pursue former bank bosses if they had simply been incompetent. Mr Sants admitted there were risks in the regulator's new approach and that, by taking a view in the future to rein in companies, the FSA would inevitably make mistakes. But he added: "This is, and possibly will always be, what society as a whole expects regulators to be doing. Indeed, it is what they thought we were doing."
Responsibility for the actions of companies will remain with their management. "In reviewing the recent litany of firm failures, in many cases, albeit with hindsight, specific decisions and strategies can be seen to be at the root of the firm's demise," he said.
The watchdog has faced severe criticism for letting the financial bubble build up and for not checking properly on business models. Mr Sants said the FSA was "seared" by the crisis but that it was now a tougher organisation. "The FSA has grown up," he added.
Provided by The Independent—from London, for Independent minds