FSA tells firms to act ethically or face another credit crisis
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Hector Sants, the chief executive of the Financial Services Authority, says firms must adopt the right culture and ethical behaviour in order to avoid another financial crisis.
Speaking at a conference at Mansion House today, Sants says without addressing the issues of values and trust within firms, the FSA will not be able to prevent another crisis from occurring again, and will never fully restore the trust of society in the financial system.
He says there is no set of economic rules or supervisory architecture that can ensure failures are eradicated, and until behaviours and judgements are addressed, regulators and firms will not achieve the goal of restoring trust.
Addressing how regulators and firms can work together, he says: “The starting point for regulators should be for the firm to have a culture which “encourages individuals to make appropriate judgements and deliver the outcomes we are seeking. “
Sants says at all times it wants an institution to act with integrity.
He adds: “The regulator’s focus should therefore be on what an unacceptable culture looks like and what outcomes that drives. It should not be on defining the culture itself.”
He says a box-ticking approach to regulating culture will not work. The regulator must focus on the actions a firm takes and whether the board has a compelling story to tell about how it ensures it has the right culture; which rings true and is consistent with what the firm does.
Turning to the issue of remuneration, Sants says: “The FSA’s role is to ensure compensation structures do not encourage poor risk management practices. We have taken the lead, around the world, in implementing the remuneration code to ensure this problem is addressed. This will continue to be a major focus.”
He says unless bankers demonstrate sensitivity and exercise restraint in this area, trust will not be restored.
He adds: “I would suggest that the way forward on remuneration is to recognise that the remuneration structure needs to reinforce the concept of employers as the ‘custodians of the firm.
“The incentive structure should generate a sense of long term ownership. Financial institutions too often see themselves as ‘renting human capital’ over the short term. It should be the other way round: the human capital is being entrusted with the firm’s capital and brand over the long term.”
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Readers' comments (4)
Anonymous | 4 Oct 2010 3:34 pm
Below is the CV of Sants. As a former investment banker it would be interesting to see his previos pay packages and the extent of and % of bonus.
Its really easy to pontificate, as sants does, once one has reaped the rewards of the practices you are now trying to outlaw.
Phillips & Drew; vice-chairman, UBS 1990-97
Head of equities, Donaldson Lufkin Jenrette, 1997-2001
Chief executive of Europe, Middle East and Africa for Credit Suisse First Boston, 2001-04
Head of wholesale and institutional markets for FSA, 2004-07
Chief executive, FSA, 2007
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Martin Tapper | 4 Oct 2010 3:53 pm
Ethical behaviour in this industry must be a given for all firms, not an aspiration.
I agree Mr Sants.
However, it seems (by report) that the direction of the MMR would make it ever more difficult for everyone to obtain a mortgage. So who exactly, is more likely to create the next financial crisis? Is it going to be the unethical broker or is is it going to be the regulator throttling the market with unbridled regulation?
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Anonymous | 4 Oct 2010 6:07 pm
So lets get this right FSA allow the banking collapse ( I call that failure ) FSA pay themselves huge bonuses. Come on Mr Sants if you beleive what you say hand back previous FSA bonuses paid to you for failure. Whats good for the goose ect hey
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Toddy | 5 Oct 2010 11:43 am
I am an ethical adviser but did ask myself the same question as Martin above.
FSA has set themselves the task of eradicate any risk in the mortgage market what so ever. They appear to having removed the aim of financial stability as I think the new MMR rules,if going ahead in its proposed form, is going to cause a financial turmoil.
One exmaple is when public sector workers lose their job and they are offered a position elsewhere, they will not be able to move home as they may no longer get a mortgage.
It is a worry that Sants is going to be the second in command in the Bank of England given the simplistic views he has given above.
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