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The elephant in the boardroom

The FSA’s decision to dump its principles-based approach may be celebrated by some but it also heralds a move towards the regulator playing hardball with senior management, says Philip Tebbatt

Us compliance professionals are not normally given to outbursts of extreme emotion or even to being particularly demonstrative.

We’re a sober bunch on the whole, but I suspect that recently the odd compliance manager has permitted themselves a restrained whoop. Or maybe, if the other members of their team have not been made redundant, there might have been a low-key outbreak of high-five greetings.

And the cause of this joy? Well, while the Financial Services Authority has not exactly signalled an abandonment of its principles it has indicated an intention to return to good old rules.

For a long time, compliance professionals been concerned about the unpredictability and lack of clarity that comes with a principles-based system and now it seems that even the regulator has recognised the limitations of the approach.

“A principles-based approach does not work with individuals who have no principles,” FSA chief executive Hector Sants said in a speech to a recent Reuters Newsmakers event,

But it would be a mistake for compliance pros to let their emotions get the better of them – perish the thought – as the move away from principles-based regulation seems also to herald a move towards the FSA playing hardball.

“There is a view that people are not frightened of the FSA,” Sants said in the same speech. “I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.”

Sants’ speech was entitled Delivering Intensive Supervision and Credible Deterrence.

So what can we expect from what Sants describes as a more intrusive and direct style of supervision? Well, It seems that senior management will be under enhanced scrutiny.

He says that in future the regulator will assess the judgements of senior management personnel and act if these pose risks to its objectives. “This would be a fundamental change involving moving away from regulation based only on observable facts to regulation based on judgements about the future,” says Sants.

While he makes the point that overly aggressive intervention stifles innovation and arguably reduces risk to a level that inhibits economic prosperity, it is clear that the FSA being the elephant in the boardroom will not be the only thing that changes the way managers make decisions.

Non-executive directors are also being called on to commit more time and raise their technical skills to exercise rigorous oversight.

It is perhaps ironic that at a time when remuneration is a dirty word Sants indicates that this extra rigour will require additional compensation. Non-executive directors take note.

This all echoes comments made by Financial Services Secretary Lord Myners to a National Association of Pension Funds’ conference in March. He encouraged shareholders to take a more active role to prevent the perceived failures of governance which had contributed to our currant malaise.

Lord Myners called on shareholders to become what he termed fully engaged and criticised the fact that shareholders are often too passive, simply accepting the decisions made by management. He made it clear that passivity is no longer an option.

Of course, it is possible that we will once more end up with compliance professionals engaged in implementing a host of new rules and decisions being made as if the regulator was sitting at the boardroom table.

On the other hand, it is possible that no decisions will be made because management and non-executive directors – flush with their lavish remuneration packages – are at loggerheads, paralysed by fear of the consequences of their decisions and with the calls of energised shareholders baying for corporate blood ringing in their ears.

Alternatively, the dust might eventually settle and the industry will get down to doing what it does best – generating business.

So which of the above is it going to be? Don’t ask me – I’ve long since given up making predictions.

Philip Tebbatt is principal of niche financial services law firm Slater Rhodes and can be contacted at


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  • Richard Farr 9th November 2009 at 4:12 pm

    Sants said all these things at the beginning of the year.

    This is what he said today: “There remains, I believe, an absence of the acceptance of collective responsibility for what has happened. I personally remain unconvinced that all senior management have taken on board the need to change and operate in a genuinely different manner.”

    Obviously Hector’s tough stance is getting stronger. NED’s need to respond accordingly.