Hector Sants, in his last speech as CEO of the FSA, focussed on the importance of corporate governance.
Firms – and particularly those that have been subject to an ARROW visit – will be aware that this is an area of interest to the FSA (see, for example, Regulatory Roundup 22, in which it is revealed that the Regulator was giving a double weighting to this area in the ARROW risk elements) and that it continues to believe that good governance increases the probability that good decisions will be made.
The speech set out five key indicators relevant to firms that failed during the financial crisis, including a dominating CEO and a dysfunctional board. Mr Sants also highlighted three key components of effective corporate governance: the board having a full understanding of the business model and associated risks, and being able to provide effective challenge; the Chairman’s role in constructing and managing a board that has appropriate skills and experience; and for the board to have management information that relates to the firm’s strategic plan so that it can ensure the execution of that plan.
As for technical competence and general suitability, the FSA is “still surprised” by the number of times firms put forward candidates for approval that “are not the right individuals for the role”. As will be known (e.g. see Regulatory Roundup 3), the FSA has taken a more intrusive approach in the approval of significant influence functions (SIFs), which are basically all the CFs bar the CF30 customer function, including interviewing candidates. We are advised that over the last two years the FSA has determined 653 applications following one or more SIF interviews. Of these, 48 were withdrawn; 39 of which were due to serious concerns identified by the FSA. The speech set out four common examples of shortcomings seen in applicants. The focus of SIF interviews will include the Chairman, CEO and the finance director with the need to interview other individuals “judged on a firm-specific basis”. We are told that these principles will be carried forward to the new regulatory regime.
The speech concluded with a new expression to add to the likes of ‘credible deterrent’ and ‘be afraid, be very afraid of the FSA’; ‘constructive tension’. The latter is to express the relationship between the FSA and firms (and replaces ‘working together in partnership’).
