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The chief executive of the Financial Services Authority (FSA), Hector Sants, provided the keynote address at a Mansion House conference on values and trust today. Exploring the role for regulators in facilitating the right culture within firms Sants said that it is crucial to address the role that culture and ethics play in shaping behaviours and judgements.
Sants said that until this issue is addressed, “we will not be able to prevent another crisis of this magnitude from occurring again, and will never fully restore the trust of society in the financial system.”
As there is no set of economic rules or supervisory architecture that can ensure failures are eradicated, 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 said:
“It is those who manage the financial institutions, who make the judgments, who should be held responsible for them and for restoring the trust between the financial sector and the public. But there is a legitimate role for a regulator in facilitating the right culture.”
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. At all times we want an institution to act with integrity. 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.”
Focusing on whether it is realistic for regulators to intervene and modify culture, he said that it is important that the regulator focuses on the outcomes that the culture delivers and that it is for a firm to demonstrate that it has a framework for assessing and maintaining that culture. He said:
“To be completely clear, 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 said:
“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.
“Remuneration practices – bonuses - have been a symbol; a lightening rod of society’s lack of trust in bankers and to address the trust issue this state of affairs has to be recognised and resolved.
“I believe that unless bankers demonstrate sensitivity and exercise restraint in this area, trust will not be restored.
“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.”
Background
- The speech
- The FSA regulates the financial services industry and has five objectives under the Financial Services and Markets Act 2000: maintaining market confidence; promoting public understanding of the financial system; securing the appropriate degree of protection for consumers; fighting financial crime; and contributing to the protection and enhancement of the stability of the UK financial system.
