FSA publishes annual report for the year 2009/10

The Financial Services Authority (FSA) has published its Annual Report, outlining its performance against the priorities set out in its 2009/10 Business Plan and the FSA's statutory objectives.

In his foreword, FSA chairman, Adair Turner, commented that over the last three years, the FSA has transformed its approach to regulation and supervision and as a result, has had to go through a process of intense internal change.

Key elements of this transformation process are:

• A radically changed approach to prudential supervision and in particular to the supervision of high impact firms, including stress testing, accounting reviews, challenges to business models, detailed liquidity assessments and reviews of remuneration policy.
• Dramatically increased involvement in international and European fora to help drive global agreement on the complete revision of the prudential regulatory regime, with recommendations for such major change set out in the Turner Review and associated discussion and consultation papers.
• A fundamental change to the FSA's enforcement approach, aiming for "credible deterrence" and pursuing market abuse and inadequate management responsibility far more aggressively. Sustained investment in this over the last three years has resulted in major successes in 2009/10.
• The launch of a new approach to 'conduct risk'. improving customer protection in retail markets by earlier intervention to reduce the scale and frequency of problems that lead to customer detriment.

Adair Turner, said:

"The measure of the effectiveness of our new regulatory and supervisory approaches will be whether in five or 10 years time potential problems are prevented, either within individual firms or across the whole financial system.

"I and the Board of the FSA are certain that we have covered an enormous distance over the last three years, that we are better equipped to identify and manage prudential risks, that malpractice faces far more credible deterrence, and that we have now launched an essential shift in our conduct risk approach.

"In all of these achievements, Hector Sants has played a very major leadership role, and in all of them the hard work and commitment of the FSA management team and staff whom Hector has led has been essential. On behalf of the Board and personally, I would like to thank Hector and all of the staff for their contribution over the last three years of major change and over the last year in particular."

In the report, FSA chief executive, Hector Sants, commented on the FSA's performance against its priorities, saying:

"The principal achievement of the last 12 months has been the completion of our reform programme, which has radically changed both our supervisory philosophy and the capability to deliver it."

The main features of this programme have been:

• Substantial investment to create the capacity and capability needed to deliver the new 'intensive supervisory' approach.  In particular, hiring 537 additional staff and the completion of a comprehensive training exercise of existing supervisors.
• The creation of new, in-house analytical capability to provide sophisticated analytics in the areas of business models, accounting, and risk.
• Significant work to reform the regulatory framework in respect of capital and liquidity. This has involved the introduction of new local rules for liquidity and considerable input from the FSA in taking forward the global agenda for reforms to the capital rules. 
• Further progress in improving the technology with which firms interact with and provide data to the FSA, culminating in the launch this year of an online system for standard notifications and applications which complements the capability to complete regulatory returns online, rolled out in 2008.

The new 'intensive' model has already demonstrated its value, with the FSA making a series of proactive interventions during the year, including:

• A comprehensive stress testing programme of the major banks, building societies and insurers.
• The facilitation of a number of key mergers in the building society sector.
• The implementation of the revised authorisation framework for senior management which led to 377 interviews being conducted, resulting in 27 applications being withdrawn.
• Issuing 46 fines with a record value of GBP33.6m and successfully completing two criminal prosecutions.

In addition, during the course of the year the FSA launched its new consumer protection strategy which involves earlier intervention and a more effective regime to secure redress.  An early example of this strategy in action has been the mortgage market review with its proposals for much stronger emphasis on affordability assessments and its highlighting of the risks of self certification mortgages. 

Hector Sants said:

"This will be my last annual report as the chief executive, so I would like to take the opportunity to thank the FSA staff for the tremendous support I have personally received over the period of my tenure, and also to recognise the outstanding level of commitment shown in the last 12 months - not only in managing the crisis but also in delivering a comprehensive reform agenda which has transformed the organisation. 

"I believe the FSA is now a different and improved regulator both in respect of its philosophy and its ability to deliver that philosophy.  It has demonstrated the characteristics that are essential to a successful regulator and proved to be an organisation capable of learning and adapting to an uncertain world."

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