The FSA has published a speech given by Jon Pain (Managing Director, Supervision, FSA) entitled FSA’s approach to intensive supervision.

At the start of his speech Mr Pain discusses what is meant by intensive supervision. Mr Pain explains that the FSA has moved to an ‘outcomes-based’ approach which is delivered through intensive supervision. The new approach is centred on intervention in a proactive way. The FSA now:

  • Undertakes more extensive business model analysis, to understand the key drivers of risk and sustainability of a firm’s business.
  • Makes judgments, on the judgments of senior management.
  • Acts quickly and decisively.
  • Proactively looks to influence outcomes, not merely react to events.
  • Applies a greater depth of analytical rigour - for example, through embedding severe stress tests into its assessment, of how much capital a firm should hold.
  • Backs its intensive supervision with credible deterrence when standards are not met.

Mr Pain then looks at the FSA’s enhanced supervision capability. The FSA is continuing to develop a more rigorous analytical approach to how it regulates the largest institutions. This will be rolled out to large banks and insurers later this year.

For prudential issues the FSA will be undertaking more intensive reviews for example, on capital, liquidity, risk management, governance and business models. For conduct issues the FSA will be assessing the key drivers of potential conduct issues by better understanding the risks posed by the firm’s business model.

Mr Pain then discusses delivering intensive supervision and refers to some examples. For instance the FSA has intensified its interventions on firms, with weak business models, where it has shaped and facilitated market solutions by encouraging boards and management to seek realistic strategies, to face up to current realities, to look at alternatives and to engage with possible suitors.

Mr Pain then looks at the outcomes the FSA is seeking to achieve through intensive supervision. These can be summarised into three broad categories:

  • That firms are well-managed and have good governance. In particular that good culture and behaviour in firms is being driven by senior management and that good culture and behaviours are being reinforced by effective corporate governance and the role of the boards.
  • That firms are prudentially sound on a forward looking basis. It is clear that senior management need to ensure that their firm has plans in place to remain resilient throughout economic cycles. The FSA expects firms to develop a robust and effective stress testing programme, which assesses their ability to meet capital and liquidity requirements in stressed conditions.
  • That consumers achieve a fair deal and are treated fairly. The financial crisis has shaken the public’s trust in financial services. Firms need to prove by their actions rather than their words that the consumer is genuinely at the heart of their business.

At the end of his speech Mr Pain discusses three key challenges:

  • The need to secure international consensus and maintain the required momentum to deliver an enhanced prudential framework that delivers a more resilient and robust banking sector.
  • As evidenced by recent events that have unfolded across the Eurozone, the word wide economic recovery remains fragile.
  • The FSA faces a number of internal risks and challenges. This includes continuing to deliver a cultural shift, where supervisors have a much tougher role, which demands a well-balanced analytic capability, good industry understanding and a willingness to make tough decisions.

View FSA’s approach to intensive supervision, 18 May 2010