The FSA has published a speech by Hector Sants (CEO, FSA) entitled The Crisis: the role of investors. At the start of his speech Mr Sants states that investors have a major role in addressing the issues that have arisen from the financial crisis. This is because they have the ability to exercise indirect and often direct control and influence over the UK economy.

Mr Sants then provides a short summary of the origins of the financial crisis. He then confirms that the Turner review will be published on 18 March 2009.

Mr Sants states that it is fundamental that firms’ senior management carry primary responsibility for their actions and their resulting consequences. However, he also states that responsibility is shared with non-executives, shareholders and auditors. The FSA believes that a key element of successful regulation is to work in partnership with these groups. Recent market events have emphasised that non-executives and institutional investors have a greater role to play in the oversight of executive management.

Mr Sants then discusses some of the ways in which investors could react to the financial crisis. He does this first by commenting on investors’ role as owners and then on their role as investors.

As owners Mr Sants encourages investors to focus on four issues:

  • Governance.
  • Risk management
  • Business strategy.
  • The issue of compensation.

In order to do this investors have to more actively engage with senior management and non-executive directors. They also need to organise themselves more effectively for collective action.

On governance Mr Sants mentions the forthcoming report that the Government has commissioned Sir David Walker to produce. He states that what is already clear is that there must be greater oversight and investors, as owners of the business, must be active in the risk management process.

Mr Sants then turns to the role of investors and asks if they knew and understood the products they were investing in. Mr Sants criticises investors, stating that many of them should have challenged ‘normal channels of information’, for example annual reports and company announcements. Mr Sants also argues that there appears to be an over reliance on credit rating agencies, external advice and a willingness to accept the views presented. These are often geared around quarterly reporting cycles and do not encourage investors to make a more long term investment.

View FSA speech - The Crisis: the role of investors, 11 March 2009