Martin Wheatley, managing director of the FSA, told an audience at the Chartered Institute of Bankers in Scotland that the Financial Conduct Authority needed a new approach to regulating the way that firms treated their customers.
He said: “In order for our regulation to work better than before, we need to understand why people make mistakes and why firms do what they do.
“So we are looking at consumer behaviour, and business models in firms to inform our new, more forward looking and intrusive supervision and we will be expecting boards of firms to play their part too.”
The FCA said it would look at what was behind the economic decisions of individuals and the firms it regulated.
It would also take into account the wider economy, the challenges facing banks in their search for profits, the pressures on consumers facing tougher times ahead and economic uncertainty today.
The regulator said it would follow the money to understand what lies behind profitability and the implications of firms’ strategies.
Wheatley added: “In all of this, we accept that firms need to be able to generate acceptable returns for shareholders and have to be financially robust.
“But this is about ‘good profits’ rather than profit at any cost, either to firms’ own stability or their customers’ best interests.
“The key point is that in the FCA, we will be looking to firms to construct business models where fair treatment of customers is central.
“And we will expect those in executive management and on the boards of firms to step up their engagement with this side of the business and take this seriously.
“Because not only will we as a regulator need to understand your business better, boards will need to do the same, and they, like us will need to ask tougher questions.
“We have to ask why boards of banks did not ask the management of firms about how things like payment protection insurance could be so profitable, 15% of some banks’ profits, and still deliver the fair treatment of customers.”
The FSA said that people did not feel their banks were putting their interests first.
And he added: “So that although we have all, I think, learned the lessons on the prudential side of banking and banks are now far more financially secure and stable, with better risk management and preparation for what might lay ahead. We are not yet in that place on the conduct side.”
