He said: “In terms of what we do next, the FSA's view on the wider structural regulatory architecture will be laid out in our Discussion Paper due to be published on 18 March, accompanied by Lord Turner's overview of the wider set of causes and potential responses that the authorities in aggregate can make.
“As I said…, my intention is… to focus in on the supervisory response and the changes I think that are required from market participants.
“I do that because I believe that these changes need to be made now. Indeed, in respect of the supervisory response the FSA has already embarked on a programme of change and is well down the track to completing it.
“The key feature of this programme is greater supervisory resource of a higher quality. We are on course to hire, by the end of 2009, 280 extra specialist and supervisory staff which will represent a 30% increase in our supervisory capacity. To ensure these individuals are properly equipped to do this job we have introduced a new Training & Competence scheme which involves a regulatory testing regime for existing supervisors. We have also ensured that we have the right mix between professional regulators and market practitioners.
“Historically, the FSA characterised its approach as evidence-based, risk-based and principles-based. We remain, and must remain, evidence - and risk-based but the phrase 'principles-based' has, I think, been misunderstood. To suggest that we can operate on principles alone is illusory particularly because the policy-making framework does not allow it. I continue to believe the majority of market participants are decent people; however, a principles-based approach does not work with individuals who have no principles.
“Similarly, the FSA, when it supervises, needs to supervise to a philosophy that says 'It will judge firms on the outcomes and consequences of their actions not on the compliance with any given individual rule'. Given this philosophy, a better strapline is 'outcomes-focused regulation'.
“It was not seen as a function of the regulator to question the overall business strategy of the institution or more generally the possibility of risk crystallising in the future.
“In the future we will seek to make judgements on the judgements of senior management and take actions if in our view those actions will lead to risks to our statutory objectives. This is a fundamental change. It is moving from regulation based only on observable facts to regulation based on judgements about the future.
“This will of course carry significant risk and our judgements will necessarily not always be correct with hindsight. Furthermore, too aggressive intervention will stifle innovation and arguably reduce risk to a level that inhibits economic prosperity. However, I believe the revealed preference of society says that this is, and possibly will always be, what society as a whole expects regulators to be doing. Indeed, it was what they thought we were doing.
“There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.”
