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Don’t shake up governance overall just to rein in banks

The FSA’s calls for “a radical overhaul” of individuals conducting governance within financial companies should be restricted to the banking sector, says Beachcroft Regulatory Consulting managing director Richard Hobbs.

He believes the regulator should not force the whole financial services sector to change its governance in order to solve a banking problem.

Hobbs says: “The rest of the sector has not shown itself to be prone to the same difficulties as the banks. In setting standards, the FSA should not create the expectation that everyone needs to make these big changes in order to operate efficiently.”

In a speech to the Securities and Investment Institute last week, FSA chief executive Hector Sants said the attitudes and competence of the individuals who conduct governance need an overhaul.

He said financial companies should create board-level governance structures that allow for challenges to companies’ risk controls without creating conflict, and the credit crisis has demonstra- ted failings in this area.

He said: “Some management decisions have revealed a degree of incompetence, and at times a rather cavalier approach regarding risk management.

“The necessary challenge was missing from governance structures, in particular boards, and there may well be questions that can reasonably be asked about the openness and thus, argu- ably, the integrity of firms dealings with regulators, shareholders and their customers.”

The FSA says that it is not seeking to establish non-executive directors as a competing mechanism against the executive, but to make both more effective.

Sants said that while the FSA supports the unitary board model, there is a risk that it will promote a “herd instinct” in encouraging “follow-the-leader behaviour” and a “reluctance to break away from the pack and express an independent view”.


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