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FSA says firms’ risk controllers must challenge senior management

The FSA has warned investment firms’ senior risk control personnel and non-executive directors must be willing to challenge senior management on the adequacy of internal risk controls.

Speaking at the National Association of Pension Funds Investment Conference in Edinburgh today, FSA chief executive Hector Sants said risk control frameworks must consist of an “effective risk and audit committee and knowledgeable non-executives”.

This follows accusations by former HBOS head of group regulatory risk Paul Moore to the Treasury select committee last month that he was fired from HBOS for challenging senior management on its risk profile.

Sants said shareholders must also be active in the risk management process.

He said: “The impact of companies lacking robust risk management and good governance will, as we have seen, impact negatively on your long term investment performance. A lesson for you from this crisis must be that greater interrogation of how well a company is managed and the adequacy of its risk controls are all material factors fundamental to investment management.”

Sants called for shareholders to question the effectiveness of company boards and for institutional investors to voice concerns about business strategy and management or performance issues through their voting rights.

He said there is an over-reliance on credit rating agencies, external advice and “a willingness to accept the views presented”.

Sants added: “Many of you are also too reliant and unchallenging of ‘normal channels of information’ for example annual reports and company announcements. In parallel to regulators taking a more macro-prudential view, long term investors must assess all risks to a business and be challenging of the information offered by a company, and perhaps more importantly, interrogate that which is made freely available.”

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