The use of judgement by regulators in future to foresee problems emerging is inevitably going to lead to mistakes, says FSA chief executive Hector Sants.
He said the shift to a judgement-based, outcome-led approach is already underway and would continue with the Prudential Regulation Authority.
He said: “A judgement-based system carries the problem the regulator will not always be right, not even a well staffed independent regulator. That shift in philosophy has already occurred within the FSA over the last two to three years and we expect that to be carried forward and developed further in the PRA.”
Under the new regulatory structure, macroeconomic stability will be the responsibility of the Financial Policy Committee. Sants says he is confident it will spot risk pools developing, but worries how it will react to it.
He said: “We have to accept there is always a degree of random occurrence in the system, caused by the fact that humans are inherently fallible and the right judgements are not always made.”