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Judgement switch will lead to blunders

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.”

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  1. Notably absent from this latest statement is any mention of doing away with the manifestly injust practice of the FSA regulating by hindsight, despite Howard Davies having said that such a policy isn’t “helpful” ~ something of an understatement, but better than nothing. The FSA got its assessment of the risks posed by Splt Cap. Investment Trusts grossly wrong, but still sought to hold practitioners to account after many of them fell apart, to the severe detriment of those who were persuaded to invest in them. Did we ever hear from the FSA a word of apology or any admission of incompetence for that fiasco? Not on your life. So to what does this latest declaration amount? Just a prediction that the FSA may be relied upon to continue making the occasional bad judgement call, but nothing about taking these blunders into account when it comes to future “thematic reviews”. In short, it amounts to nothing at all, just an empty waste of breath.

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