Speaking at the Reuters Newsmakers event today, Sants said the FSA will replace its “principles-based” regime with “outcomes-focused” regulation, signifying a move from regulation based on observable facts to governance based on judgments about the future.
Sants described the switch as a fundamental change and said the FSA will make “judgments on the judgments of senior management” and take actions if they risk statutory objectives.
He said this approach will carry “significant risk” and judgments will not always be correct with hindsight, but society expects regulators to be acting in that way.
Sants said: “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. Europe, in particular, has a particular penchant for rules and in any case in a number of key areas such as prudential they are indeed necessary.
“Furthermore, the limitations of a pure principles-based regime have to be recognised. 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.”