FSA moves to reduce risk in its new report

Steve Dinneen
Follow Steve
Senior employees at financial firms will have to undergo tough new vetting procedures under rules announced yesterday by the Financial Services Authority (FSA).

Management and board members will face extra scrutiny to make sure they pass stringent competence and probity tests. Any executives or senior managers moving positions will have to submit a thorough application proving they have the ability to fulfil their new role.

There will also be compulsory changes to the way senior management and executive roles are defined. Firms will have to produce detailed job descriptions that outline the exact responsibilities given to staff.

Under previous guidelines banks were able to move staff between positions with little dialogue with the FSA but the new rules mean any changes will have to be rubber-stamped.

The FSA says the new guidelines will supplement rules that are already having a noticeable effect on company behaviour. The number of applications for senior positions vetoed by the organisation fell from 11 per cent last October to just four per cent this month. Firms will be “strongly encouraged” to introduce new risk committees that will be charged with making day-to-day assessments about the level of risk institutions are exposed to. The report recommends that top executives are installed on the committees.

The FSA hopes this will highlight where potentially damaging trading is taking place and reduce the possibility of big financial losses. The guidelines follow government recommendations aimed at clamping down on banks in the wake of the financial crisis.

Another report scheduled for mid 2010 will specifically address remuneration, and may force institutions to disclose the pay of their top employees.

● Firms will be "strongly encouraged" to set up risk committees and appoint top executives as chief risk officers.

● Senior employees will be more heavily vetted for competence and suitability and the FSA will interview all borderline cases.

● Companies will be made to create detailed frameworks of management duties.

● Important staff at the holding companies of regulated firms will be scrutinised.

● Tough rules may follow in the summer forcing companies to disclose the pay of high-earners.