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FSA demands seats in the boardrooms of high-risk firms

Regulator takes ‘eyeball-to-eyeball’ approach, but investors fear this could lead to decision-making being driven out

The Financial Services Authority is sitting in on board meetings of the some of the biggest firms in the City as it steps up its surveillance of those institutions it believes could pose a major risk to the financial system.

In an attempt to rectify some of the criticism it faced in the wake of the collapse of Northern Rock, the FSA is now demanding access to the inner workings of big banks and other high-risk groups as part of what Hector Sants, the chief executive of the City regulator, regards as an “eyeball-to- eyeball” approach to regulation.

In a dramatic change in its approach to regulation, the City regulator has asked big banks and other financial firms for permission to sit in on board meetings, sub-committee meetings of boards and some divisional board meetings as it attempts to understand the goings-on at the top of what it regards as “high-impact firms”.

The latest approach, which is thought to have begun in the last three months, is causing some concern among City sources about whether the presence of regulators stifles debate at board meetings. Top investors are concerned that the FSA attendees could be regarded as “shadow directors” – exerting influence without being accountable to shareholders – if they attend on a regular basis. The shareholders also expressed fears that the FSA presence could drive key decision-making outside the boardroom.

It thought, however, the FSA is keen to make clear to firms that it does not want to sit in on every board meeting and its attendance is to monitor the ways firms are managed rather than to interfere.

An FSA spokesman said: “Our more intensive supervision of the largest and most complex firms  includes a greater emphasis on the senior management and governance of the firm.”

The more intensive approach to regulation is being adopted by the FSA as it prepares to be split up and a new Prudential Regulatory Authority – which Sants will run – created by 2013 to safeguard “the safety and soundness of regulated firms”. When Sants outlined how he wanted the PRA to operate, he promised to “devote personal amounts of time to supervising”. While City sources say he is not personally attending the board meetings and other top gatherings of executives and non-executives, the presence of supervisory teams from the FSA at some board meetings reflects the new approach that Sants and his deputy Andrew Bailey want the PRA to adopt.

In May, Bailey set out the key features of the new approach. “Major supervisory judgments will be subject to rigorous review, involving the PRA’s most senior management. For the systemically most important firms there will be regular contact with PRA senior management. Constructive engagement and corrective action undertaken by regulated firms may, in some states of the world, act as a substitute for additional capital requirements imposed by supervisors.”

Even before the coalition announced plans to break up the FSA, the regulator had been taking a more intrusive approach to the board composition of major firms. It began to vet applicants for the top jobs, introducing 90-minute interviews for those seeking boardroom roles and senior jobs overseeing risky operations.

The FSA spelled out its new approach in October 2009 when it wrote to chief executives of major City firms saying that it expected successful appointees to boards to be able to explain the risks in their business and explain what plans were in place to mitigate the chances of firms collapsing.

While the FSA argues this is a key way to ensure that top directors are suitable for the key roles, some City sources are concerned that it slows down the recruitment process. © 2011 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds