10
its peers are not sanctioned.80
The approach taken by the risk supervisory process to flesh out decisions and show how they
are arrived at as regards resource allocation between different sectors of the financial services
industry improves transparency and thereby provides a form of accountability mechanism as
government can gauge how efficiently the FSA is utilising its resources to achieve its
81
objectives.
It is important to distinguish between risk and uncertainty.82 “Risk is traditionally associated
with probability calculation and this suggests that an event can be predicted and controlled.83
Uncertainty however is not capable of measurement and deals with possibilities incapable of
calculation which are based on guesswork and judgment”.84
There are four elements to the FSA's response to risk namely :85 (i) Diagnostic : To identify,
assess and measure risks ; (ii) Monitoring : To track the development of identified risks; (iii)
Preventative : To limit or reduce identified risks and prevent them from crystallising or
increasing and (iv) Remedial : To respond to risks when they have crystallized. Six principal
regulatory tools in this response are as follows :86 An authorisation process - led by the
Threshold Conditions for authorisation; The approval of individuals - applying fit and
proper person criteria; Supervision -where the regulators monitor authorised business;
Enforcement - of the regulatory rules and penalising transgressors; Publicity - highlighting
areas of concern to the industry and consumers and Education - Forewarning or forearming
investors.
The FSA states in its risk assessment framework that it functions to measure firm risks
differently to the way firms normally manage risk.87 The FSA's operating framework has also
been designed to link its statutory objectives with its regulatory activities.. 88 Risk, in
particular risk to its four statutory objectives, is now used as the determinant for all regulatory
activity, including overall strategy and development.89 It has the following stages :90
- Identifying the risks to the statutory objectives
- Assessing and then prioritising the risks : The FSA will first assess the effect of the
collapse or lapse of conduct of a firm on the industry as a whole, on public perception and
market confidence and on retail consumers, considering the availability of compensation
or redress for them.
- It will then consider the probability of a problem occurring by considering factors such as
business risk, external context and the firm's business strategy and decisions.
80
81
82
83
84
85
86
87
88
89
90
ibid
D Singh, 'Bank Regulation of UK and US Financial Markets: Legal Aspects of Prudential Supervision' 2007
at p 90
J Gray and J Hamilton, Implementing Financial Regulation: Theory and Practice (2006) 20
ibid
ibid
J Hitchins M Hogg and D Mallett p 121
See J Hitchins M Hogg and D Mallett, Banking : A Regulatory Accounting and Auditing Guide (Institute of
Chartered Accountants 2001) 121
FSA (2003) at p 12.
See J Hitchins M Hogg and D Mallett, Banking : A Regulatory Accounting and Auditing Guide (Institute of
Chartered Accountants 2001)123; The FSA refers to the risk-based approach as a ‘bridge linking the
statutory objectives and our regulatory activities’ see FSA A New Regulator at p 14.
J Gray and J Hamilton, Implementing Financial Regulation (2006) 25
J Hitchins M Hogg and D Mallett pp 123-124