The Impact of Risk-Based Regulation as a “tool of governance” on Behaviors of
Regulators in the UK, Germany, Italy and the US.
The supervision and monitoring of management performance and ensuring accountability of
management to shareholders and other stakeholders constitute the two key aspects of
corporate governance.59
The UK
Whilst the contested nature of risk, the values attached to it, and the likelihood of different
interpretative frameworks have raised questions about the ability of risk to carry the weight of
expectations attached to its as a regulatory tool60, relating risks to its objectives enables the
FSA to establish a boundary around its regulatory role.61
Impact of Risk-Based Supervision
With the FSA under its risk-based approach dedicating more resources to the supervision of
insurers, the extent of the involvement of external auditors in the supervision process is of
considerable interest.62
Overall, the FSA's risk based approach has led to a reduced role for auditors in banking
supervision.63 Since the date of implementation of the FSMA known as N2,64 there have been
84 skilled person reports of which the Enforcement Division has initiated only six.65 From 1
April 2003 to 31 March 2004, the FSA exercised its power under section 166 of the Financial
Services and Markets Act 2000 to require firms to produce a skilled person's report in 28
situations.66 This figure dropped to 17 in 2005/06 and 18 in 2006/07.67 This is a considerable
reduction in investigations from the number of reporting accountants commissioned under
section 39 Banking Act 1987 which frequently exceeded 600 reports annually.68
Impact of Meta Regulation
Legal and General Assurance Society v FSA highlighted how the more holistic focus which
meta regulation has on systemic failures on the part of firms, rather than their specific acts or
omissions, is starting to influence the ways of approaching issues of causation in the
framework of regulatory responsibility.
In contrast to the FSA’s use of holistic approaches, to fact finding to establish regulatory
responsibility and the Tribunal’s acknowledgement in Legal and General Assurance Society v
FSA, of the need to do so, in Lloyds TSB General Insurance Holdings Ltd and others v Lloyds
59
60
61
62
63
64
65
66
67
68
V Beattie, S Fearnley and R Brandt ‘Behind Closed Doors: What Company Audit is Really About’ (Institute
of Chartered Accountants in England and Wales) 26
J Gray and J Hamilton, Implementing Financial Regulation, pg 20
ibid at page 30
P Dewing and P O Russell, The Role of Auditors, Reporting Accountants and Skilled Persons in UK
Financial Services Supervision Institute of Chartered Accountants of Scotland (2005) 118
P Dewing and P O Russell at p 107
December 1 2001
See M Blair and G Walker, Financial Services Law (2006)136 and
<http://www.fsa.gov.uk/pubs/other/enf process review report.pdf> pg 35
ibid
FSA Annual Report 2006/07 at page 162
Blair and Walker, page 35