The FSA will create a new supervisory taskforce to review its employees who are overseeing standards for high-impact firms.
It comes in the wake of the Northern Rock crisis, in which the FSA admits making four key failings.
The regulator says it lacked “sufficient supervisory engagement” with Northern Rock, while failing to rigorously follow up with management following changing market conditions.
It also says FSA line management failed to provide adequate oversight on the firm's supervision, while admitted it lacked specific resources directly supervising Rock and the intensity needed to ensure all available risk information was “properly utilised”.
The FSA board says even if it had provided an “acceptable” level of supervision, it is unsure whether the Northern Rock disaster could have been avoided.
However, in a bid to avoid any further disasters, the FSA’s new group of supervisory specialists will regularly review supervision of all high-impact firms to ensure procedures are being rigorously adhered to.
The regulator will also increase the number of supervisory staff engaged with high-impact firms, with a mandated minimum level of staffing for each firm.
Its existing specialist prudential risk department will also be expanded, with the current supervisory training and competency framework to be upgraded.
Furthermore, the FSA will put more focus on liquidity and it will raise emphasis on assessing firm senior management competence.
"This programme is the response of the management of the FSA to the weaknesses identified in the particular case of the supervision of Northern Rock,” FSA chief executive Hector Sants says.
“Our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge.”
However, Sants says he is determined to prevent a similar situation to Northern Rock undermining financial stability.
“That does not mean a 'no failure' regime,” he says. “However, together with the proposed reform of the insolvency regime for banks - and an improved deposit protection scheme - it creates a platform to strengthen financial stability and better protect the interests of consumers.
"Demonstrating our willingness to examine ourselves critically and learn lessons is central to giving the financial services industry and consumers confidence in the FSA, although, like any organisation, we cannot and do not claim infallibility, and we cannot, and should not, attempt to remove all risk from the system."
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"It must be wonderful to be part of an organisation that can excuse its own shortcomings by actually increasing the size of its operation when things go wrong and thereby profiting by the disaster. Then to make sure that all the extra costs are passed back to other people in the Industry to support them financially. A couple of large fines here and there will soon sort all the additional costs out!" Phillip Gavey, IFA, Pobbles Financial ServicesIFAonline
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