At the PRA Banking Conference today, Sants outlined the new approach of the PRA.
The Prudential Business Unit of the FSA was formed on 4 April this year, and will eventually break away and become part of the Bank of England as the PRA by 2012.
Sants said the primary function of the PRA will be to promote stability in the financial system, and its single objective will be to promote the soundness of regulated firms.
To do this Sants said there must be a shift in the approach of the regulator from a reactive organization which trusts the judgment of firms, to an organization which forms its own views and enforces compliance.
“The FSA’s supervisory approach rested on a presumption which was false; namely that senior management judgment and market discipline should not be questioned by supervisors,” said Sants.
“Supervisors did not seek to make their own judgements as to what might happen in the future. Regulators only intervened following observable failings relative to the then set of rules.
“Regulators cannot rely on the judgement of the management of the firms they supervise, and must take their own view formed from their own analysis about the significant issues which affect the safety and soundness of the firm.”
Sants warned that when the PRA’s judgment differs from that of the firms it supervises, it will act.
Adding a caveat, Sants said the public must recognise the PRA is not responsible for all firm failures.
