Making risk-based regulation effective

The UK’s Financial Services Authority (FSA) does not seek to avoid all failure of financial firms. It is an impossible goal whose pursuit has many undesirable consequences, according to FSA chairman Sir Callum McCarthy in a recent speech delivered as part of the British American Business London Insight Series and Financial Services Forum lecture series. Nor does the FSA approach all firms it regulates in the same manner, but rather it devotes resources according to the potential impact that a firm might have on the FSA’s statutory objectives and according to the risk of such impact occurring. In an edited extract from Sir Callum’s speech, he addresses the issues involved in making risk-based regulation effective.