HIGHLIGHTS-UK's FSA seeks to make bank failures acceptable

LONDON Dec 13 (Reuters) - Financial Services Authority Chief Executive Hector Sants spoke at a Reuters Newsmaker event in London on Monday about Britain's new financial supervisory framework.

Following are highlights of his speech:

REGULATORS MUST DEAL WITH BIG, SYSTEMIC BANKS

"If we do not deliver, we will not be able to achieve the key objective of the Basel reforms, namely ensuring that tax payers never have to foot the bill again."

BANK FAILURES

"A key point here is that orderly failure with minimal cost to the economy should not be seen as a regulatory failure. This objective contrasts with the situation the FSA found itself in, namely no acceptance from the media or politicians that the FSA was not a zero failure institution."

"The PRA will not be attempting to pursue a zero failure regime. Persuading society that this is an acceptable goal will be a challenge."

"The FSA has been accused of tick box regulation and it is vitally important that the PRA sheds that image."

"The financial crisis has clearly demonstrated that in reaching their own conclusions regulators should not rely solely on the judgements made by firms or indeed their auditors."

"We expect to review the prudential aspect of the current FSA Handbook with a view to achieving this end subject to constraints imposed by EU directives."

"Where the PRA will feel different overall is the fact that it has a far narrower focus and the recognition that we are not seeking to operate a 'zero-failure' regime is now directly built into the statutory objective."

CONSUMER PROTECTION

"While the CPMA will pursue a more aggressive consumer protection agenda, the CPMA will not always assume that the consumer is right, or that consumers have no responsibility to look after their own interests when dealing with financial firms."

"In future, the CPMA must therefore have a lower risk tolerance than that of the FSA."

NEW BANK SUPERVISION MODEL

"The expectation is that the cut-over will occur in the second half of 2012. The FSA has already started to evolve towards this new structure. In April 2011 we will replace our current Risk and Supervision business units with a Prudential business unit and a Consumer Protection and Markets business unit. From this point we will then, over time, take a progressive approach to changing those regulatory processes that can be changed within our existing statutory remit so that the FSA can begin to operate a more 'twin peaks' style of regulation."

TRANSITION RISKS

"We should not underestimate the fact that a de-merger of the FSA is a complex and resource-intensive exercise which carries significant execution risk."

LESS ROUTINE SUPERVISION

"By activity, the overwhelming majority of staff time in the FSA is spent on frontline supervision. It follows then that we need to re-prioritise our supervisory efforts in a way that delivers the capacity needed to manage such a complex transition. We will thus be taking a bottom-up and risk-based approach to scaling back some of our supervisory activities. Nevertheless we will inevitably be decreasing the amount of time spent on pre emptive routine supervision for lower risk firms."

(Reporting by Huw Jones and Paul Hoskins)