Financial Services Authority chief executive, Hector Sants has warned the financial services industry to be wary of the City regulator, claiming the new regulatory regime will be more intrusive than before.

The new rules will even include how much case banks can hold in reserve.

Chancellor Alistair Darling is backing these new regulations, pointing out the importance for “backstop” powers to stop banks overstretching themselves.

He told Channel 4 News: “Banks took on too much risk. RBS for example buying the Deuch bank ABN – they took too much risk.”

The aim of “backstop” power is to limit banks lending and will “make sure that banks have got adequate capital against times when things are tough, I think that is very, very important,” he added.

‘People Should be Very Frightened’

Mr Sants comments were part of a speech he gave on the lessons of the banking crisis, in which he also added that society was demanding aggressive intervention in order to prevent banks taking unnecessary risks that bring the financial system down further.

He also said: “There is a view that people are not frightened of the FSA. I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.”

City regulator has been criticised for its lack of intervention in its role as UK banks supervisor in order to stop huge liabilities building up, which has lead to the massive credit crisis we are currently facing.

Last month, the new chairman of the FSA admitted that the FSA was also guilty of not performing its role as well as needed, and that it had not focused on the “excessive risks” that banks had been taking.

He told the BBC: “the FSA at that time was more focused on the processes, the structures, the reporting lines, rather than simply saying ‘when I look at this whole business model…it’s all too risky’.”

It won’t be long before the FSA publishes the full extent of their plan to change the financial services industry regulations, which will include a new system controlling the pay of bankers.

Intensive Supervision Needed

Mr Sants has advised for more “intensive” supervision of banks in order to prevent a “similar crisis” in the future.

He also said that the FSA would take action if it decided actions of senior bank managers were too risky, even at the risk of stifling innovation.

He said: “This is a fundamental change. The revealed preference of society says that this is, and possibly always will be, what society as a whole expects regulators to be doing. Indeed, it was what they thought we were doing.”

Sir Nigel Rudd, deputy chairman of Barclays bank has also shown his disapproval of banks actions, going so far as to call other banks “lunatics”.

He said: “we couldn’t compete with these lunatics who were throwing money at the market: 125% mortgages; self-assessment; it was madness.”

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