Banks should be “very frightened” of the FSA, the chief executive said in a speech outlining the City watchdog’s new tougher stance.

Hector Sants told delegates at a Reuters Newsmakers event that the Financial Services Authority (FSA) will take on a more “intrusive and direct” role in the future and threw down the gauntlet to the industry.

“There is a view that people are not frightened of the FSA,” he said.

“I can assure you that this is a view I am determined to correct. People should be very frightened of the FSA.”

The FSA, which has been on a recruitment drive to expand its regulatory activities, is changing in response to the crisis, Mr Sants added.

“In the future we will seek to make judgements on the judgements of senior management and take actions if in our view those actions will lead to risks to our statutory objectives. This is a fundamental change.

“It is moving from regulation based only on observable facts to regulation based on judgements about the future.”

Mr Sants said the FSA will need to balance tougher regulation with the need to encourage innovation and warned reducing risk too much could stifle economic growth.

The FSA will also be focusing on ‘outcomes testing’ – for example, ‘mystery shopping’ and ‘branch visits’ – that judge services from a customer point of view rather than detailed reviews of high-level management information.

Adam Phillips, the acting chairman of the Financial Services Consumer Panel, welcomed this move. “The FSA’s new commitment to focus on outcomes is long overdue – we have argued for some time that the FSA’s supervisors need to see how things look from the point of view of the customers dealing with firms, rather than relying on what firms tell the regulator,” he said.

The watchdog needs to undergo a transformation, Mr Sants said, but it is on track to deliver better regulation.

“The FSA has been seared by recent events but it is tougher and better as a result. The FSA has grown up,” he concluded.