The head of the U.K. Financial Services Authority has signaled the end of its principles-based philosophy of regulation and told companies they should be “frightened” of the tough approach it plans to take in future.

In his second important speech in a matter of days, FSA Chief Executive Hector Sants conceded that “a principles-based approach does not work with participants who have no principles.”

Up until the credit crunch the FSA had been championing a “light touch” approach to regulation, and had been tearing pages out of its rulebook. Only two years ago Sants’ predecessor John Tiner said the FSA was determined to replace many of its detailed rules with overarching principles. Such a move would be “the natural next step in the evolution of our regulatory system,” Tiner said.

But in his recent speech Sants said that the term “principles-based” has been “misunderstood.” He added: “To suggest that we can operate on principles alone is illusory.”

Sants said a better strapline for the FSA’s philosophy would be “outcomes-focused” regulation. In the future the regulator would judge financial firms “on the outcomes and consequences of their actions not on the compliance with any given individual rule.”

The FSA chief also used his speech to signal that the regulator would take a tougher approach to enforcement in the future. “There is a view that people are not frightened of the FSA. I can assure you that this is a view that I am determined to correct," he said. "People should be frightened of the FSA.”

Sants’ comments follow an earlier speech in which he told big investors to ask companies harder questions on topics such as compliance, risk management, and governance. Prior to the credit crunch, shareholders were too willing to accept corporate disclosures at face value, he argued.