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FSA admits RBS failings and calls for tougher penalties for bankers

The FSA has admitted it had a significant part to play in the near collapse of Royal Bank of Scotland in 2008.

In its report, published today, the FSA says its supervisory approach into the bank “provided insufficient challenges to RBS”.

The regulator says there were six factors which almost led to the demise of RBS in the midst of the 2008 financial crisis. Among them were concerns and uncertainties about its underlying asset quality, which were subject to little fundamental analysis by the FSA as well as concerns and uncertainties about RBS’s strategy. The FSA also says it underestimated how bad the losses associated with structured credit might be.

The report highlights poor management decisions such as the acquisition of ABN Amro. FSA chairman Adair Turner says had Basel III been in place RBS would not have been able to launch its bid for ABN Amro as well as being unable to pay dividends at any time during the review period. He says the FSA is a completely different organisation to what it was in 2007, with far more resources and skills.

Turner has called for new powers to be introduced in a bid to prevent a collapse of this nature happening in the future. These include stricter rules that would mean heavier fines and bans should a bank fail as well as an automatic incentives based approach, which includes preventing senior directors and executives of failed banks from future positions of responsibility or changes to remuneration to ensure that a very large proportion of pay is deferred or forfeited in the event of a failure.

Turner says: “The fact that no individual has been found legally responsible for the failure begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future?

“In a market economy, companies take risks on behalf of shareholders and if they make mistakes, it is for shareholders to sanction the management and board by firing them. But banks are different, because excessive risk-taking by banks, for instance through aggressive acquisitions, can result in bank failure, taxpayer losses, and wider economic harm. Their failure is a public concern, not just a concern for shareholders.

“We should, therefore, debate policy options to ensure that bank executives and boards strike a different balance between risk and return than is acceptable in non-bank companies.”

RBS is now 83 per cent owned by the Government and has seen thousands of job losses since the crisis.

Six factors are deemed to have led to the collapse of RBS:

– significant weaknesses in RBS’s capital position, as a result of management decisions and permitted by an inadequate global regulatory capital framework;

– over-reliance on risky short-term wholesale funding, which was permitted by an inadequate approach to the regulation of liquidity;

– concerns and uncertainties about RBS’s underlying asset quality, which in turn was subject to little fundamental analysis by the FSA;

– substantial losses in credit trading activities, which eroded market confidence. Both RBS’s strategy and the FSA’s supervisory approach underestimated how bad losses associated with structured credit might be;

– the ABN AMRO acquisition, on which RBS proceeded without appropriate heed to the risks involved and with inadequate due diligence; and

– an overall systemic crisis in which the banks in worse relative positions were extremely vulnerable to failure. RBS was one such bank.

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Comments

There are 19 comments at the moment, we would love to hear your opinion too.

  1. So who at the FSA is losing their job, as an IFA if I make a mistake I can be fined or shut down, why is no-one at the FSA accountable, must be a great job to be able to screw up a whole industry, and not be held responsible, they are a joke!!!!

  2. I completely agree with @Brian – where is the accountability for the FSA? Yes, get tough with the Banks, but we need to see the same level of toughness with the Regulator – let’s see them get fined, and have their bonuses removed every time they fail to do their job properly.
    Come on Government – the only way you’re going to restore faith in the financial system is to make all parties accountable.

  3. The FSA should be shut down for negligence.

  4. Turner says: “The fact that no individual has been found legally responsible for the failure begs the question: if action cannot be taken under existing rules, should not the rules be changed for the future?
    Yes absolutely, particularly with regard to the regulators lack of accountability.
    Turner wants everyone to shoulder responsibility unless they are employed at the FSA.
    The regulator was so busy bullying the IFA sector, who pose no systematic risk, they missed the bigger picture of their buddies at the banks, who were deemed “to big to fail”
    The regulator MUST be held to account. They are spending millions each year and must be held responsible just as they expect us to be.No more double standards Mr Turner. If staff at the regulator lack the skills to do their job, then they should be deemed “not fit & Proper” just as you would quickly label any IFA who, in your opinion lacks the skill to do his job.

  5. Well done to Mark M and previous posters – digesting a several-hundred page report in under three hours. Clearly you can all read a lot quicker than me.

    Or is it just that you’ve completely pre-judged the situation – something you take the FSA to task for all the rest of the time?

  6. The joys of ‘light touch regulation’.

  7. The pot calling the kettle black. The FSA as we know is not accountable to any or anything. It has admiited its failure and those at the top should resign. The government should then take a long good look at the regulations proposed and stop them in their tracks Stop RDR and close down the FSA it is useless

  8. Someone just tweeted –

    “Hector Sants received a performance related bonus from FSA of £114,000 in 2007-2008 – the year he signed off the RBS-ABN takeover. Clawback?”

  9. Re Adam Smith
    We did not need to read the report.
    We already knew what went on.

  10. If a bank fails, how is it going to be able to pay heavier fines? The money isn’t going to be there, is it?

    And, as pointed out by others, how can no individuals (at any of the banks) have “been found legally responsible for the failure” when the FSA clearly has the powers to find individual senior managers of IFA firms responsible and to punish them acordingly?

    Does the FSMA 2000 state that if you’re a senior manager at a bank (or indeed at the FSA) then you’re untouchable whilst, on the other hand, that if you’re a senior manager of an IFA firm, the FSA can do to you whatever it likes? I don’t recall ever having read of such selective exemptions from individual accountability. It all smells rather strongly of the Old School Tie Club, doesn’t it?

  11. One very pertinent question that Money Marketing can ask is the extent of the bonuses enjoyed by those FSA directors and other individuals tasked with responsibility for RBOS.

    Who received these bonuses. Will they be clawed back? Have individuals suffered punishment or is this another instance of the “collective responsibility” that Clive Briault found so refreshing?

  12. If you watch “Inside Job” which is available on iPlayer until Wednesday

    http://www.bbc.co.uk/iplayer/episode/b0183l0t/Storyville_20112012_Inside_Job/

    At about 5.15 mins along.. the expert interviewed from Iceland explains exactly why regulators across the globe have failed to regulate the banks in almost every case.

    It’s not rocket science……..We’ve all known for years as IFAs that people exit the FSA like at SEC or elsewhere to go and sit on bank and city boards, paying themselves mega bonuses, hence the double standards of regulation still being applied.

  13. Who would believe that a ‘Regulator’, any regulator, could in its own report, consider itself as ‘Not fit for purpose’ and still be in business? The rest of the financial world must be looking on and laughing at us. For Sants to be promoted when he should be sacked is a disgrace. Turner, on the news, blamed PM Brown for “lightening the regulation on the banks”. Now is that not typical? Find someone to blame! No mention at all of all the other blunders, mistakes and failures the FSA have made in the past few years. A total whitewash!

    Not so much the Old School Tie as possibly a form of high level corruption with no control and no fear of repercussion. The system stinks and any government that encompasses such a discredited organisation is tainted with it. It would seem that all you have to do in this financial world is go to the right school, kiss enough rear ends, join the FSA and wait for your massive bonusses to arrive just before your knighthood.

    The RDR should be totally reconstituted with completely new staffing from top to bottom and removed from the priviledged position of being “bulletproof”.

  14. Hogworts Reasearch Facility 12th December 2011 at 11:02 am

    – a man made disaster without a man to blame. what an outcome !

  15. Wot no penalties for regulators or politicians?

  16. hindsight is 20/20. The fsa is showing the classic “expert after the event” syndrome. there really was only one factor which is pretty much endemic within most large financial institutions…if you’re making money it must be good right? it’s good for the economy, good for jobs, good for shareholders and most of all good for bonuses. it’s all good until it isn’t, then that’s when we do the autopsy and ask how people were allowed to keep on making money for so long. how could the fsa justify taking steps to stop a bank making too much money? how can you blame a bank executive for making huge profits? legalised robbery is what it is, just look at the mortgage market, the biggest legal pyramid (or ponzi) scheme around. no wonder it collapsed. but it’s nobody’s fault, because everyone wanted to be a part of it.

  17. Re Adam Smith
    How much was your bonus?

  18. @Realist

    You are so right, Fred the Shreddy had a puppet Board which when he was increasing shareholder value by share price, divvies and increasing the value across the Banking sector mattered not.

    ‘In hindsight’ – the 2 favoured words of the FSA finds them issuing a not proven verdict against themselves.

    Unaccountable, unethical and ineffective on the Macro Economic issues they the Sole Regulator are of.

    No Change ahead under Dave Camerons Tories to the above.

  19. “Turner has called for new powers to be introduced…” i.e. given to the FSA. It’s just more of the same old same old ~ Give us yet more of what we’ve shown ourselves already to be manifestly unable to wield competently, and everything will be alright………..next time.

    Which is a bit strange, give that the FSA has admitted in print that it failed to exercise properly the powers it already has. How much more power will it take? This bloke’s positively a megalomaniac, a completely power-mad nutter, in fact. In his book, more powers appear to be the answer to all failure. He never stops calling for them. Absolute power solves everything.

    No it doesn’t, Lord Turner ~ Absolute power corrupts absolutely. And if a more morally bankrupt organisation exists in Britain than the FSA, I’ve yet to learn of it.

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