Giving evidence to the Treasury Select Committee this afternoon, FSA chief executive Hector Sants and chairman Lord Adair Turner both blamed the “political philosophy” of past regulation for missing the problems in the part and fully nationalised banks.
Turner said: “We had a philosophy of how we did regulation, that focused on organisation structure, processes, systems – it fairly overtly said it wasn’t the function of the regulator to cast questions over the overall business strategy of the institution. With hindsight I find it surprising, but it’s the case.
“That existed in a political philosophy where all the pressure on the FSA was not to ‘are you looking these business models’ but to say ‘why are you being so heavy and intrusive, can’t you make the regulation light touch?’”
But both men assured members that the FSA recognises these faults and is changing the way it regulates.
Turner said: “It is going to be fit for purpose; it’s a revolutionary approach. It is a long way through necessary changes. Both us and the Bank of England should have a significant and formal role in macro-prudential analysis.”
Sants agreed, he said: “I do believe for the last 12 months we have put in place significant changes to our supervisory processes; we look at the business, we look at the risk and we look at the future of the banks – we are a fundamentally different organisation that we were 12 to 18 months ago.”
Turner admitted that he would have made the same regulatory mistakes as his predecessors, but doubted that the FSA would have had the power to change anything.
He said: “The FSA should have been more involved in sector analysis. But I think if the FSA had come out in 2004 and had begun to aggressively tell mortgage banks to cut lending, the predominant reaction for many people would have been to tell us not to hold back mortgage credit to ordinary people and that we were preventing the democratisation of home ownership.”