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Review finds FSA’s handling of Northern Rock was not acceptable

The FSA’s internal audit division has identified four key failings which contributed to the regulator’s failure to prevent the Northern Rock crisis.

In a review published today, the internal audit division found that there was a lack of sufficient supervisory engagement with Northern Rock and says the supervisory team failed to rigorously follow up with the management of the firm.

The report recommends establishing a new group of supervisory specialists which will regularly review the supervision of all high-impact firms to ensure procedures are being adhered to.

The numbers of supervisory staff engaged with high-impact firms will also be increased and the existing specialist prudential risk department of the FSA will be expanded.

The report found there was inadequate specific resource directly supervising the firm and a lack of adequate oversight and review by FSA line management of the quality, intensity and rigour of the firm’s supervision.

It also says there was a lack of intensity by the FSA in ensuring that all available risk information was properly utlised to inform its supervisory actions.

But the report says that even if supervision had been carried out at an acceptable level, it does not mean the outcome necessarily would have been different.

The review concludes that overall the supervision of Northern Rock was at the extreme end of the spectrum within the firms reviewed and that its supervision did not reflect the general practice of supervision of high-impact firms at the FSA.

The report recommends more focus on liquidity and an upgrade in the supervisory training and competency framework for FSA staff.

FSA chief executive Hector Sants says: “This programme is the response of the management of the FSA to the weaknesses identified in the particular case of the supervision of Northern Rock. It is clear from the thorough review carried out by the Internal Audit team that our supervision of Northern Rock in the period leading up to the market instability of late last summer was not carried out to a standard that is acceptable, although whether that would have affected the outcome in this case is impossible to judge. However, I am determined through the programme of work that I am announcing today, that proper standards will apply to all significant firms supervised by the FSA.

“This represents our specific supervisory contribution to the package of measures introduced by the Tripartite Authorities to prevent a similar situation to Northern Rock undermining financial stability. That does not mean a “no failure” regime. However, together with the proposed reform of the insolvency regime for banks – and an improved deposit protection scheme – it creates a platform to strengthen financial stability and better protect the interests of consumers.”

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