In May 2009, the FSA launched a supervisory investigation into the failure of the Royal Bank of Scotland. On December 2, 2010, as we all know, the FSA announced in a 16-line statement that its investigation into the bank was complete.
The FSA said its review confirmed that RBS made a series of bad decisions in the years immediately before the financial crisis, most significantly the acquisition of ABN Amro and the decision to aggressively expand its invest- ment banking business.
However, the review concluded that these bad decisions “were not the result of a lack of integrity by any individual and we did not identify any instances of fraud or dishonest activity by RBS senior individuals or a failure of governance by the board”.
The FSA went on to say: “The issues we investigated do not warrant us taking any enforcement action, either against the firm or against individuals.”
The FSA’s announcement was greeted with widespread outrage. The headline in the Financial Times, for example, was, FSA’s failure to punish Goodwin sparks anger. The newspaper reported the reactions of a number of people, including several lawyers. One senior lawyer was reported to have said: “I find it very hard to believe that, given their findings of bad decisions, there still has been absolutely no one found at fault.”
There was anger not only at the decision itself but also that the FSA did not offer any explanation. It simply said it could not publish the content of the review because the information it had gathered from the bank remains confidential by virtue of the provisions of the Financial Services and Markets Act 2000 (FSMA).
The FSA is relying on section 348 of that act, which provides that confidential information relating to the business or affairs of any person must not be disclosed.
What should we make of the FSA’s announcement?
The first question that springs to mind is how good was the FSA’s regulation and supervision of RBS during the relevant period? The FSA has not told us. It should do so.
It has not always been so reticent. There are two good examples of the FSA investigating its own performance and then publishing the reports, the first of which relates to Equitable Life.
When Equitable Life closed to new business on December 8, 2000, there was a debate in the House of Commons. During that debate on December 19, in response to concerns voiced by MPs, the then economic secretary to the Treasury reported that the FSA would carry out a review of events that led up to the company’s decision to close to new business.
The review would cover the period before the FSMA came into force, during which the FSA was acting on behalf of the Treasury as prudential regulator.
That report, running to more than 200 pages, was published in full in October 2001. In its conclusions, the report stated that by the time the FSA became responsible for the regulation of the company, “the die was cast” and nothing the FSA could have done would have made a material difference to the final outcome.
But the report went on to say that there were “a number of things which the FSA could have done better. There were occasions when both the prudential and conduct of business regulators did not spot issues to be addressed or, having spotted them, did not follow them up.”
One of the recomm-endations in the report was that the FSA should “be prepared to act more proactively to ensure that the interests of the customer are properly protected”. In other words, the FSA should take action when necessary to protect customers.
The second example relates to Northern Rock.
After the failure of Northern Rock, the FSA’s internal audit department carried out an inquiry and published a report of more than 130 pages which concluded that the FSA should have done better.
On the same day as the principal conclusions of that report were published, FSA chief executive Hector Sants issued a response in which he said: “As we have already made clear, the failure of Northern Rock should first and foremost be attributed to the failure of its board and executive to create a durable funding model which could withstand the exceptional set of market circumstances that occurred in summer 2007.
“Nevertheless, the FSA acknowledges that its supervision of Northern Rock was not of sufficient intensity or appropriate rigour to challenge the company’s board and executive on their risk management practices and their understanding of the risks posed by their business model.”
Surely the same could be said of its supervision of RBS?
Why do we not know how well the FSA itself thinks it has performed in relation to its regulation and super-vision of RBS and, indeed, how well it has carried out its investigation into RBS?
The answer, or at least the explanation, is probably that the FSA is independent of the Government and of Parliament. It is not accountable in the same way as a Government department.
It is true that all the members of the FSA’s board are appointed by the Treasury and may be removed by the Treasury. It is also true that the FSA must submit a report at least once a year to the Treasury and that report must be laid before Parliament. And, of course, executives of the FSA do appear before the Treasury select committee to answer questions. But the FSA is not accountable for its performance either to the Treasury or to Parliament.
So to whom is it accountable? The answer is no one.
If a Government minister, such as the Chancellor of the Exchequer, were answerable to Parliament for the FSA, it is likely the Chancellor and, if not he, Parliament, would have insisted on changes so that the FSA carried out its remit appropriately after its failure to do so with Equitable Life, Northern Rock, RBS and HBOS, to mention only four of the companies whose financial difficulties and potential failures occurred on the FSA’s watch.
Issues of accountability arise not only in relation to the FSA’s performance of its supervisory duties but also in relation to the way in which it carries out its other functions.
Take the retail distribution review as an example. During the historic debate in the House of Commons on November 29, 2010 on the RDR, several MPs expressed concern about the FSA’s lack of accountability.
For example, as a comment on the likelihood that as many as 20 to 30 per cent of IFAs will leave the industry as a result of the RDR, Harriet Baldwin, MP, said: “Imagine the outrage there would be in the Chamber if a minister said from the dispatch box, ’I am going to put between 20 and 30 per cent of an industry out of business at the stroke of my pen on 1 January 2013’. It is unbelievable that we have allowed an organisation to grow and, unscrutinised by this legislative body, have such a power over our constituents’ lives.” (Hansard col 608).
If the FSA had been properly accountable to Parliament, the proposals to disqualify advisers who do not attain the new qualifications by the end of 2012 would almost certainly have been changed to permit grandfathering.
The present Government has said that the FSA, when it becomes the Consumer Protection and Markets Authority, will still be independent of government. The Government must be persuaded to change its view and to make the FSA truly accountable to Parliament and, through Parliament, to society at large.
Peter Hamilton is a barrister specialising in financial services at 4 Pump Court