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TSC report attacks FSA for failing to supervise Northern Rock

The Treasury Select Committee’s report on the Northern Rock fiasco has attacked the FSA for failing in its duty as regulator.

It has also called for a new role at the Bank of England to be established which would look after issues of liquidity.

The new post of “Deputy Governor of the Bank of England and Head of Financial Stability” would have a key role in ensuring that the Chancellor receives authoritative and co-ordinated advice in any future case where financial stability is threatened by difficulties in the banking sector.

The report, entitled ‘The Run on the Rock’, saved its biggest criticism for the regulator for the events that played out over the Summer.

It laid blame on the regulator’s door for failing to supervise Northern Rock properly. It said: “It did not allocate sufficient resources or time to monitoring a bank whose business model was so clearly an outlier; its procedures were inadequate to supervise a bank whose business grew so rapidly.”

It added: “The failure of Northern Rock, while a failure of its own board, was also a failure of its regulator.”

The report claims that the FSA “systematically failed” in its duty as a regulator to ensure Northern Rock would not pose such a systemic risk.

It concluded that the regulator failed in its responsibility to ensure that the work of the board of Northern Rock was sufficient to the task.

The report also notes its concern that the chief executive of Northern Rock, Adam Applegarth, was not a qualified banker. It points out that the FSA should not have allowed – nor ever again – the two appointments of a chairman and a chief executive to a “high impact” financial institution where both candidates lack relevant finanical qualifications.

The TSC report has recommended that the FSA should undertake an “urgent review” of the current qualifications of senior directors in financial firms and ensure that the current approved person regime requirements are adequate. It has asked the regulator to respond to the Committee on this by June 2008.

It adds that it thinks it is wrong that the FSA should be investigating its own failure and that it should ensure there is an independent component in the analysis of the decision-making of the FSA in relation to Northern Rock.

A FSA spokesperson says: “As we have already acknowledged publicly, there were clearly supervisory failings in relation to Northern Rock and we are already addressing these. We will also examine carefully any further lessons that emerge from our internal review of the supervision of Northern Rock. We will be publishing the conclusions of that review in March.

“We intend to study carefully the Committee’s report and will respond more fully in due course. The report will inform our input into the Tripartite Authorities’ wider consideration of reform, which is currently underway.”

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