FSA chairman Adair Turner has called for new powers to penalise individual bank directors for making the sort of risky decisions that led to the near collapse of Royal Bank of Scotland.
In a report published this week, the FSA identified a number of poor management decisions which led to the Government having to bail out RBS, including an over-reliance on short-term, wholesale funding and insufficient capital reserves as well as inadequate supervision from the FSA.
Turner has called for one of two approaches to be adopted by regulators to ensure that bank executives judge risk appropriately.
The first is a strict liability approach, meaning a banking failure could be followed by successful enforcement action against individuals, including fines and bans.
The other is an automatic incentives-based approach, which would involve rules that automatically ban senior executives and directors of failed banks from future positions of responsibility or major changes to remuneration to ensure that a significant proportion of pay is deferred and forfeited in the event of failure.
The report suggests RBS did not conduct appropriate due diligence during its £49bn takeover of ABN Amro, which eventually brought down the bank. To counter this, the FSA says there should be a formal requirement for banks to get regulatory approval for major acquisitions.
MAC Consulting chief executive Mark Chilton says: “Having an incentive to prevent bank executives from taking excessive risks is, in theory, very powerful. However, if you look at RBS, it becomes blatantly clear the senior management did not understand the risks they were taking.”