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Turner says greater supervision may not have prevented Dunfermline failure

FSA chairman Lord Turner has written to Chancellor Alistair Darling to say that intensive supervision of Dunfermline may not have prevented the collapse of the building society.

Turner says the building society’s problems arose from a combination of the build up of commercial real estate loans and the purchase of specialised mortgage loans from other mortgage lenders.

The FSA has implemented a supervisory enhancement programme over the past 12 months which has introduced a model of intensive supervision for important firms.

Turner says: “It is unclear, however, if these changes to the FSA’s approach would have prevented the specific problems at Dunfermline Building Society; nor do I currently believe that the SEP should be redesigned to try to prevent such problems via even more intense firm-level supervision.”

Turner says the causes of the Dunfermline failure highlight the need for major reforms to capital adequacy rules and macro-prudential analysis and may raise questions about the legislation governing building societies.

He recommends tighter rule-driven constraints on building society lending including a tighter definition of commercial lending and a tighter cap on commercial lending than the current 25 per cent of total assets.

He says the FSA has repeatedly warned the building society sector of the importance of maintaining asset quality, particularly focusing on non-traditional lending. The regulator said it did this between 2003 and 2008 by sending supervisory letters to all building societies and speaking at the Building Society Association’s Conference.

Turner says the FSA was in regular contact with Dunfermline from August 2007 and this culminated with an Arrow visit in November 2007.

The FSA will issue a general code of practice for building societies in July 2009.

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